|
 |
LLCs Gain in Estate Planning Jan. 19, 2001 (Principal Financial Group) The versatility of limited liability companies (LLCs) makes them an alternative to traditional business entities and a useful estate planning tool. Increasingly LLCs are used as a flexible alternative to irrevocable life insurance trusts (ILITs). LLCs are a hybrid of a corporation and a partnership that attempt to combine the favorable characteristics of each. Like partnerships, LLCs are pass through entities (income, deductions, and credits pass through directly to owners without double taxation) yet the owners have limited liability. Nearly all states now permit LLCs. LLCs can be used in several ways in estate planning. Like limited partnerships, LLCs may be a viable alternative to an irrevocable life insurance trust. LLCs can be more flexible than ILITs though. As with partnerships, the insured can retain some management control by retaining a small percentage of membership interests in the LLC and gifting the balance to his or her family. The LLC document can include restrictions mirroring those normally placed in a trust instrument.
This arrangement allows a client to (1) maintain direct control of the policy while having only a nominal percentage included in the estate, (2) access and control cash values if desired, (3) change the terms of the LLC document as appropriate, and (4) avoid the burdens of Crummey notices. If the LLC owns life insurance, only the direct ownership percentage of the insured should be included in the estate.
LLCs also offer advantages in a gifting program. The organizational document can contain restrictions on the donees' use yet no Crummey notices are needed upon the transfer of LLC interests. Because of such restrictions, it may be possible to reduce the gift tax value of the LLC interests through lack of marketability and minority interest discounts. If the LLC owns real estate, gifting LLC memberships is much simpler than annually deeding small real estate parcels.
A key question is whether an entity that owns nothing but life insurance has sufficient business purpose to be classified as a partnership for tax purposes. The legal authority on this issue is unclear and commentators on both sides make compelling arguments.
The easy case is where a client's existing business is or can easily be operated as an LLC. If so, a business purpose clearly exists. If the only asset to be owned by the LLC is life insurance then advisors must make a determination on the issue.
In recent years proposed legislation would have eliminated gift tax discounts for LLCs funded with publicly traded stock. Although such proposals have not been passed into law, advisors should keep this in mind when planning with LLCs.
The state law governing corporations and partnerships is thoroughly developed and many boundaries are clearly delineated. The law governing LLCs is new which creates some ambiguity and uncertainty that should be considered.
LLCs are an attractive estate planning tool. They allow clients to obtain estate and gift tax advantages while retaining control and access to assets. Not all tax and legal issues surrounding LLCs are clearly resolved however, so advisors should move carefully.
2001, Principal Financial Group. All Rights Reserved.
|
|
|
|||||||
|
||||||||||
|
|
||||||||||
|
||||||||||
