Can You Use an LLC for Estate Planning Advantages?
Family LLCs can be used as an estate planning tool to help pass your assets on to family members. Using the LLC, you can reduce the value of your estate. You can give shares of the LLC to loved ones in a manner that controls how they are distributed and minimizes the estate tax bill.
Many U.S. small-business owners use the limited liability company (LLC) business entity type. The LLC business structure offers tax advantages and helps protect the owners' assets and personal property.
However, family LLCs can also be used as an estate planning tool to help pass your assets on to family members. Using the LLC, you can reduce the value of your estate. You can give shares of the LLC to loved ones in a manner that controls how they are distributed and minimizes the estate tax bill.
Creating a family LLC to hold your business or other assets will allow you to distribute significant wealth to family members during your lifetime.
This enables you to reduce the size of your estate and minimize estate taxes. A family LLC lets you distribute your assets however you choose without incurring gift taxes.
Finally, like all LLCs, family LLCs provide their owners with some measure of asset protection.
What Is an LLC?
A correctly established LLC operates as an entity separate from its owners — often called "members." This separation means you can't be found liable for the debts and financial obligations of an LLC.
LLC members have several options regarding how the business is taxed. The following list sets out the three most common LLC ownership structures and how they are taxed:
- Single-member LLCs: LLCs with a single owner are treated as disregarded pass-through entities by the Internal Revenue Service (IRS) and most states. That means the company is not treated separately from its owner, and any income earned by the LLC is taxed as income earned by the owner.
- Multimember LLCs: LLCs with at least two owners are treated as pass-through entities for tax purposes. Thus, they are taxed in much the same manner as a partnership or single-member LLC. That means the company itself pays no tax on its income. Instead, the LLC's income is the members' income, who pay a percentage based on their ownership interest in the company.
- LLCs that are taxed as corporations: One of the primary benefits of organizing your business as an LLC over a corporation is that the LLC avoids "double-taxation." That is where a traditional C corporation's (C-corp's) income is taxed when the company earns it and again when distributed to shareholders. However, in some circumstances, it is more financially beneficial for owners to tax the LLC as a C-corp. An example would be when the business reinvests most of its profits in the company rather than distributing them to shareholders.
LLCs are also responsible for collecting and paying the 15.3% self-employment tax. This tax is due on the income earned by members working for the company to cover their Social Security and Medicare contributions. In addition, it must pay any state and federal employment taxes due on amounts paid to employees.
What Is a Family LLC?
The primary difference between a family LLC and a standard LLC is that only people related by blood or marriage can form a family LLC. Family members must own all LLC units in a family business structured as a family LLC. Otherwise, family LLCs operate in the same manner as standard LLCs.
The IRS and most states will treat a family LLC like a standard LLC when paying income taxes.
A family LLC provides estate planning benefits. When used as an estate planning tool, the family LLC lets the organizers who own the LLC's assets give shares in the company to other family members as non-managing members.
A family LLC offers several benefits:
- Control of asset distributions: The family LLC organizers can distribute company shares in the manner they choose during their lifetime.
- Reducing the size of an estate: Giving away shares in the LLC reduces the organizers' stake in the company. Since the organizers' stake in a business is subject to the estate tax when they die, this reduces the size of the estate subject to the tax.
- Avoiding gift taxes: The individuals gifting pay gift taxes on gifts of more than $17,000 annually. The tax does not apply to transferring ownership interests in a family LLC.
- Keeping assets in the family: When organizers form a family LLC, the organizers can place restrictions on transferring shares outside the family. This approach keeps individuals who have been gifted shares from selling or transferring stakes to anyone outside the family.
Most family LLCs own businesses, real property, rental properties, or brokerage companies. A family LLC can own almost any asset that is not a personal residence. IRS rules bar all types of LLCs from owning private homes.
How Do Estate Taxes Work?
According to the IRS, the federal estate tax is "a tax on your right to transfer property at your death." It's a 40% tax levied on estates of more than $12.92 million based on the fair market value of the deceased's combined assets.
