Estate planning is something that all of us will have to face at some point in our lives. It’s a long process with a lot of planning, documenting, and computing.
Unfortunately, taking stock of your assets also includes thinking about taxes and other fees. Inheritance taxes and estate taxes can burn holes in your savings that you plan to pass down to your family. And while your local government is more than capable of distributing your assets, these services often come at a price. When disputes between beneficiaries arise, that incurs fees as well.
If you’re hoping to pass down your assets while avoiding all these additional costs, you might want to consider forming a limited liability company (LLC).
But First, What is an LLC?
An LLC is a type of legal business structure designed to ensure that the owners are not personally responsible for their company’s debts and lawsuits. This means that you, as a business owner, are not required to shell out money to pay for company debts.
How is an LLC Different From a Trust?
By now, you might have noticed that trusts often come up in estate planning. It’s a three-party agreement involving a trustor, a benefactor, and a beneficiary. In this legal process, the benefactor assigns a trustor, who is given certain assets that must be turned over to a beneficiary. In contrast, LLCs are not legal processes, but business entities.
Since LLCs are a relatively new type of corporation, trusts have been the go-to solution for estate planning. Both have similar benefits, including avoiding probate and providing more freedom when allocating assets. However, LLCs offer a few more upsides.
Benefits of Forming an LLC for Estate Planning
So, why opt for an LLC? It’s a guaranteed way for business owners to protect their personal assets in case issues arise within the company. But what about people working on an estate plan? Here are five reasons why you should form an LLC for estate planning:
1. They’re easy to set up
Unlike partnerships or corporations, LLCs come with far fewer costs and paperwork. The first step is to file a document of organization, which should include the name of your company, the address, and a list of members. The next few steps vary depending on the state you’re filing in, but it shouldn’t be more than a bit more paperwork, including filing an Operating Agreement.
2. They are flexible in terms of ownership, management, and profit-sharing
In LLCs, there are no strict guidelines for the organizational model. You can start one even if you’re the only member, and there’s no need to have a board of directors. Annual meetings and meticulous record-keeping are not a requirement either. In short, you have free rein to organize the business structure. Just make sure to lay them out in the Operating Agreement.
3. They protect your assets from lawsuits and creditors
Unlike trusts, LLCs can help you transfer your assets while keeping them safe from lawsuits and creditors. This is because assets that have been transferred to your LLC are solely for company matters. Should creditors demand payment from you, these can only come from your personal assets.
4. They aren’t taxed by the IRS
LLCs are not considered separate tax entities. Instead, it falls to the members to pay through personal income tax. The company’s annual profits will be divided by the number of members and then taxed depending on overall tax liability. This measure protects the assets that you’ve transferred to the LLC from taxation. You’ll be in complete control of the funds and properties of your LLC.
5. They remove the need for probate
Probate is a long, expensive process wherein a court of law settles the allocation of a person’s estate. By setting up an LLC, the company is simply transferred to your heirs. This removes the need to pay legal fees and additional inheritance taxes.
