Utilizing a variety of financial tools and estate planning techniques, a family may significantly mitigate the estate tax and minimize transfer costs.
Q: Should we establish an LLC for our family farming business? We’ve spent our entire adult lives building a diversified farming and ranching operation. Now in our mid-70s, it’s time to make a plan for passing it to the next generation. Though none of our children are active in the farming business, we’d still like them to share in it equally and maintain the home place without the burden of an estate tax or other costly transfer obligations. In other words, is an LLC is the best way to pass our property to the next generation without losing it due to the death tax?
A: A limited liability company (LLC) is an excellent tool for holding and managing properties. An LLC allows for shared ownership, clearly defined management structure and, as the name implies, liability limited to the assets of the company. An LLC also allows for shared, yet disproportionate ownership percentages among an owner group, i.e.: so, though you mention equal, your children do not necessarily have to receive or maintain equal shares.
For your situation and based on your brief description, an LLC may be an excellent entity choice for managing the family farm.
• You may leave membership shares (ownership interests in an LLC) to your children in your trust/will.
• The LLC agreement should specify how to manage the entity, make decisions, add members, or allow for withdrawal.
• Allow your children to co-manage the property, lease the land, acquire additional property, etc., according to a written operating agreement.
An LLC alone will not help you avoid the estate tax. However, you may decrease the value of the properties and thereby reduce the estate tax through valuation discounts using an LLC.
Two discounts are commonly used in estate planning. One is for a lack of control and the other is for a lack of marketability. Assuming you establish some form of divided ownership in which no single person has a majority or controlling interest, each owner’s separate interest may be appropriately discounted.
So, an LLC may allow you to better manage the property and at the same time mitigate the estate tax by discounting the property value. But these advantages are accompanied by some disadvantages, including record-keeping and income tax planning. Your children will have to keep both financial and property management records. They’ll have to account for the entity separately and include their share of expenses/income in their personal tax return.
Before committing to an LLC, and in an effort to fully achieve your goals, I recommend a comprehensive succession plan. There are four steps to completing a plan, attaining financial security, and creating a lasting legacy:
Financial Security – Securing the owner’s financial future and determining the best course of action for passing the family business to the next generation. The plan will include retirement planning, debt satisfaction, diversified investing, and contingency planning.
Ownership Transition – Combining financial, tax, and estate planning strategies to design the most effective transfer of family business ownership to the next generation, including researching the best financing methods, gifting strategies, buy-sell provisions, and business entity review (which is where the LLC discussion may take place).
Leadership Development – Structuring business management and preparing family business leaders to govern as business ownership and management transition to the next generation. Leadership will explore the best structure to manage the entity, define roles/responsibilities, spell out compensation/benefits, and may use assessments for leader selection.
Estate Tax Strategies – Planning to mitigate the estate tax and efficiently transfer ownership, while providing for dependents due to the death of a family business owner. This is another point in the process where the entity structure will be reviewed and altered if necessary. Estate tax strategies are designed to mitigate tax burden, define distributions to heirs, satisfy any outstanding obligations, and provide for your dependent’s lifestyle.
Success in the planning process is predicated on good communication and common goals. The entire design is to help the owners pass the family farm, ranch, or agribusiness, as a going concern, to a well-prepared next generation.
Kevin Spafford and his firm Legacy by Design (Legacy-by-Design.com) serve the succession planning needs of farmers, ranchers, and agribusiness owners. Reach Kevin by email ([email protected]) or phone (877) 523-7411.