Taxable assets include:
- Real estate
- Business interests
- Bank accounts
A taxable estate does not include property passed to surviving spouses, mortgages, expenses for estate administration, or charitable donations.
The estate tax does not apply to estates with a taxable value below $12.92 million for 2023. In 2026, the estate tax exemption drops dramatically. That's because the Tax Cuts and Jobs Act of 2017 sunsets in January 2026. The estate tax threshold will drop to the previous $5.5 million amount at that time (expected to be roughly $6 million when adjusted for inflation).
Congress may take action before the act sunsets. But structuring your estate plan to minimize your estate's size and take advantage of all tax benefits is a good idea.
A few states levy either an estate or inheritance tax of their own. Estate taxes are paid from the estate, while the beneficiary pays inheritance taxes.
How Do Gift Taxes Work?
A federal gift tax applies when assets or property transfers from one person to another in return for nothing or less than the total value. The tax keeps taxpayers from giving money and other valuable assets to others — usually family members — to avoid paying the federal income tax.
The gift tax applies every time someone is given something in exchange for less than its total value. The donor must report the gift on their income tax return and pay the gift tax. Depending on the size of the gift, the tax is assessed at 18% to 40% of the gift's value.
Fortunately, a gift tax exclusion generally spares those giving smaller gifts from the tax. For 2023, the exclusion was set at $17,000 annually for each gift, with a total lifetime exemption of $12.92 million per donor. That means an individual can only make $12.92 million in exempt gifts to anyone tax-free while alive. In January 2026, the lifetime exemption drops to $5.5 million with the sunset of the Tax Cuts and Jobs Act.
Additionally, some categories of gifts are not subject to the tax. For example, you can give your spouse unlimited money if they are a U.S. citizen. Other gifts not subject to the tax include:
- Gifts to charitable organizations
- Gifts to political organizations
- Gifts made to cover medical or educational expenses, such as payments to a college or hospital on another's behalf
- Gifts to a spouse who is not a U.S. citizen of up to $175,000 annually (for 2023)
A Family LLC Provides Tax Savings
Lifetime gifts of LLC interests can provide substantial tax benefits. A donor can achieve tax savings for the estate through valuation discounts and removing future appreciation from the donor's estate.
Due to the uncertain future of federal estate tax law, as discussed above, business owners should consider making lifetime gifts to take advantage of the gift and estate tax exclusion.
A Family LLC Provides Asset Protection
One of the primary reasons business owners organize their companies as LLCs is to protect their personal assets from creditors owed money by the business. Family LLCs also provide this benefit if they are correctly set up and registered with the state. This liability protection stems from the LLC's operating agreement that has been agreed to by each of the company's members.
Once all of an LLC's members have signed it, an operating agreement is legally binding and protects members from personal liability for the company's debts and other obligations. However, if there is no agreement, most states have applied default rules. These default rules are generally vague and provide some asset protection but must be written with estate planning in mind. So be sure your LLC's operating agreement is valid and serves your needs as an estate planning tool.
An LLC Can Be Part of a Comprehensive Estate Plan
An estate planning attorney can provide legal advice on a comprehensive estate plan. In addition to explaining your options regarding how an LLC fits into your estate plan, they can help ensure your estate plan meets your needs.
Have More Questions? Ask an Attorney
LLCs are complicated on their own. Ensuring that a family LLC set up for estate planning purposes meets your needs adds additional complexity. If you are forming a family LLC, it is recommended that you meet with a local attorney who has experience with both establishing LLCs and estate planning. A skilled attorney will ensure you follow all the legal formalities necessary to establish a family LLC. They will also ensure the LLC will serve the estate planning purposes for which it is intended.
Can I Solve This on My Own or Do I Need an Attorney?
- DIY is possible in some simple cases
- Complex estate planning situations usually require a lawyer
- A lawyer can reduce the chances of a family dispute
- You can always have an attorney review your forms
Get tailored advice and ask your legal questions. Many attorneys offer free consultations.