Wealth Planning Insights
Wealth Planning Insights | Preserving Family Assets with a Limited Liability Company
Keith Fenstad CFP®, January 2025
Families who wish to retain legacy assets such as ranches, vacation homes, or other legacy property, face many challenges – delegating operational responsibilities; managing ownership; liability protection; to ensure smooth transition across generations. A Limited Liability Company (LLC) provides a legal and practical framework to address these challenges making it an ideal choice in many instances.
Over the years, Tanglewood has worked alongside clients and their estate planning attorney to assist with the formation and ongoing management of many LLCs. Here are some of the basics.
What is a Limited Liability Company? An LLC is a legal entity that combines the liability protection of a corporation with the flexibility and simplicity of a partnership. When an LLC is formed to hold an asset, the property is owned by the LLC rather than all the individual family members. Each family member who is part of the LLC is considered a “member” and holds an ownership interest in the entity.
The LLC operates and manages the asset—collecting income, handling expenses, and making decisions according to agreed-upon rules or the desires of the founding family members. Additionally, this structure helps to shield the personal assets of the members from potential liabilities associated with the property.
Why Hold Family Assets in an LLC? Forming an LLC for a family asset offers numerous benefits. Below are some of the key advantages:
Simplifying Management An LLC allows families to establish an operating agreement. This is a legally binding document that outlines how decisions will be made, who is responsible for day-to-day operations, and how profits or losses will be shared.
Clarifying Ownership Rights An LLC formalizes ownership by issuing membership interests to each family member. These interests clearly define each person’s share of the property, voting rights, and responsibilities.
Streamlining Generational Transfers Families can establish rules and guidelines for how ownership interests of the LLC will pass to the next generation. The rules for buying, selling, or gifting membership interests are clearly established ensuring that the asset remains in the family.
Protecting Personal and Family Assets An LLC separates personal assets from those of the entity. If a lawsuit is filed related to the family property – for instance, an accident on a ranch or vacation home – the liability is limited to the LLC’s assets. This protection goes both ways. If a family member faces personal financial issues, such as bankruptcy or lawsuits, their ownership interest in the LLC may be protected from creditors.
Facilitating Tax Efficiency An LLC offers flexibility in taxation. Income and expenses pass through to members’ personal tax returns. Additionally, holding the asset in an LLC may allow for deductions related to property expenses. LLC interests may be eligible for significant valuation discounts that can equate to a substantial reduction in estate taxes when passing to heirs.
Example: Holding a Ranch in an LLC Consider a ranch used by the family with the intention to pass it down for generations. Over time, as the family grows, questions or even disputes arise over who should manage the property, how expenses should be shared, and what happens when someone wants to sell their share. When forming an LLC, the family can:
Clearly define each member’s ownership interest.
Establish an operating agreement that dictates how decisions will be made, such as rules for leasing the property, approving major repairs, or handling disputes.
Simplify transfers to the next generation by gifting membership interests instead of dealing with complex title changes.
In addition, the current owners of the ranch can contribute additional capital to the LLC to be a long-term source of funds for ongoing costs.
This structure preserves the ranch as a cherished family asset but also reduces the burdens associated with its management and enjoyment.
Basic steps to Forming an LLC Key steps:
Choose a Name: Select a unique name that complies with your state’s rules and reflects the purpose of the LLC (e.g., "Smith Family Ranch LLC").
File Articles of Organization: Submit this document to your state’s business office, providing basic details such as the LLC’s name, address, and members. Each state may have other required information.
Draft an Operating Agreement: This is one of the most critical steps. The agreement should outline ownership percentages, voting rights, management responsibilities, rules for transferring interests, and procedures for resolving disputes.
Obtain an EIN: An Employer Identification Number (EIN) from the IRS is necessary for tax purposes and opening a bank account.
If you would like to learn more or are considering an LLC for your situation, contact your Tanglewood Wealth Advisor to begin the conversation. We can also participate in conversations with your estate planning attorney to help tailor the structure to your specific needs.