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How LLCs Affect Estate Plans

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The Limited Liability Company, or simply the LLC, has become among the most popular ways to form a business today. When family members are developing their estate plans, they often think of the usual documents such as the will, durable power of attorney, health care proxy, and possibly the trust along with IRA beneficiary designations. However, that same family may own and operate a successful closely-held business. The family members who founded the business may have formed it as a partnership, corporation, limited partnership, trust, or even an LLC after weighing the costs and benefits of limited tort liability, double taxation, and active involvement in management. Most likely, little thought has been given to how this choice of entity can affect their estate planning goals.

Why Use an LLC for a Family Business?

One of the most significant advantages for using the LLC for a family business is the availability of valuation discounts for estate tax purposes. Two aspects affecting valuation discounts are lack of control and lack of marketability. If the parents have enough assets to potentially be subject to federal and state estate taxes, the LLC choice of entity for the business may reduce the value of the taxable estate, thereby reducing or even eliminating estate taxes. The valuation discount may be available because the LLC is structured so that the parent is not entitled to participate in management but still retains an ownership interest; the lack of marketability discount would then be available since potential purchasers are less likely to purchase an LLC interest which has few or no rights to participate in management. In these types of cases, the IRS has generally allowed valuation discounts for lack of control and marketability ranging from 10% up to 45% and beyond.

At Christopher, Hays, Wojcik & Mavricos, we have formed more than several hundred LLCs for closely-held family businesses in connection with the family’s long-term estate planning goals. Recently, our firm successfully obtained a 25% lack of marketability discount for a recently deceased member’s interest in an LLC which managed various country clubs and real estate. Consequently, the decedent’s estate paid thousands of dollars less in estate taxes. This is just one aspect as to how an LLC can be utilized in an estate plan. Our attorneys have the expertise to help you understand how tax, business, and estate planning considerations can help you achieve your goals.

Do you need assistance with forming a business? If so, contact Christopher, Hays, Wojcik & Mavricos today.

About the Author

Christopher R. Mitchell is admitted to the Massachusetts bar and concentrates his practice in the areas of estate planning, trust and estate administration, tax planning, and business succession planning.

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