Using a Florida LLC for Estate Planning [Key Advantages]

Common Advantages to Using LLCs in Florida and Elsewhere

With their exceptional flexibility, limited liability companies (LLCs) are a favorite structure of business owners in Florida and throughout the country.  A Florida LLC (like LLCs in most other states) can combine the efficiency and simplicity of sole proprietorships and partnerships with the robust legal protections of corporations.

Organizing and running an LLC involves less paperwork and fees than incorporating, but you still get the ever-important “limited liability,” the concept that the owner of an entity is only liable for its debts up to the amount of the owner’s investment.

Perhaps just as importantly, the IRS lets an LLC choose whether to be taxed like a corporation in Florida and elsewhere—filing its own tax return and passing on profits to members in the form of dividends—or like a partnership.  In the latter case, LLC profits and losses “pass through” to owners’ personal returns. Not only does this simplify the process, it can also decrease the total taxes owed by avoiding the detested “double taxation,” where profits are taxed once on the entity’s return and then again when distributed to owners as dividends.

The business advantages of the LLC structure in Florida and elsewhere have been well-publicized, but the utility of LLCs in estate-planning and family Florida asset protection is less well-known. And, as it turns out, an LLC can be a great way to protect family assets and smoothly transfer wealth to succeeding generations.  For estate planners, this makes LLCs an important tool, even if the entity isn’t necessarily operating a business.

LLC Advantages in Florida Estate-Planning

There are a few contexts in which limited liability companies turn up in estate-planning.  Membership interests in an LLC may be an asset of the estate, in which case the goal is to transfer the interest to heirs efficiently.  Or, a family LLC can be designed and created specifically for an estate plan, serving as a vehicle for transferring wealth in Florida.  And, whether within an estate plan or more generally, an LLC is a highly effective tool for shielding assets from creditors.

Limited liability works both ways, after all:  not only are an owner’s assets protected against claims of the company’s creditors, but assets held in an LLC are also protected against creditors of the company’s members.

Transferring LLC Interests to Heirs

For the most part, ownership interests in an LLC (or shares in a corporation) can be transferred to heirs using a Florida last will or Florida revocable living trust.  Like most other assets, the value of equity in an LLC counts toward a decedent’s taxable estate.  So, if the estate will be large enough to qualify for estate taxes in Florida, the estate plan should provide for sufficient liquidity to avoid having to sell off part of the company to pay taxes.  Using life insurance as part of a Florida estate plan is a good way to do this.

Small and family-owned businesses often have articles of organization or operating agreements that restrict transfer of ownership interests.  Likewise, a Florida buy/sell agreement between members of an LLC may require a buy-back upon an owner’s death.  An estate plan involving LLC shares needs to take into account any provisions along these lines.  It may be that the estate is required as part of a Florida continuity business succession plan to sell the interest back to the company or to other owners upon an owner’s death, in which case heirs receive the proceeds of the sale rather than part of the company.

Family LLC Advantages in Florida to Transfer Wealth

Family LLCs are a creative way to reduce the aggregate tax liability owed for transfers of wealth to the next generation.  Instead of gifting assets directly to your children in Florida or grandchildren, or using a will or trust, you transfer wealth through a multi-member LLC. After first creating the LLC (or, alternatively, a limited partnership), you transfer into the LLC the assets ultimately intended for your heirs.  Then, you allocate non-voting membership interests in the LLC to the heirs.  As part owners, they now own a percentage of the LLC’s value, but, as the company’s manager, you keep control of the assets during life.

The transferred share still counts as a “gift” for gift-tax purposes in Florida and elsewhere, but, because the interest lacks management rights, the value of the gift is discounted by up to 40%.  So, a gifted LLC interest with a discounted value of $15,000 (the annual gift tax exclusion as of 2019) removes considerably more wealth from your eventual taxable estate without triggering any gift tax.  Upon your death, your heirs can inherit through your estate whatever ownership interest you still hold in the LLC, including the management rights.  At their option, they can wind down the company and distribute its assets or continue holding the assets within the entity.

A family LLC can own just about any property—real estate, securities, intellectual property, valuable personal property, or even good old-fashioned cash.  This makes family LLCs useful in the Florida Medicaid planning context because an income-producing asset (like a rental property) can be held by a family LLC without counting toward the asset test.  The income the property generates still counts toward the income limit, but that potential snag can be addressed with a trust and/or by allocating a portion of the income to an adult heir with an ownership interest in the LLC.  In the end, income produced by the property may be subject to a Medicaid lien, but the property itself benefits your heirs—safe from most creditor claims while held in the family LLC.

