Limited Liability Companies (LLCs) are an important tool for small business owners, but they can also be useful in estate planning. An LLC can help you pass assets to your children while avoiding gift and estate taxes.
An LLC is somewhere between a partnership and a corporation. Like a corporation, LLC owners are protected from liability. But like a partnership, the owners report income and losses from the company on their personal tax returns. LLCs also have fewer fees and filing requirements than corporations, as well as fewer rules about how the company is organized and managed.
If you have a large estate, an LLC can be used to pass assets to children without being subject to gift and estate taxes. In 2021, the estate tax exemption is $11.7 million for individuals and $23.4 million for couples. That means that any estate over the exemption amount will have to pay federal estate taxes at a 40 percent tax rate. The lifetime gift tax exclusion – the amount someone can give away without incurring a tax – is also $11.7 million. While a parent can give their children $15,000 each per year (in 2021) without the gifts counting against the lifetime limit, any amount gifted over that eats into the lifetime limit. These limits are set to drop back down to the previous exemption amount of $5.49 million (adjusted for inflation) in 2026.