The Benefits of Including an LLC as Part of Your Estate Plan

Takeaways

• A Limited Liability Company, or LLC, is an estate planning tool that business owners and families alike may use.

• LLCs can help with protecting assets, avoiding probate, and transferring generational wealth.

Limited Liability Companies (LLCs) are typically associated with businesses, but they can also be powerful and flexible estate planning tools that you can use to pass assets to your children while avoiding gift and estate taxes.

This modern business entity provides a versatile legal structure that can unlock many estate planning possibilities for those looking beyond just wills and trusts. Advantages of including an LLC as part of your estate plan are asset protection, avoidance of probate, family business succession, and family real estate planning.

LLCs are generally simple and inexpensive to set up, but they involve some ongoing administrative requirements and costs. Each state has its own laws about LLCs. Some of these rules and regulations can be complicated and should be discussed with an estate planning attorney.

LLC Basics

Somewhere between a partnership and a corporation, the LLC is a relatively new form in the world of business structures.

Like a corporation, LLC owners are protected from liability. But like a partnership, the owners report income and losses from the company on their personal tax returns — that is, an LLC is a “pass-through” entity.

LLCs also have fewer fees and filing requirements than corporations, as well as fewer rules about how the company is organized and managed. Basic LLC rules are established at the state level. These rules become default rules if the LLC owners — known as “members” — do not update them in a document known as the “operating agreement.”

An LLC operating agreement is a contract that establishes the structure, operations, and internal management of an LLC. It governs the relationship between members, outlines member rights and responsibilities, and in general helps ensure the LLC operates in a way that suits the owners' needs, whether those needs are business- or estate planning-related.

The operating agreement can specify who makes key decisions, the method of selecting the management team, procedures for adding or removing members, the process for transferring ownership percentages, voting rights, how disputes are resolved — and much more. It can even establish practices not strictly necessary under state law, such as holding regular meetings and keeping financial records.

Despite the flexibility of LLC operating agreements, most states mandate that LLCs file an annual report, along with a filing fee, to remain in good standing and keep their business information up to date. In addition, each LLC must have a “registered agent” in the state where it is formed. This person is listed on the state LLC business filing and is often an attorney.

Notably, an LLC does not have to be formed in the state where somebody lives, allowing them to “shop around” for a state that has more favorable tax laws.

In 1977, Wyoming was the first U.S. state to enact LLC legislation, driven by the needs of an oil company seeking a structure with liability protection and tax advantages. It took time for other states to adopt LLC laws, and there was uncertainty about how the IRS would treat them for tax purposes.

An IRS ruling in 1988 allowed LLCs to be taxed as partnerships, avoiding double taxation. This, along with the Uniform Limited Liability Company Act (ULLCA) of 1996, fueled the LLC’s popularity. Delaware’s business-friendly LLC Act in 1992 strengthened the LLC's position as a preferred business structure.

The Limited Liability Company and Estate Planning

When LLCs first emerged, their primary purpose was to provide a flexible and liability-protected structure for businesses. Estate planning applications were not a major focus, partially due to the uncertainty about how the IRS would treat LLCs for tax purposes.

IRS rulings clarifying the tax treatment of LLCs made them more attractive for estate planning purposes like asset protection, probate avoidance, and generational wealth transfer. As states updated their LLC laws to provide more clarity, it further encouraged the use of LLCs for estate planning. A more recent LLC concept is the family LLC.

LLCs and Estate Taxes

An LLC can be used to pass assets to children without being subject to gift and estate taxes. In 2025, the estate tax exemption is $13.99 million for individuals and $27.98 million for couples. That means any estate over the exemption amount will have to pay federal estate taxes at a 40 percent tax rate.

The lifetime gift tax exclusion – the amount someone can give away without incurring a tax – is the same as the estate tax exemption ($13.99 million/$27.98 million). A parent can give their children $19,000 each per year in 2025 without the monetary gifts counting against the lifetime limit, but any gift over that amount cuts into their lifetime combined gift and estate tax exemption.

These limits are the highest they’ve ever been but are scheduled to revert to the previous exemption amount of around $5 million to $6 million in 2026. Proposals like Elizabeth Warren’s tax plan could further reduce the estate tax exemption to $3.5 million per individual, with increased tax rates on larger estates.

Such changes would make far more estates subject to taxation and dramatically heighten the need for proactive estate planning.

