Whether I’m working on a business transaction or assisting business owners with their estate planning, I always look at how the ownership of the LLC is structured. While many business owners have set up a revocable living trust in order to direct how their assets are managed and to avoid probate, it is common to find that their LLC interests have not been put into the trust. This means that even if everything else in the estate plan were done perfectly, the family would still likely need to open up probate to access and manage the LLC interests. Obviously, this is not ideal in any situation.
Fortunately, putting an LLC interest into a trust is often a simple and affordable solution. If the LLC is a single-member LLC, including an LLC owned by a married couple, the change can be made by signing an Assignment of Membership Interest and filing Articles of Amendment with the Arizona Corporation Commission. If there is more than one member, the operating agreement will control the steps necessary to transfer the LLC interest into the trust. Often there are provisions in the operating agreement allowing a member to make such a transfer. However, if there is no provision, or no operating agreement, the consent of the other members would be necessary to make the transfer. With either a single-member LLC or a multiple-member LLC, the operating agreement should be updated to reflect the change of membership. This is most often not a big change, and can be done by updating a Schedule which lists current members and their addresses. As a side note, if you do not have a written operating agreement for your LLC – get one!
Since I am a lawyer, I must include a few caveats. First, if the LLC is treated as an S-Corporation for federal income tax purposes, or could be in the future, it is imperative that the trust contain language necessary to qualify the trust as an S-Corporation shareholder in the event the business owner becomes incapacitated or passes away. Second, you want to make sure that the transfer of the membership interest is not prohibited in any financial or other agreements that have been entered into by the LLC. Third, I really mean it about the operating agreement – you really do need one, but I’ll save that for another blog post.
Lisa is well versed in challenges faced by small businesses and their owners. Her unique prospective benefits her business clients with agreements, employment advice, copyright violations and succession planning. She also assists families with estate planning not only guiding them through the estate planning process but also understanding why this is so vital to their families.
When forming your LLC, you may wonder the importance of specifying your company’s “purpose,” and may be tempted to provide a hasty response or use a generic phrase such as “any purpose authorized by law.” The reason defining your company’s purpose is important is because the actions that the members or managers may legitimately take on behalf of the company are limited by the company’s purpose as stated in the operating agreement. In a member-managed LLC, the unanimous approval of all members is required for a member to make a decision to undertake an action falling outside of the company’s purpose. Likewise, in a manager-managed LLC, all of the members must approve any decision or action of the manager that falls outside the scope of the company’s purpose.
When defining the purpose of your LLC, you want to be specific enough to place reasonable limitations on the actions of the members or managers, but broad enough that it does not impede the ordinary course of business for your LLC. Generally one or two phrases or sentences can provide a sufficient purpose for your LLC, such as:
Purchase and manage residential real property rentals;
Provide landscape services; or
Create custom artwork.
You can place more specific limitations within your purpose, but be sure you are thinking long-term. The LLC’s purpose as defined in the operating agreement can only be amended if all LLC members agree.
Putting a few minutes of thought into the purpose of your LLC is worth it to protect you and the other LLC members. In addition, just having the purpose conversation with the other LLC members can help facilitate important discussions to ensure everyone’s interests and expectations are aligned at the formation of the LLC.
Lisa is well versed in challenges faced by small businesses and their owners. Her unique prospective benefits her business clients with agreements, employment advice, copyright violations and succession planning. She also assists families with estate planning not only guiding them through the estate planning process but also understanding why this is so vital to their families.
Adding an adult child as a joint owner of a parent’s bank account seems like a simple and straightforward solution that allows the child to help care for mom or dad without the expense or hassle of preparing powers of attorney or other legal documents. Naming a child as a joint owner also allows the account to avoid probate at the death of the parent. However, there are many dangers that account owners, and the children, may not realize.
Most bank accounts are set up so that once a child is added as a co-owner to a parent’s bank account, the child becomes a legal owner of the assets in the account. Even though in the minds of both the parent and the child, the money “belongs” to mom or dad, the reality is that from a legal perspective, the money actually belongs to both the child and the parent. This means that the money in that account can be spent by the child for any reason, not just for caring for mom or dad. The money in the account also becomes reachable by any creditors of the child. Even if the child is a responsible adult, unforeseen circumstances, such as a car accident, could cause mom or dad’s bank account to be wiped out due to the child’s liabilities. One of the most common creditors is a divorcing spouse, and the money in the joint account could be counted as an asset of the child in a divorce.
Another common misconception is that the parent does not need a Will or Trust because the child on the jointly-owned account knows after the parent dies, the money is to be split among all of the child’s siblings. Now, there are times when this strategy could work; however, legally the money transfers 100% to the child named as a co-owner on the account. That child has no legal obligation to share the assets of the account with other siblings. Frequently, there is conflict among siblings about whether mom or dad offered the co-owner child a larger share, or all, of the account to compensate that child for caring for the parent during their last years.
The intentions behind adding an adult child to mom or dad’s accounts are good – everyone wants a simple solution that is easy to manage. Even though I do not recommend adding a child to a parent’s bank account, there are other ways to address the issues, and they do not need to be complicated or expensive. At the most basic level, the child could be added as agent, or signer, on mom or dad’s accounts by filling out a form at the bank. This would allow the child to access the money for mom or dad’s benefit only. The money would not legally belong to the child, and would not be reachable by the child’s creditors. A beneficiary designation form can also be filled out at the bank which would allow the assets in the account to avoid probate and pass to all the siblings automatically at mom or dad’s death.
