For the past several decades, estate planners have used limited liability companies (“LLCs”) as versatile tools to pass businesses, land, and other assets from one generation to the next. LLCs work well in conjunction with trusts and other planning structures, and they offer numerous benefits, including flexibility of design and ownership options, a great deal of retained control, general asset protection, ease of formation and administration, broad customization options, and unmatched privacy. But the tide may be turning against LLCs as the recently enacted Corporate Transparency Act (CTA) is set to eliminate the LLC’s broad benefit of privacy starting on January 1, 2024. Individuals who use LLCs as part of their estate plan should stay informed, take proactive measures to protect their assets and privacy, and work with their estate planners to ensure their goals are attained in this shifting planning landscape.
Benefits of LLCs in Estate Planning
The benefits of LLCs in estate planning are well known and require only brief mention here. While some states impose onerous surtaxes on the structure, generally LLCs are cost-effective, as well as easy to form and operate. LLCs can hold most types of assets, and participants are issued membership shares that are easily transferred. It is typically much easier to contribute land to an LLC and move LLC shares amongst family members, rather than run down to the courthouse and re-record the title every time the land changes hands. LLCs are also flexible and customizable, allowing a founding member to restrict how future members use their membership shares or giving membership voting rights to the trustee of a trust holding the shares. And, as a constant thread through all of these benefits, the LLC structure has always offered extraordinary privacy to the LLC members.
While LLCs are created under state law and registered with the Secretary of State, most LLC laws require only that the LLC publicly list a registered agent and do not require that the LLC disclose the identity of its members. This privacy has numerous benefits. For instance, if an LLC owns a home, the LLC members can live in that home without having to be publicly recorded as homeowners. Also, LLC transfers are themselves not publicly recorded, allowing substantial movements of wealth from person to person, far away from the prying eyes that linger around the probate court or county recorder’s office. Of course, this kind of privacy can be abused by malevolent actors, such as drug syndicates and money launderers, and this possibility of abuse has recently caught the federal government’s attention.
Corporate Transparency Act Overview
Congress passed the Corporate Transparency Act as part of the National Defense Authorization Act of 2021 by overriding President Trump’s veto. Starting on January 1, 2024, the CTA will require certain entities to report their beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. The act defines a “beneficial owner” as an individual who exercises control over the entity, either through ownership of a substantial portion of the company’s voting shares or through other means. Companies covered by the CTA must provide specific information about their beneficial owners, including their names, addresses, and dates of birth, to FinCEN. Importantly, the CTA covers LLCs, including those simply used to hold assets for estate planning. Moreover, any LLCs held in trust will likely have to report the required information for the grantor and beneficiaries of the trust, not just the information of the trustee.
The CTA is likely to have a chilling effect on the use of LLCs in estate planning. Individuals who value privacy, especially from the federal government, are likely to forgo using LLCs in favor of structures that still allow anonymity, such as irrevocable trusts. Individuals who continue to use LLCs despite the loss of privacy will likely face the added compliance costs of reporting to FinCEN, maintaining accurate records, and updating reports whenever membership shares trade hands. Law firms and accounting firms may have to put in place additional protocols to ensure that client holding LLCs are meeting their obligations under the CTA.
The CTA does not eliminate the use of LLCs in estate planning; it just changes the landscape. LLCs still offer their members a great deal of flexibility and control, even if those members must now report themselves to the government. Individuals who are interested in how the CTA may affect their existing estate plan or how they may plan for it in the future should contact their LBMC professional advisor.
Content provided by LBMC tax professional, David Frederick.
David Frederick, J.D., LL.M. is a Senior Manager of Taxation in the Private Client Group of LBMC, PC. David is an attorney by background and his practice at LBMC is focused on advising high net worth individuals on matters of estate planning, business succession planning, and tax mitigation. He can be reached at david.frederick@lbmcstage.webservice.team or 615-690-1931.
LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.