There are many different ways to create a comprehensive estate plan that looks out for your loved ones. The most common plans involve wills, trusts, and beneficiary designations, but creating a specific type of limited liability company (LLC) for estate planning purposes offers several unique benefits that other methods simply don’t provide.
Estate planning LLCs are dedicated legal entities that let you house assets like real estate and investments in a formal structure. They exist to make transferring those assets to your loved ones cheaper by reducing tax liability and more protected by providing asset protection benefits
Key points
- Forming one of these types of LLCs for estate planning lets you take advantage of certain tax benefits for your estate and can help your loved ones avoid going through the probate process.
- LLCs help maintain family control over assets across generations while still letting you gradually shift ownership interests to your chosen heirs over time.
- The type of LLC you choose to form will depend on your goals and the complexity of the estate.
- Assets held in a restricted LLC can’t be distributed for at least 10 years, which could help you reduce your loved ones’ estate and gift taxes.
- If you want to leave specific assets to individual family members, forming series LLCs could help you clearly separate assets. This could make it easier to protect and allocate parts of your estate to the people you want to receive them.
Why might you choose an LLC for estate planning?
Creating an LLC for estate planning entails setting up certain assets in your estate as a separate legal entity from yourself, allowing you to manage your assets in a unique way. This can set up your loved ones up for an easier inheritance process.
Below are some of the reasons you may want to use an estate planning LLC in your strategy.
- Reduce estate and gift taxes. When you form an LLC for estate planning, you’re able to reduce your estate and gift taxes by effectively reducing the taxable value of your estate.
- Avoid probate. With an LLC, your loved ones will typically be able to inherit your estate without having to go through probate. Your heirs don’t inherit the assets directly. Instead, they inherit an interest in the LLC, which allows the LLC to transfer ownership of the assets outside of probate court.
- Maintain privacy. An LLC is treated as a private and separate entity, and the assets and beneficiaries of the LLC will be kept out of the public eye.
- Protect your assets. Your estate planning LLC will protect your assets from seizure if your business experiences financial hardships, you get sued personally, or you default on personal debts. The assets held in your LLC will be safe and typically can’t be used to settle your debts unless you personally guaranteed specific business debts.
Every situation is different, so be sure to consult with an estate planning attorney or tax professional to learn how forming an LLC will impact your estate and the benefits you and your loved ones may see.
The types of LLCs for estate planning
There are several types of LLCs that you can use for estate planning, and each offers different benefits.
Restricted LLCs
Restricted LLCs are a type of business entity developed with estate planning in mind. These LLCs are only available in Nevada, but you can open an LLC in Nevada even if you live out of state. Restricted LLCs require that assets remain in the LLC for at least 10 years after formation. This means your loved ones won’t receive distributions until the LLC is 10 years old.
Family LLCs
Family LLCs are a type of limited liability company often formed by individuals running a family business. However, it can also be used by family members to leave assets to their children, grandchildren, or any family members of their choosing. While they’re alive, the person(s) who started the LLC will typically act as managing member(s), overseeing the assets held by the LLC.
These LLCs are available in every state, so you can form one locally and appoint family members to the LLC as members with interest. This means you can leave assets to any family member of your choosing, whether it's your child, grandchild, your niece or nephew, or a sibling.
Series LLCs
Series LLCs are a type of limited liability company that lets you create different series or categories within a single organization. This type of LLC lets you divide up assets into individual entities and assign different owners or members to each series. This allows you to effectively divide your assets to your chosen beneficiaries within a single umbrella LLC.
