As previously discussed, placing your real property assets into an LLC may be an effective means of asset protection. Now that your real property is titled in an LLC and is protected, a question to consider is: how can you make sure the asset(s) in your LLC are transferred to your children or other beneficiaries with as little difficulty and cost as possible upon your death?
Traditionally, if you had no estate plan at the time of your death, then any interest you have in an LLC (and its assets) will pass through the laws of intestacy. This means that before the interest can be transferred, a probate proceeding will be initiated. Upon completing the probate proceeding, any interest in the LLC is transferred to the decedent’s heirs. A probate proceeding can be (and often is) an expensive and lengthy public process, often spanning a year or more, that requires court supervision.
However, if your interest in an LLC is titled to your trust, then any interest in the LLC can be transferred and distributed by the trust’s trustee upon your death as directed by the terms of the trust. This informal process to complete any transfer does not need court supervision, so it is faster, easier, and far less costly.
A hypothetical can help explain the various outcomes. Mr. Smith passes away, leaving three children. His main asset is an LLC worth $1,000,000.00 at the date of death. He had expressed that he wanted his son, John Smith, to manage his interest in the LLC for five years. During those five years, any income created by the LLC is to be divided equally between his three children. At the end of the five years, the interest in the LLC is to go to John Smith.
In Scenario 1: At John Smith’s death, he either left no will or had a will, but never created a trust. As he passed away with no further estate planning, a probate proceeding would be initiated to transfer the LLC. After the appointment of a personal representative and payment of any outstanding debts owed by Mr. Smith at his date of death, the court would order that the asset(s) of his estate, including the LLC, be divided equally between Mr. Smith’s three children.
In this scenario, Mr. Smith would be unable to manage the interest in the LLC. The attorney’s fees would equal at least $23,000.00 (the statutory percentage based on the LLC’s value). The personal representative could receive the same compensation as counsel. Mr. Smith’s wishes about the LLC would not (and could not) be fulfilled.
Scenario 2: Before his death, Mr. Smith prepared a trust naming John Smith as the trust’s successor trustee. The trust instructs the successor trustee to manage the LLC for five years. During those five years, any income created by the trust, including the LLC, is divided equally between his three children. Thereafter, the interest in the LLC is to go to John Smith.
After Mr. Smith passes away, John Smith would step in as successor trustee of the trust. For the next five years, he would manage the trust, including the LLC, and distribute any income between Mr. Smith’s three children. Then, after five years, John Smith, as trustee of the trust, would transfer the interest in the LLC to John Smith as a beneficiary of the trust. In this scenario, because Mr. Smith created a trust and titled his assets in the name of that trust, there is neither confusion about what Mr. Smith wants nor any court intervention or supervision. Thus, Mr. Smith’s wishes would be fulfilled.
It is never too early to start an estate plan or discuss how an estate plan can help fulfill your wishes, so don’t wait. Please contact attorney, Victor Herrera, and his team at Carmel & Naccasha today!