An Investment Limited Liability Company (LLC) is a unique estate planning technique that Morris Law Group uses to provide clients with protection from creditors. An Investment LLC is a multimember holding company whose primary purpose is to own non-qualified investment accounts in a manner that is protected from creditors. Since the LLC has more than one member, a personal creditor of any individual member cannot attach the LLC’s assets. Additionally, our client maintains control over the underlying investments (buying, selling, etc.) by acting as the manager of the LLC. Please watch our video below on Investment LLCs by Morris Law Group founding partner Stuart R. Morris, Esq., CPA, B.C.S.
In order to form an LLC in Florida, you must file the Articles of Organization with the state. This document lists the name of the LLC, its address, and the names of the managing members. You also will need an Operating Agreement. This sets up how the LLC will function, specifies the requirements of the members, determines how new managers are chosen, details a succession plan, and so on, but unlike the Articles of Organization, the Operating Agreement is private.
Investment LLCs are typically taxed like partnerships and are pass-through entities. This means that the tax that the LLC owes is passed through to the members. This sounds like it could be costly, but it actually provides a better result than being taxed as a corporation. Unless it is taxed as an S Corporation, corporations are taxed at the corporate level and then the shareholders are taxed on distributions, resulting in two taxes instead of one. However, it is important to note that LLCs can elect to be treated as a corporation (including as an S Corporation) for tax purposes if the members desire.
Married Couples Can Equalize Estates
In addition to the asset protection benefits, the Investment LLC also provides married clients the ability to equalize their estates better for estate tax purposes. In cases where one spouse owns the majority of the assets, their estates can be equalized by transferring such investment accounts to an investment LLC owned equally by each spouse. Furthermore, because all investment accounts will already be titled within the LLC, none of the accounts need to be retitled upon a client’s death (only the interest in the LLC needs to be retitled) resulting in significant savings on post-death administration costs.
Lastly, Investment LLCs also provide significant upside in the event a client wishes to make gifts to trusts for the benefit of their descendants, as it can lead to a valuation discount. Consider the following example where Jim owns an investment account valued at $10 million. If Jim gifts $1 million from the account directly to his daughter, Heather, it will result in a gift of $1 million. However, if instead, Jim owns the $10 million investment account within an Investment LLC, and gifts a 10% interest in the LLC (actual value of $1 million) to Heather, a valuation discount for lack of marketability and control (that can exceed 20%) can be applied to the transfer, resulting in the gifting of a $1 million asset while only utilizing approximately $800,000 of Jim’s estate tax exemption.
For more information on this specialized planning technique, pleaseor call Morris Law Group at (561) 750-3850.