Not only are Limited Liability Companies (LLCs) a useful tool for small business owners, but they can also be a valuable tool for your estate plan and can be used to avoid gift and estate taxes when you pass assets down to your children.
An LLC is somewhere between a partnership and a corporation and has some characteristics of both. LLC owners are protected from liability like a corporation, and income and losses from the company are reported on personal tax returns like a partnership. LLCs also have less fees, filing requirements, and rules for how the company is organized and managed compared to corporations.
You can use an LLC to pass assets to children without being subject to gift and estate taxes. The estate tax exemption in 2021 is $11.7 million for individuals and $23.4 million for couples, and the lifetime gift tax exclusion is also $11.7 million. Currently, a parent can give their children $15,000 each per year before the gifts count against the lifetime limit. In 2026, these limits are set to drop back down to the previous exemption amount of $5.49 million (adjusted for inflation).
For a family LLC, parents and children create an LLC and transfer assets into it. LLCs can hold cash, real property, and personal property. These assets are translated into units of value once they are in the LLC. For this type of LLC, parents are the managing members and have control over the assets, and children are the non-managing members with restrictions on what they can do with their membership interests.
When the parents transfer assets in the LLC to their children (who are non-managing members of the LLC), these assets receive a valuation discount of up to 40 percent of the market value. If a parent transfers an asset worth $10,000 to a child, this asset would only be taxed at $6,000 when transferred. This way, parents can transfer more assets to children without hitting the gift tax exclusion and can reduce the value of their own estate at the same time.
Other advantages of LLCs include protection of assets from creditors as well as flexible control and streamlining of management of family assets. On the other hand, the disadvantage of an LLC is that it is more expensive and has more rules and regulations than other estate planning instruments. You should consult with your attorney to weigh the pros and cons of an LLC before making one part of your estate plan.
For help creating or updating your estate plan, contact us at Wilson and Wilson Estate Planning and Elder Law, LLC at 708 482 7090 for our main office in LaGrange, Illinois or at 847 656 8958 for our Northbrook, Illinois office.