A Limited Liability Companies (“LLC”) is a form of business structure that provides liability protection for its owners as well as a great deal of flexibility. It is a hybrid legal entity, having certain characteristics of both a corporation and a partnership or sole proprietorship. The owners are referred to as members. Members are entitled to their share of distributions, but they have no control over company operations. The management of the organization is vested in one or more managers. Members may or may not be managers.
The initial owners of a family LLC are often parents who wish to preserve a family farm or other assets while keeping the ownership intact. In other situations, the initial owners are a husband and wife who wish to shift assets to their children without losing control. Sometimes this is done through gifting shares. However, under current tax laws, it is sometimes better planning to leave membership interests as an inheritance.
When used for estate planning purposes, family LLCs usually take advantage of the separation of control from ownership and utilize a restrictive operating agreement. Those members who are managers control all business decisions, including the power to buy and sell LLC assets, without interference by other members. Members who are not managers generally have no right to participate in management, may not withdraw unilaterally and receive cash for their membership interest, and are subject to restrictions on transfer of their membership interest.
Placing real estate in an LLC converts an interest in real property to personal property. This is particularly helpful when property is owned outside of North Carolina, because ownership does not change at your death. This could prevent the need for an ancillary estate or even a deed.
An interest in a family LLC is also clearly identifiable as separate property in the event of a divorce. If all or a part of the membership interest is inherited rather than gifted, the membership can be owned by a trust for your beneficiary’s benefit, giving extra protection. We can also use buyout provisions to ensure that if an interest in the LLC is considered marital, the other family members may buy that interest.
The operating agreement may also provide for rights of refusal in an effort to keep family assets within the family. These are often used to protect family farms or vacation homes. The operating agreement may also address resolution of family disputes related to the assets by explaining exactly how the members will interact and resolve disputes.
LLCs provide a streamlined mechanism for transfers of interest in family assets, which simplifies the estate planning and gifting process. For purposes of valuing a membership interest given to a family member, the value of the assets are sometimes discounted to reflect the fact that the donee has no control over business decisions and that his or her interest cannot easily be sold to a third party. A more restrictive operating agreement provides for higher discounts.
In North Carolina, the general rule is that a charging order is the only remedy a court can use to seize assets from a LLC. This means that any distributions otherwise payable to the debtor/member must instead be paid to the creditor. However, a Court cannot order a distribution of assets. However, we believe that based on case law from other jurisdictions, multi-member LLCs provides stronger asset protection than single member LLCs.
Family LLCs are an effective estate planning tool in certain situations. However, the key to their effectiveness is making sure the operating agreement addresses your specific needs.