Passing Assets to Your Heirs Without Probate and With Personal Liability Protection
Estate planning tips to make the most of your financial legacy
When you have a limited liability company that owns assets, such as investment real estate, it provides you with personal liability protection but often doesn't have any estate planning benefits. A living trust enables you to pass assets to your heirs immediately, outside of probate, but doesn't provide any personal liability protection. To gain the liability protection of an LLC and the estate planning benefits of a living trust, consider making your living trust the sole member of your LLC.
When you put assets into a revocable living trust, the assets pass directly to your heirs when you die without going through probate court. This eliminates the delays associated with supervision from a probate judge and prevents public disclosure of the transaction. It's also usually less expensive than probate court. While you're alive, you can add assets to the trust, remove assets from the trust and control the current assets as the trustee.
Limited liability company
When you form a company to hold assets, you must typically choose to organize it as a corporation, a partnership or a limited liability company. A corporation provides personal liability protection if someone wins a judgment against the company, but the government taxes you twice. A partnership eliminates double- taxation, but doesn't provide personal liability protection to the general partner. A limited liability company, however, combines the liability protection of a corporation and the single taxation of a partnership in a single entity. When you die, however, your LLC ownership must pass to your heirs through a probate in many states.
LLC membership and management
While the rules regarding LLCs vary by state, most states don't require more than one member to form an LLC. A member can be a person or an entity such as a corporation, a partnership, another LLC, a foreign entity or a trust. The company's operating agreement specifies who is responsible for making decisions and commitments on behalf of the company. If an LLC is member-managed, the members are responsible for running the company. It the company is manager-managed, the members appoint a manager with responsibility for company operations. An LLC can be manager-managed, with the single member of the LLC serving as the manager.
Living trust as sole member
By making a living trust the sole member of an LLC, the living trust becomes the owner of the company. If the company is member-managed, the trustee is responsible for running the company. If it's manager-managed, the manager runs the company but the trustee can usually replace the manager at any time, depending on the provisions in the company's operating agreement. When you die, company ownership passes to the trust's beneficiaries without a probate, and your heirs also inherit personal liability protection as the new owners of the LLC and its assets.