By Curt Ferguson
Estate planning is the process of arranging your affairs to bring about desired results, such as remaining in control of what you want to control, assuring that your farm will be managed as you believe best in the event of your disability, and transferring what you have to whom you want, when you want and the way you want, as efficiently and privately as possible. A fundamental tool to accomplish these goals is a revocable living trust, drafted to address each of these issues.
A limited liability company is another tool that can be useful in estate planning. It cannot do what a trust does, but can address some additional issues of control, management and transfer efficiency. An LLC can provide some tax benefits, as well. Just as a living trust must be personally tailored to your goals, so must an LLC be designed specifically around your objectives.
For example, should you choose “member management” or “manager management” for your LLC? In LLC lingo, a “manager” is the person who controls, speaks for and signs for the LLC, and an owner is referred to as a “member.” Member management means each member is a manager, and the members appoint one or more managers. You might choose member management, thinking it sounds simple and you intend to be sole owner and manager. But that might not be best in the long run. Here are three reasons why:
1. Family manager. You might want a family member to be a manager, even while you are the sole owner. That isn’t possible with member management unless you give that person some ownership. Under manager management structure, you (sole member) could appoint any number of managers you choose.
2. Membership transfer. You should transfer your membership interests to your living trust. When a trust is a member (owner), then how can the trust be a manager? Member management creates an extra layer of complication, since you will have to prove who can act for the trust in order to prove who can manage the LLC. It would be simpler to have the member (your trust) appoint you as the manager.
3. Ownership transfer. At some point you will probably transfer a percentage of the ownership of your LLC to your spouse or children. Eventually (after your death), the LLC membership might be divided among children or asset protection trusts you set up for them. With member management, every owner becomes a manager. Are you sure you want everyone who has even a small percentage of ownership to have management rights? Manager management, on the other hand, would allow whomever has voting control (majority of membership) to appoint managers: you (at least while living) and whomever else you think can help run the business.
Giving it away?
This leads us to another control issue to consider as you create your LLC: voting and nonvoting membership. There may be a point at which you want to have given away more than 50% of the LLC membership, but still want to have management control of the business.
To make this possible, start out with two classes of membership: voting and nonvoting. Define a large percentage, say 95%, as nonvoting and the rest (i.e., 5%) as voting. By retaining just 3% of the total membership (three-fifths of the voting shares), you can still have 60% of the vote and control who is appointed to be managers.
One of the primary reasons farmers form an LLC is for liability protection. An LLC is a distinct legal entity, separate from you. If a lawsuit arises from activities in the business, it is difficult for the person suing to reach assets that are outside of the LLC. However, do not be deceived into thinking that “having an LLC protects my personal assets”! A recent case in Iowa demonstrates that when the owner of the company doesn’t maintain formalities of the business, a claim against the business can reach the owner’s personal assets. Appointing LLC managers (manager management) might help you keep the formalities front and center in your mind, and ultimately prevent the catastrophic failure that has occurred in other cases.
Finally, operating as an LLC may provide some tax savings, a common estate planning objective. A manager-managed LLC can be a convenient vehicle for giving assets away. It may be used to turn self-employment income into lower-taxed rental income or S corporation shareholder distributions, or both. Carefully consider what tax election to make as you form your LLC.
Ferguson is an attorney who owns The Estate Planning Center in Salem, Ill. Learn more at thefarmersestateplanningattorneys.com.