This structure can make it easier for people who want to clearly allocate specific assets to different individuals. After your death, your loved ones will be able to inherit the assets you allocate faster and with less hassle.
| LLCs for estate planning at a glance | |||
| Feature | Restricted LLC | Family LLC | Series LLCs |
|---|---|---|---|
| Availability | Only available in Nevada | Widely available in all states (as a general LLC type used for family assets) | Available in a growing number of states; legal standing varies across states |
| Distribution timeline | Typically, no distributions permitted for 10+ years after formation | Distributions determined by the operating agreement; can be immediate or scheduled | Distributions can be made from individual series as per their operating agreements |
| Asset growth | Growth on assets within the LLC can be tax-deferred until distribution (after the restricted period) | If treated as a pass-through entity, asset growth is generally taxable annually to members | Generally treated as a pass-through, so growth within each series is taxable to its members annually |
| Succession control | Built-in restrictions can ensure assets remain within the family for an extended period, preventing premature dissipation | Senior family members can retain significant management control even while gifting non-managing ownership interests to heirs (dictated by operating agreement) | Overall control rests with the master LLC. Operating agreement dictates succession for each series |
| Estate planning impact | The "locked up" nature of assets significantly reduces their present value for estate/gift tax purposes, leading to higher valuation discounts (e.g., 35–40% or more) and substantial tax savings over time. | Allows for gifting of discounted non-controlling interests, reducing the taxable estate and leveraging annual gift tax exclusions. Provides asset protection from creditors for heirs. | Excellent for segregating liabilities across different assets. Simplifies gifting of distinct assets by transferring series interests rather than individual deeds. |
How to choose between restrictive, family, and series LLCs
The type of LLC you choose to help with your estate planning efforts largely depends on your goals and concerns.
If you’re looking for a simpler structure and don’t have an overly complex estate that you need to partition, a family LLC may be sufficient. However, if you want to divide the LLC up into several smaller units to protect each group of assets from possible liability and take advantage of personal liability protection, a series LLC may be your best option. If you want to prioritize tax benefits like reduced estate taxes, opening a restricted LLC may be a good choice.
It’s important to set up your estate planning LLC appropriately so that your assets are protected and distributed as expected. That’s why it’s a good idea to speak with an estate planning attorney before you make your decision. They can help you explore your options and can recommend the best type of LLC based on your situation, your assets, and your long-term goals.
How to create an LLC for estate planning
Forming an LLC for estate planning is similar to creating an LLC for a business. These are the steps you’ll need to take to create an LLC as part of your estate plan.
1. Choose your LLC type
Think about the type of LLC you want to form. This can determine which state you’ll form the LLC in and the exact steps you’ll take once you form it. Remember, not all LLCs are available in every state. If you want to open a restrictive LLC, you’ll need to do so in Nevada. If you want to open a family LLC or a series LLC, you can likely do so in your state of residence.
2. Pick a name for your LLC
You’ll need to name your LLC before you can take the next step in registering and forming it. The name you choose is entirely up to you. However, many people choose to name their LLCs using their surnames or a name with sentimental value to you and your heirs.
It doesn’t have to be complicated. But it should be something you and your loved ones can remember.
3. Choose a registered agent
To open an LLC, you’ll need to appoint a registered agent with a physical address in the state where you’re forming the LLC. If you’re forming the LLC in your state of residence, you can act as the registered agent. However, if you’re forming the LLC out of state, you’ll need to work with someone local. You’re free to choose one yourself or work with a registered agent service to find a professional you can trust.
4. Create your operating agreement
Your operating agreement outlines the structure of your LLC. The document should explain who owns and manages the LLC, as well as the members or beneficiaries you want to have an ownership interest in the limited liability company. Your operating agreement also explains how assets should be distributed after your death.
5. File your articles of organization
You’ll also need to file your articles of organization with the state in which you’re opening your LLC. These articles should include the following:
- The name of your LLC
- Your LLC’s address
- The purpose of your estate planning LLC
- How the LLC is managed
- The signature of one or more of the LLC's organizers
6. Apply for an employer identification number (EIN)
You’ll need to request an employer identification number from the IRS. This number functions as your LLC’s unique identifier, much like your personal Social Security number. You’ll use your LLC’s EIN when you file your LLC’s tax return each year.
You can request an EIN on the IRS website for free, or use an EIN service if you’re having trouble navigating the website.
Once you have your EIN, it’s a good idea to open a dedicated LLC bank account. Having a separate bank account from your personal bank accounts will keep the LLC’s finances separate from your personal finances, allowing for cleaner accounting.
7. Fund your LLC
You’ll need to fund your LLC by transferring ownership of the assets you want to leave to your beneficiaries to the LLC. In most cases, you’ll transfer ownership by making what’s called a member contribution. This act effectively turns your personal assets into the LLC’s assets.