Caring for family members can sometimes feel complicated, but taking these steps will allow the child to not only care for mom or dad, but also protect mom or dad’s money from unintended consequences that may arise from joint account ownership.
Lisa is well versed in challenges faced by small businesses and their owners. Her unique prospective benefits her business clients with agreements, employment advice, copyright violations and succession planning. She also assists families with estate planning not only guiding them through the estate planning process but also understanding why this is so vital to their families.
One of the best things about working with someone or a couple on their estate plan is that a primary goal is usually to take care of their children, grandchildren, and other loved ones. I enjoy getting to know the families, hearing their stories, and helping them make sure future generations will be protected and cared for.
Because their focus is on others, many clients do not think about making sure they are cared for during their lifetimes and during any periods of incapacity. This is equally important, if not more important, than taking care of others. Too many times since COVID-19 pandemic started, I have received heart-wrenching phone calls from children whose parents have become ill. They want to know how they can help take care of their parents’ finances, who is the proper person to make medical decisions, or how do they make end of life care decisions.
Nobody wants to contemplate these types of issues. I don’t like to think about them for myself or my family either. What we learned during COVID-19 pandemic is that things can change in an instant. It is so important to put documents in place to give authority to those who will be decision-makers if someone becomes incapacitated. Once those documents are together, it is time for another uncomfortable yet critical step. It is vitally important to talk to the decision-makers about your wishes so, if they are needed, they can be as prepared as possible.
Providing for your family means more than figuring out how to distribute your assets. It also means giving them the tools to make sure you are cared for during your lifetime.
Lisa is well versed in challenges faced by small businesses and their owners. Her unique prospective benefits her business clients with agreements, employment advice, copyright violations and succession planning. She also assists families with estate planning not only guiding them through the estate planning process but also understanding why this is so vital to their families.
Don’t let the chaos of the holiday season prevent you from avoiding federal gift tax by making “annual exclusion” gifts, medical payments gifts, and educational gifts.
Make Annual Exclusion Gifts
“Annual exclusion” gifts are transfers of money or property in an amount that does not exceed the annual gift tax exclusion.
In 2017, the annual gift tax exclusion is $14,000 per recipient, and it rises to $15,000 per person in 2018. Therefore, you can give up to $14,000 to as many individuals you choose on or before December 31, 2017, and then give another $15,000 to the same people on or after January 1, 2018, and you will not have to file a federal gift tax return (IRS Form 709). In other words, the IRS doesn’t consider gifts that are equal to or less than the annual exclusion amount to be taxable gifts at all.
Married couples can take double advantage of the annual exclusion and gift $28,000 in 2017 and then another $30,000 in 2018. But note that in some situations, a couple may still need to file a gift tax return to report any “split gifts” – they’ll need to consult with their estate planning attorney or accountant to be sure. Also, you may need to file a gift tax return if you make gifts that exceed the annual exclusion amount or if you make gifts that don’t qualify for the annual exclusion – your attorney or accountant can guide you through this.
Make Payments that Qualify for the Medical Exclusion
Another type of transfer that the IRS doesn’t consider to be a gift for gift tax purposes is a payment that qualifies for the medical exclusion.
Payments that qualify for this exclusion are ones that are made directly to an institution that provides medical care to an individual or to a company that provides medical insurance to an individual. In general, medical expenses that qualify for this exclusion are the same as those that are deductible for federal income tax purposes.
Therefore, in 2017 you can pay for your grandchild’s emergency appendectomy in the amount of $20,000 and also give your grandchild an additional $14,000 by December 31, 2017, and then another $15,000 on or after January 1, 2018, and you will not have to file any gift tax returns.
One incredibly important detail – in order to qualify for the medical exclusion you must make payment directly to the institution providing the medical care or company providing the medical insurance. If you give the money to the individual receiving the medical care or insurance benefit, even with explicit instructions that it be used to pay for the medical care, your payment will be considered a gift.
Make Payments that Qualify for the Educational Exclusion
A payment that qualifies for the educational exclusion is another type of transfer that the IRS doesn’t consider to be a gift for gift tax purposes.
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Payments that qualify for this exclusion are ones that are made directly to a qualifying domestic or foreign institution as tuition for the education of an individual.
For example, in 2017 in addition to paying for your grandchild’s emergency appendectomy (see above), you can pay your grandchild’s college tuition in the amount of $25,000, give your grandchild an additional $14,000 by December 31, 2017, and then another $15,000 on or after January 1, 2018, and you will not have to file any gift tax returns or pay any gift tax.
Two incredibly important details – in order to qualify for the educational exclusion
(1) You must make payment directly to the institution providing the education, not to the individual receiving the education, and
(2) Your payment must be for tuition only, not for books, supplies, room and board, or other types of education-related expenses.
If you fail to follow either of these restrictions, the payment will be considered a gift.
If you have any questions about how to make the most out of gifts to your family, please contact me, and I will be happy to guide you through this.
Lisa is well versed in challenges faced by small businesses and their owners. Her unique prospective benefits her business clients with agreements, employment advice, copyright violations and succession planning. She also assists families with estate planning not only guiding them through the estate planning process but also understanding why this is so vital to their families.