LLC Advantages for Florida Asset Protection

Along with the estate and Medicaid-planning perks, family LLCs have Florida asset-protection advantages inherent in the limited liability company structure.  Creditors, particularly judgment creditors, generally have a right to attach debtors’ property to satisfy outstanding debts.  This includes interests in co-owned property.  So, for instance, if a vehicle is co-titled, a creditor of one of the owners could potentially attach that owner’s half of the title.  Typically, this scenario results in a sale of the attached asset and distribution of the proceeds—half to the creditor and half to the other owner.

Assets held in an LLC, though, are not technically the property of the LLC’s owners.  The LLC itself owns the assets, and each member owns a share of the LLC.  So, if the same vehicle from the above example is owned by a multi-member LLC, a creditor of one member can’t directly attach the vehicle. In estate planning, this means that an asset transferred into a family LLC is shielded from creditors of both the original owner of the asset and the family members who eventually receive a share of the LLC.

Although an LLC owner doesn’t personally own assets held in the LLC, that owner does own equity in the company.  And this, of course, raises the question of whether and how a creditor can attach a debtor’s interest in an LLC.

Creditor Attachment of LLC Ownership Interests

The customary remedy for a creditor looking to satisfy a judgment from a debtor’s stake in an LLC is through a “charging order.”  When a charging order is entered by a judge, distributions payable to the debtor from the LLC are instead paid to the creditor and applied toward the judgment balance.  It’s similar to a wage garnishment except that, instead of attaching wages paid by a third-party employer, the charging order attaches income derived from a company at least partially owned by the debtor.  Notably, though, the creditor does not receive any actual ownership interest or voting rights in the LLC, which prevents creditors from interfering with the company’s management.

Notably, creditor’s rights may be further limited by preparing an effective Florida LLC Operating Agreement for asset protection that includes limiting provisions directed at potential creditors.

From a creditor’s perspective, the weakness of charging orders is that, if a single-member LLC (i.e., an LLC owned by only one person) is involved or if the debtor otherwise controls distributions, the debtor can simply elect not to pay out any funds from the LLC, rendering the charging order unproductive.  This precise issue was explored by the Florida Supreme Court in a prominent case from 2010, Olmstead v. FTC, 44 So. 3d 76 (Fla., 2010), which resulted in counteractive legislation the following year.

The Olmstead Decision and the Florida Legislature’s Response

In Olmstead, the Court permitted a judgment creditor—in this case the Federal Trade Commission—to attach a debtor’s entire interest in a single-member LLC.  The decision effectively turned over complete control and ownership of the LLC, and as a result the assets it held, to the FTC.  The Court determined that a charging order is not the “exclusive” means of attaching a debtor’s stake in an LLC, and, because a single-member LLC was involved, protecting other owners was not a concern.  Thus, the ultimate outcome was that the creditor could reach assets held in the LLC by attaching the owner’s equity.

The Florida legislature didn’t like the implications of Olmstead.  Although the underlying case involved an especially unsympathetic debtor, the holding threatened to diminish the appeal of the LLC structure in Florida and therefore make Florida’s business climate less attractive in comparison to other states.

So, during the next session, the legislature delivered a swift, nearly unanimous response by amending Fla. Stat. §608.433, the code section addressing charging orders.  The amendments clarify that a charging order is indeed the exclusive remedy available to a creditor who wants to involuntarily attach a debtor’s interest in an LLC, subject to a narrow exception.  In the case of a single-member LLC only, a creditor can ask a court to order a foreclosure sale of the debtor’s LLC interest if the creditor can show that a charging order would be insufficient to satisfy the judgment within a reasonable time.  Any such sale is supervised by the judge, and the purchaser acquires the debtor’s entire interest in the LLC, not just interests designated as “transferable.”

For estate planners in Florida, the legislative response ensures that family LLCs will continue to offer the strong creditor protections with which they have long been associated.  When coupled with the corresponding tax advantages, Florida LLCs become an estate-planning strategy worth serious consideration for anyone wishing to transfer assets to the next generation in a secure, tax-efficient manner.

If you think a family LLC might work well in your estate plan, or if you need assistance in determining how best to transfer your business to your children or grandchildren, an experienced Florida estate-planning attorney can provide guidance on family LLCs and the many other tools available to Florida estates.

Steve Gibbs, Esq.