Estate Planning with a Delaware LLC
In an LLC, the members are free to organize the LLC in whatever manner they choose, with near-total freedom to define the relationship among the members and the terms governing the operation of the entity. The fundamental terms of an LLC’s ownership, operation and management are set forth in its LLC agreement. The LLC agreement has been a popular topic in many other blog postings. This posting will focus on the LLC’s potential as an estate planning tool, highlighting just how flexible the Delaware LLC can be!!!
The LLC agreement not only governs terms such as sharing of income and liabilities, it also sets forth the terms governing the liquidation of the entity and the replacement of members. An LLC does not have a fixed life term, and can remain in existence, even after the death of one or more members. A carefully drafted LLC Agreement can help to ensure a smooth transition of control after the death of a key member, making the LLC an attractive vehicle for family estate planning. The LLC agreement will allow control over the LLC, its assets and/or its business to be passed along to surviving family members.
Here's how estate planning with an LLC works:
- The initial members, which are often the grandparents, will form and file the LLC and appoint themselves as Class A member internally within the LLC agreement. These Class A members have all the rights and responsibility to manage the assets of the LLC.
- The Class B members are often the offspring of the grandparents; these family members initially have no responsibility or rights in the LLC. When all the Class A Members have passed, these Class B members will become the Class A members, granting them all the rights and privileges associated with the Class A member status.
- The Class C members , which are typically the grandchildren, are a dormant class Class C members have no responsibility or rights in the LLC until the passing of both the Class A and Class B members. New classes of member interests can be established at any time, so the Class B or Class C members can, when they ultimately obtain control over the LLC, create additional classes to continue the chain of ownership and control over the LLC to even more distant generations.
It is important to remember that an LLC Agreement is not filed or otherwise provided to the state of Delaware, and is not available for public inspection or part of the public record. Thus, the confidentiality of family affairs is maintained.
Structures such as these can be used for holding of real estate, passing along of a family business or any large asset. The structure allows the family business/asset to be transferred from one generation to another, in theory, forever! The long and costly procedures associated with probate and interpretation and implementation of wills can be avoided, allowing for a quick and seamless transition in the event of a passing.
This structure is an example of how flexible the Delaware LLC can be while providing the members’ freedom of contract with one another upon whatever terms they deem best suited to their circumstances and goals.
*Disclaimer*: Harvard Business Services, Inc. is neither a law firm nor an accounting firm and, even in cases where the author is an attorney, or a tax professional, nothing in this article constitutes legal or tax advice. This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances. Any action taken or not taken based on this article is at your own risk. If an article cites or provides a link to third-party sources or websites, Harvard Business Services, Inc. is not responsible for and makes no representations regarding such source’s content or accuracy. Opinions expressed in this article do not necessarily reflect those of Harvard Business Services, Inc.
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There are 3 comments left for Estate Planning with a Delaware LLC
James Bentley said: Wednesday, July 7, 2021Hi, I purchase my Series LLC through your company. i found the Series LLC Template. Do you have a template for Estate Planning such as the Class A, Class B, and Class C members? Thank You, Jim
HBS Staff replied: Thursday, July 8, 2021Hello James, Yes we have the Estate planning template on the same link https://www.delawareinc.com/llc/llc-operating-agreement/, it is called Multi-Member LLC Operating Agreement with Three Member Classes
Nick said: Wednesday, September 16, 2020Brett: great article. Thank you. If the Class A only member of the LLC is a foreign individual and the LLC has no income from US source, will there be any taxes to be paid associated to the LLC when he/she passes away and the Class B member takes control? Anything related to the inheritance tax?
HBS Staff replied: Thursday, September 17, 2020Thanks, Nick. Any Delaware LLC is required to pay the $300 annual Franchise Tax fee to the state of Delaware, regardless of the LLC's income. Unfortunately, we're not able to comment on other tax implications. That question would be best answered by a tax professional.
Gerry said: Friday, June 26, 2020Brent: I read your article about using an LLC as an estate tool. I searched the internet for language that can be used for A, B and C membership levels but could not find any. Could. you direct me to a place where I could find some this language?
HBS Staff replied: Tuesday, June 30, 2020We offer free LLC operating agreement templates, but they do not include language specific to this setup. The Delaware LLC operating agreement is extremely flexible and can be crafted to stipulate whatever terms you want. For assistance getting the exact language to put in your agreement, we recommend speaking with an attorney.