Keep in mind that once you add assets to your LLC, you’ll need to treat them as if the LLC owns them outright. If you want to sell them down the road, you’ll have to sell them through the LLC. You can’t sell them yourself like you can the personal assets not held in the LLC.
8. Develop your succession plan
You’ll want to create a clear succession plan for your LLC that details who inherits which assets, how the LLC’s assets will be distributed, and any other relevant terms. You’ll want to get an attorney review your succession plan to make sure everything goes to the intended beneficiaries and that distributions are made in a way that upholds your values and wishes.
Costs of starting your estate plan’s LLC
Though using an LLC as part of your estate plan is an affordable option, you’ll still want to make sure you’re prepared to pay the following costs.
- Filing fee. This varies by state, but most charge you $50 to file your articles of organization. If you want expedited processing, it may cost more.
- Registered agent fee. If you’re acting as your own registered agent, you won’t have to pay a fee. If you hire an external registered agent or use a service, you could pay up to $300/yr.
- Publication costs. Some states and counties require you to publish notice of your LLC’s formation in several newspapers for a few weeks. The costs to publish will depend on the newspaper.
- Attorney fees. If you work with an estate planning attorney to review your LLC and your comprehensive estate plan, you’ll need to cover those fees as well. Rates vary from attorney to attorney.
The pros and cons of using an LLC for an estate plan
Here are a few of the pros and cons of forming an LLC for an estate plan.
The pros of using an LLC
Here are the benefits you may see from forming an LLC:
- Tax savings. Transferring assets to the LLC can reduce the taxable value of your estate, potentially reducing the amount of estate taxes your loved ones pay when you die.
- Enhanced privacy. The assets held in your LLC and the beneficiaries with an ownership interest in the LLC stay private when you die. This keeps others from learning about what you left your loved ones.
- Avoiding probate. Transferring assets to your LLC lets you avoid probate. Your loved ones will inherit the assets you want them to, when you want them to, without waiting potentially months or years for the court to complete its review of your estate.
The cons of using an LLC
Here are a few of the potential downsides of using an LLC as part of your estate plan:
- Complex formation. Creating an LLC for estate planning that fits your needs and helps you achieve your estate planning goals can be tough to do on your own.
- Loss of some control. When you transfer assets into your estate plan’s LLC, the LLC becomes the owner of those assets. This makes it more difficult to sell property down the line.
- Risk of disputes between members. The beneficiaries who you appoint as members may still disagree with each other, leading to disputes about how your assets are distributed.
How LegalZoom can help with estate planning
Creating an estate plan that looks out for your loved ones and provides for their futures can be difficult to do on your own. It’s best to get advice from an attorney who specializes in estate planning. LegalZoom’s Personal Attorney Plan is powered by a network of vetted attorneys and gives you access to an easy-to-use platform.
Your plan covers a wide range of personal legal matters, including estate planning, and gives you unlimited consultations on new legal topics, document reviews, and more.
LLC for estate planning FAQs
Does forming an LLC for estate planning avoid the probate process?
In many cases, forming an LLC for your estate can help you avoid probate. However, you’ll want to make sure the LLC is set up correctly to avoid the probate process if that is your goal.
What are the downsides to family LLCs?
Family LLCs are not ideal for passing assets and inheritance onto minors. Individuals typically must be at least 18 years old to have an ownership interest in the LLC and to receive distributions. If you want to pass assets on to a minor, you’ll want to work with an estate planning attorney to choose the best method for your needs and guide you through the legal process.
Can I still sell assets held in the LLC before I die?
You can sell assets held in your LLC. However, you must do so according to the LLC’s operating agreement. Remember, the assets held in the LLC are owned by the LLC. Any returns from the sale go to the LLC, and while the LLC can use those returns to invest in new assets, the money and/or new assets are owned by the LLC.
Is a trust better than an LLC?
Both trusts and LLCs are useful estate planning tools. Neither is technically better than the other. It all depends on how you want to use the tool for your estate plan. An experienced attorney will help you choose between a trust and an LLC based on your situation.
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