Families can use several advanced planning tools to achieve their values, goals, and objectives. Along with preserving family wealth, many families are interested in reducing taxes, effectively transferring wealth across multiple generations, protecting assets from catastrophic loss, and making impactful charitable gifts. A Family Limited Liability Corporation (LLC) or a Family Foundation are two worthy options for you to consider.
FAMILY LIMITED LIABILITY CORPORATIONS (FAMILY LLC)
A Family LLC is a legal entity that enjoys the limited liability of a corporation and the operational flexibility of a partnership. Most people who set up Family Limited Liability Corporations are typically larger estates, looking to minimize state and federal estate taxes and avoid paying gift taxes. A Family LLC can benefit from owning rental properties, brokerage accounts, or a family business. Having a Family Limited Liability Corporation can protect your family members from creditors, help with estate planning, and divide income among the members.
You will want to have an operating agreement that limits and defines ownership and transfer rights. Some Family LLC could provide significant discounts from estate and gift tax.
ADVANTAGES OF A FAMILY LLC
One of the main benefits of a Family LLC is that you can transfer a family business with ease to the next generation. A Family Limited Liability Corporation acts as a pass-through for income tax purposes, minimizing federal gift and estate taxes.
For successful business owners, a Family LLC can reduce income taxes by spreading business income across multiple family members and generations that may be in lower income tax brackets.
Owners retain control over the assets and can protect younger members from financial decisions.
A Family Limited Liability Corporation can be an excellent vehicle to protect the assets against claims by creditors, divide income among generations, and facilitate multi-generational wealth transfer and estate planning.
DISADVANTAGES OF A FAMILY LLC
You cannot blend personal and business assets in a Family Limited Liability Corporation.
A Family LLC must meet IRS requirements; there could be consequences if you form a Family Limited Liability Corporation only to avoid paying taxes. Also, the general partners of a Family LLC can be vulnerable to some risk, so it is a good idea to work with an elite wealth manager and a team of experienced and knowledgeable professionals in this area.
The members of the Family LLC pay taxes on their share of the entity’s profits, and there will be initial and annual fees associated.
A Family Foundation, also known as a private foundation, is a not-for-profit organization mainly funded by a person, corporation, or family. The assets within the private foundation will generate income, which is used to support the foundation’s operations and make charitable grants to other nonprofit organizations. In addition, a family foundation can help foster family connections and instill family values for the younger generations.
ADVANTAGES OF A PRIVATE FOUNDATION FOR YOUR FAMILY
A private foundation gives you control over the choice of charitable organizations to which you want to support. In addition, you and your wealth manager can choose how to invest the assets in the foundation.
With a private foundation, succession possibilities are endless. With your family involvement, you will create a legacy and bond as a family around something meaningful. You can have a clear vision of how you want to make a difference in the world and which causes you to want to support.
Family Foundations provide significant tax benefits. You can avoid paying capital gain taxes on appreciated assets, including private business shares, public stocks, real estate, etc., by donating the assets to your foundation and then selling. Since the Private Foundation is a tax-exempt entity, the sale incurs no capital gain tax.
Additionally, you can claim a significant charitable deduction for the total market value of the assets donated to the Family Foundation, which can help offset taxes on other income sources. The tax deduction can be carried forward for several years to continue providing tax benefits years after the donation.
When you transfer assets to a Family Foundation, they are usually not subject to estate taxes; this can provide three types of tax savings combined with the tax benefits described above.
DISADVANTAGES OF A PRIVATE FOUNDATION FOR YOUR FAMILY
Setting up a Family Foundation is time-consuming, and there will be legal, and accounting fees associated with the setup and ongoing maintenance of the foundation. There are regulatory and other reporting requirements, usually completed by your accountant and attorneys each year.
Assets transferred into a Private Foundation from you are irrevocable. You can’t change your mind once the transfer is complete.
There are annual excise tax payments; most foundations pay a 1 to 2% annual excise tax on their net income. This percent depends on the foundation’s annual grantmaking.
Family Limited Liability Corporations and Family Foundations are two effective strategies to help achieve what’s important to you and your family. They can help you live a life of significance, accomplish your aspirations, and leave a multi-generational legacy.
Both of these tools have significant advantages for the right family. However, both have their share of disadvantages too. If a Family LLC or a Private Foundation is not a good fit for your situation, there are many other options to consider. It would be best to consult with your wealth manager and other advisors to determine the best solutions for your circumstances.
DISCLOSURE & ACKNOWLEDGEMENT
The information included in this material is for informational purposes only and should not be relied upon for any financial or legal purposes. Arlington Capital Management Inc, dba Arlington Wealth Management (AWM) is an investment adviser registered with the U.S. Securities and Exchange Commission. Our registration with the SEC or with any state securities authority does not imply a certain level of skill or training, nor are we selling you any product. Rather, we are seeking to provide you with advisory services. Please consult with your own tax and legal advisers before investing. AWM cannot and does not guarantee the performance of any investment. Past performance is no guarantee of future results.