September 5, 2023
A few months ago, we wrote about the liability risks associated with doing business in a general partnership, and the protections you could gain by converting the partnership to a limited liability company. The best business entity for your operation is a hot topic, so let’s look at a few more issues surrounding LLCs.
Let’s be clear. An LLC is not an estate plan. It is not a substitute for a living trust or will, documents that govern how your estate will pass on at your death. If you form an LLC, it is simply one of the things you own. It is part of your estate. If you put land in an LLC, you no longer own land, but you own membership shares in a company that owns land. If you put your farm operation — equipment, inventory, leases, crops, etc. — into an LLC, then you no longer own those items, but you own the company that owns those various items.
The best way to think of LLC membership shares is like stock. You own the “stock” in the limited liability company. By putting stuff into the LLC, you have converted what you own from one type of asset (land, equipment, etc.) to another (membership shares). But the membership shares are still part of your estate.
So, set within the broader estate plan, an LLC can help limit the risks to assets you hold outside of the LLC. But there are other benefits as well.
Pros of LLC
Is the value of your estate at or above the current estate tax exemption? Value for estate tax purposes is the amount of money you could easily convert an asset to. If you put your land on the market, how much money would someone pay? That’s the value. One way to reduce the taxable value of your estate is to convert your land to LLC shares. Assuming that you do not own 100% of the LLC at death — for example, you and your spouse each own half — the shares will be worth less than the value of the land. Membership shares of an LLC are not readily marketable. If the LLC is operated as a true business while you are living and you die with 50% of the LLC shares, your 50% will likely be valued 65% to 75% as much as if you simply owned 50% of the land.
An LLC provides better continuity than a partnership. On the death of one LLC owner, their shares pass on to heirs, and the operating agreement will specify how management will change. By contrast, a general partnership typically terminates on the death of a partner. A partnership entity depends on there being two or more living partners. When a partner dies, the surviving partner or partners must buy out the heirs of the deceased partner.
One solution to this is to have other business entities, such as corporations, be the partners, so there won’t be a death. For instance, Alvin forms Corporation A and Bob forms Corporation B, and the two corporations form the partnership. All rights of a partner are held by their corporation instead of by the individual, and the corporation will not die when Alvin or Bob dies. His corporation passes to his heirs, so the partnership does not have to end. This arrangement provides a measure of partnership-liability protection because the corporation, instead of the individual, is the at-risk partner. It does require three legal entities instead of the one LLC.
Con of LLC
One potential reason for a partnership instead of an LLC that may justify the complexity of the three-entity arrangement is Farm Service Agency risk management program benefits. Payments are capped per “person,” and an entity that limits liability, such as an LLC, is one person, no matter how many owners it has. On the other hand, a partnership where each partner has unlimited liability risk qualifies for government payments based on the number of partners.
Most farm operations are not hitting these payment limitations, but if yours is likely to, you may want to stay in a general partnership. To provide a measure of liability protection for your assets outside of the partnership and to provide better continuity on death, you might create the corporations to be the partners. Corporation A and Corporation B would each be a “person” under the FSA rules.
In estate planning, remember: There is no magic bullet. Plans that work require appropriately coordinated legal tools.
Ferguson is an attorney who owns The Estate Planning Center in Salem, Ill. Learn more at thefarmersestateplanningattorneys.com.
About the Author(s)
You May Also Like
Current Conditions for
New York, NY
Enter a zip code to see the weather conditions for a different location.