Limited liability companies ("LLCs") have become very popular in Michigan. LLCs are entities that combine the limited liability of a corporation with the pass-through taxation of a partnership. The use of this business vehicle as part of an overall estate plan can provide unique planning opportunities.  The creation of a Family Limited Liability Company can provide a method of transferring family wealth to the next generation while preserving the parent's control over the asset.

• Simplify Gifting.  An LLC can be used to avoid cumbersome direct transfers to various family members of assets like real estate, which require the preparation of separate deeds each time a fractional interest is transferred.
• Take Advantage of the Gift Tax Annual Exclusion. The IRS has ruled that despite the broad control retained by the donor, gifts of LLC interests can qualify for the annual exclusion as long as the LLC documents are properly drawn.
• Permit the Donor to Retain Control of Transferred Assets. The donor can serve as manager of the LLC even if he or she gives away 100% of his or her interest in the LLC.  Even after complete divestment of the asset, the Donor can receive management fees to continue business income to the Donor.
• Reduce the Size of the Gross Estate.  Placing rapidly appreciating or income-producing property in an LLC and then making gifts of some or all of the LLC interests will remove a proportionate share of the property from the donor's estate, even though the donor retains management control. Future appreciation and income from the interests transferred will be allocated to the donees.
• Reduce the Cost of Administering Assets.  Using a single LLC to hold investments will allow a donor to avoid the additional expense of maintaining separate investment accounts for each donee and, if managed properly, take advantage of the opportunity for greater diversification.
• Provide an Opportunity to Teach Investment and Business Tactics.  The LLC allows parents to involve their children in the business without surrendering control. It protects the assets from unwise decisions made by the children. An LLC serves this purpose better than an a family limited partnership (FLP) since it allows children to become gradually more involved in management without risking reclassification as general partners and loss of limited liability.
• Provide Asset Protection.  LLC interests are not attractive to creditors. A creditor who attaches an LLC interest only receives an interest in profits. The creditor is not entitled to management rights and generally cannot force a distribution.
• Protect the Family's Privacy.  An LLC requires the initial filing of articles of organization and an annual statement. Both of these are one-page documents that provide no information regarding the capital structure or financial status of the family business. The certificate required to be filed for an FLP contains substantial information regarding not only the structure of the business but also the capital contributions of the limited partners.
• Provide Limited Liability for All Members.  An LLC offers protection to family members from liability for the debts of the business. An LLC offers more protection than an FLP since no general partner (with unlimited liability) is required. This can be particularly beneficial when the asset held is commercial or rental real estate or a going business with substantial potential liability.
• Permit a Step Up in Basis.  Property transferred to another during a donor's lifetime loses the step-up in basis at the donor's death. However, the basis of assets held in an LLC may be stepped-up on the death of a member to the extent they are attributable to the deceased member's LLC interest. This option is not available in the case of a corporation.

Take Advantage of Discounts.  An LLC interest is generally worth less than the underlying assets of the LLC. The value of an LLC interest, like that of any other closely-held business, may be discounted to account for its lack of marketability and, if appropriate, the fact that it is a minority interest. As you may expect, the IRS does not like discounts and has issued rulings over the last several years denying discounts to FLPs and LLCs formed shortly before a donor's death. The rulings are based on a variety of arguments, many of which are poorly thought out and contradict prior IRS rulings. We continue to believe discounts are valid but taxpayers should know that the IRS will likely attack large discounts on interests in LLCs formed shortly before the donor's death.

This summary is intended as a source of general information.  If you have questions or desire additional information, please contact Ryan M. Wilson at (517) 377-0897 or rwilson@fraserlawfirm.com or Edward J. Castellani, J.D., CPA at (517) 377-0845 or ecastellani@fraserlawfirm.com.