How to Use a Family LLC in an Estate Plan

LLCs are a popular choice for businesses because they provide a way for multiple owners to pool resources while maintaining different levels of investment in the business within a clear yet flexible ownership structure that gives liability protection to each owner.

The same properties that make LLCs attractive for many business owners can also make them useful for estate planning by effectively treating the LLC as a family business. Here are the basics of setting up and running a family LLC:

• The parents and children create the LLC and transfer assets into it. LLCs can hold cash, real property, and personal property.
• Assets held by the LLC are protected from creditors and other claims against family members. For example, if the LLC is used to own a family vacation home, and one of the family members owes a lawsuit debt, creditors cannot seize the home to satisfy the debt.
• The LLC’s assets are translated into units of value called “membership interests” or “membership units” and assigned to each member. The rules for how units are assigned are spelled out in the operating agreement.
• Family LLCs may be set up with the parents as the managing members and the children as the nonmanager members. Under this arrangement, the parents have control over the assets and the children have restrictions on what they can do with their membership interests. The operating agreement should specify the details of the arrangement.
• The tax advantages come when the parents transfer assets in the LLC to their children. Because the children are nonmanaging members of the LLC, any assets transferred to them receive a valuation discount of up to 40 percent. For example, a parent can transfer an asset worth $10,000 to a child, but by applying a 40 percent valuation discount, the asset would only be taxed at $6,000 when transferred.

To summarize: Using an LLC as part of an estate plan is a way for parents to transfer assets to their children below the estate tax exclusion limit while at the same time reducing the value of the parents’ taxable estate.

There are other, more traditional — and sometimes, simpler — estate planning instruments, like trusts, that can achieve similar outcomes, which raises the question of why a family would instead consider an LLC. Families that might benefit the most from a family LLC include those with:

• High-value assets like real estate, business, investments, or collectibles.
• Estate taxes exceeding the current federal exemption, or concerns about financial impacts from the potential reversion of the exemption to lower levels in 2026.
• A family business that requires succession planning to keep the business within the family.
• Concerns about a beneficiary’s ability to manage their inheritance responsibly, or shielding assets from potential claims in a beneficiary’s divorce.
• A goal to avoid probate costs and delays.
• Diverse assets (e.g., real estate, investments, or business interests) that need to be centrally managed.
• The need to retain management rights among the older generation while transferring equity to younger beneficiaries in a controlled, tax-advantaged manner.

One alternative to a family LLC is the family limited partnership (FLP). FLPs offer similar asset control, taxation, and liability benefits, although FLPs are generally more complex to set up and administer than LLCs. And importantly, each LLC member enjoys limited liability, whereas an FLP only grants limited liability to some members.

In addition to protecting assets from creditors, streamlining management of family assets, and providing flexible control over how assets are managed, LLCs can be used in a variety of creative estate planning ways. For example, families can:

• Use an LLC in conjunction with a trust to enhance liability protection and expand customization options beyond what either structure can achieve alone.
• Divide assets among heirs to equalize their inheritances, even if the underlying assets are indivisible (e.g., real estate).
• Limit non-family members from acquiring interests through the LLC operating agreement.
• Define rules for succession, distributions, asset use, and member buyouts in the operating agreement to ensure a smooth ownership transition and limit disputes.
• Place real estate, such as a family vacation home, into an LLC to streamline management and transfer upon death.
• Shift LLC dividends (i.e., income) to lower-tax-bracket family members through set distributions.
• Transfer LLC membership shares to a charitable organization for a potential tax deduction, or set up an LLC to manage charitable activities under family control.

The major disadvantage of using an LLC in an estate plan is that it introduces costs and administrative requirements, like filing annual reports and maintaining proper records, that can be more burdensome than traditional estate planning tools. The family LLC operating agreement should also be reviewed every few years and updated as necessary to reflect changes in family dynamics and the law.

A family LLC might be overly complex for families with minimal or straightforward assets that do not require advanced management or protection, and for individuals who are not concerned about tax planning, liability protection, or multigenerational planning. But with careful structuring and a well-drafted operating agreement, an LLC can help to effectively control your assets, reduce tax burdens, and facilitate wealth transfers to your loved ones.

To better understand the uses and benefits of including an LLC as part of your estate plan, get in touch with a local attorney.