Is a Family LLC Right for You?
Key POINTS:
Setting up a family LLC can come with benefits in asset protection and wealth transfer.
The flexibility a family LLC offers usually makes it a better choice than opening a family limited partnership.
Knowing whether a family LLC is right for you depends on your current situation, long-term goals, and family dynamics. LLC rules also vary by state.
For high-net-worth individuals, protecting and passing on wealth is a top priority. One strategy that's gained popularity in recent years is the family limited liability company (LLC). This powerful tool can help you safeguard your assets and smoothly transfer wealth to the next generation. Is it right for you? Let's dive in and see.
What Is a Family LLC?
Think of a family LLC as a special kind of business for your family. It's a legal structure where family members come together to own and manage assets. Like a traditional LLC, it’s considered a separate legal entity that can offer asset protection. Usually, one family member (often a parent or grandparent) acts as the managing member, while other relatives are regular or non-managing members.
Reasons to Consider a Family LLC
Asset Protection
There are several benefits that come from setting up a family LLC. First is protecting your assets. It can shield your personal assets from business-related liability. If something goes wrong with the LLC's investments or properties, your personal assets (like your home, vehicles, or savings) are generally safe.
For example, if you own a rental property in your own name and a tenant sues you, your personal assets could be at risk. But if that property is owned by your family LLC, only the LLC's assets are typically on the line.
Wealth Transfer & Gifting
A family LLC can also help with tax benefits and passing down wealth. Family LLCs make it easier to transfer wealth to younger generations while still maintaining some control. Instead of directly giving assets to your children, you gift them ownership shares in the LLC. This can be done gradually over time, potentially reducing gift and estate taxes.
For example, if someone wants to pass down real estate that’s worth $1 million, gifting that property directly reduces a person's lifetime exemption by the entire $1 million in value. On the other hand, if they were to transfer that real estate into an LLC and gift their heir a partial ownership interest in the LLC, it’d be valued less than the $1 million. The value of the gift, and therefore the use of the exemption, is further reduced due to minority and marketability discounts that may be applied. Keep in mind while there are positives, liquidity can be an issue as while it may be easy to sell a parcel of real estate outright, selling someone a partial interest in a family LLC might not be as desirable.
This advantageous wealth transfer is especially true as the Estate and Gift Tax Sunset of 2025 approaches. Currently, the lifetime gift and estate tax exemption is $13.61 million per individual ($27.22 million for a married couple). This means you can pass down substantial amounts without paying hefty estate taxes — provided it happens by the end of 2025. On January 1, 2026, unless Congress acts, the exemption drops to pre-2018 levels, or about $7 million for individuals and $14 million for married couples.
While this sunset seems less likely with the result of the recent 2024 election, we still want to monitor the status closely.
Flexibility
Another benefit of the family LLC is its flexibility. Family LLCs are adaptable, allowing for more customization in the operating agreement. These changes can allow for additional members, modifications to the manager of the LLC (even to a non-member), or other changes to ensure the structure meets the family’s needs.
This flexibility usually makes it a better solution than a family limited partnership.
A family limited partnership requires a general partner. That general partner is the person tasked with managing and making decisions and also continues to have liability exposure. In an LLC, everyone is a member. The managing member can maintain control over the assets while gradually giving ownership to children or grandchildren. If something changes, responsibilities can shift and the operating agreement revised.
How Does a Family LLC Work?
Setting up a family LLC is like starting a small family business. You follow a similar process as when setting up a business. In the most simplest terms, here’s the process:
Decide on State of Registration
You'll need to file some paperwork with the state to officially create the LLC. You also need to choose an available name and registered agent in that state.
Create Your Entity with the IRS
As most family LLCs have more than one member, this entity will be a separate taxpayer, requiring an annual tax reporting with the IRS and possibly the appropriate state(s) as well. You’ll need to apply for an Employer Identification Number with the IRS.
Formalize an Operating Agreement
This important document spells out how the LLC runs, who's in charge of what, and how decisions will be made. It should provide for income allocations, specifics on the allowance of new members, and terms related to the winding up of the business, just to name a few.
Transfer assets
You'll move or contribute certain assets — a family business, real estate, other investments – into the LLC.
Is a Family LLC Right for You?
A family LLC can be a powerful tool for protecting and transferring wealth, but it's not for everyone. It tends to work best for families with significant assets and a strong desire to keep wealth in the family for generations. It can also be a good structure for maintaining some form of control, while still moving growth of your assets outside of your estate.
Before deciding, it's crucial to consult with experienced professionals, especially if you’re a high-net-worth individual. At Capstone, we can help you understand if a family LLC aligns with your specific situation and goals. There are costs to set up and maintain an LLC. Family LLCs come with their own set of rules and responsibilities that differ based on the state you reside in. You'll need to hold meetings, keep records, and follow specific IRS guidelines. Laws and tax rules can change. What works well today might need adjusting in the future.
You also want to consider your family dynamics. Mixing family and finances can sometimes lead to disagreements. It's crucial to have open communication and clear guidelines from the start.
Remember, the key to successful wealth management is finding strategies that not only protect your assets but also reflect your family's values and long-term vision. A family LLC might just be the structure that helps your family's wealth flourish for generations to come.
To learn more or begin a planning review, contact us to schedule a consultation.
Disclosures:
This article is not a substitute for personalized advice from Capstone and nothing contained in this presentation is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed by other businesses and activities of Capstone. Descriptions of Capstone’s process and strategies are based on general practice, and we may make exceptions in specific cases. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review by contacting us at capstonefinancialadvisors@capstone-advisors.com or (630) 241-0833.