By Colton Powell, The Law Office of Libby Banks
In our office, Libby and I see a growing number of clients with LLCs who own businesses or have rental properties to protect. Some clients come into an estate planning consultation thinking their estate plan is a totally separate matter from their LLC, but that couldn’t be further from the truth!
Liability and litigation lurk around every corner, so the legal protections provided by an LLC are crucial. The next step that many people overlook is making sure that their LLC interest avoids probate upon their passing. LLCs are just another piece of the puzzle when we create estate plans for our clients.
First and foremost, what is an LLC?
LLC is short for “limited liability company,” and it is a type of business entity that offers liability protections for its owners (called “members”). The idea is that if a claim or lawsuit arose from the LLC, the members’ assets are protected from liability. Likewise, if a claim or lawsuit arose from a member’s personal actions, the LLC’s assets receive protection. LLCs are excellent vehicles for gaining some protection from lawsuits while maintaining flexibility and simplicity in managing the LLC’s assets.
Why create an LLC?
Typically, our clients have LLCs for their small businesses or for holding rental and investment properties. Rental properties, especially short-term rentals like Airbnb, have no shortage of accidents waiting to happen. Creating an LLC to own the rental property can protect personal assets from lawsuits. On the small business side, creating an LLC gives your business more structure and credibility.
How does this intertwine with estate planning?
Owning an LLC is just like owning any other asset. Under Arizona law, an interest in an LLC is treated as personal property. If someone with an LLC dies with only a will, or no estate plan at all, that LLC interest could get tangled up in probate with all their other assets. Creating a trust can help avoid probate for your LLC and other assets, but only if the trust is properly funded.
We have a few different ways to make sure an LLC interest avoids probate.
• First, we can assign membership to a client’s trust. When a trust is the member of the LLC, that makes the trust the owner of that LLC as well. If the trust owns the LLC, then the LLC can avoid probate under the terms of the trust.
• Another way for the LLC to bypass probate is by using a transfer on death designation. That is a simple document, effective only upon the owner’s death, that transfers the LLC interest to the designated beneficiaries automatically without the need for probate. Members choose this option over an assignment to their trust depending on the LLC’s tax treatment.
• The final method, which is more common in LLCs with multiple members or business partners, is to provide for succession planning in an operating agreement for the LLC. An operating agreement is the primary governing document for an LLC, setting forth the basic rules governing the members and management. In addition to establishing ground rules and strengthening the LLC’s legitimacy and liability protections, the operating agreement can include provisions for what happens to a member’s interest upon their passing.
What are some mistakes to avoid?
The last thing you want to do is leave yourself needlessly exposed to liability from your business or rental property. You can protect yourself by creating an LLC with a strong operating agreement. However, don’t assume that’s where your work ends. You don’t want your loved ones dealing with probate court for an asset that was created to make your lives easier. Don’t forget to include your LLCs in your estate plan using one of the methods we covered here.
How can we help?
Our office has recently expanded its offerings to include business formation services alongside our longstanding estate planning, probate, and trust administration practices. If you’ve been thinking about creating an estate plan or if you’ve been curious about setting up an LLC, we can help you accomplish both goals! Even if you already have an LLC, we can make sure your LLC records are up to date and ensure the liability protections are maintained. Most of our clients with LLCs do not have operating agreements in place yet, so they are not receiving as much asset protection as they could be. Once we’re sure your LLC is in good shape, we can discuss the proper strategy for helping your interest in the LLC avoid probate.
If you’re interested in advice about your own situation, give us a call to schedule a consultation. We would be happy to talk through your options for protecting your business and your legacy!
