Stautz Law

Tag: LLC

  • LLCs as Trust Substitutes!?

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    Hi folks, it’s Andy Stautz at Stautz Law. I am here today with the avant-garde of estate planning. I’m kidding. This talk is just kind of a thought experiment. It’s not informational. It’s definitely not legal advice. It’s just kind of a “what if?”  

    So you might have seen my talk a couple weeks ago about planning around LLCs. If you’re a small business owner or you’re self-employed, you’ve got an LLC, I talk about how you can. Put those in trust. Make them payable on death. You know, handle them in probate and just kind of how to deal with that.  

    Today. I want to float the idea that an LLC is a lot like a trust, and if you were really crazy I think you could use an LLC to do pretty much everything that a trust does.  

    Is an LLC the same as a Trust?

    Because think about it. OK, what’s a trust? A trust lets you separate legal and equitable title to property. And you give the trustee a set of instructions on how to administer the property for the benefit of the beneficiary, the beneficiaries.  

    OK, What’s an LLC? Well, an LLC is an entity that controls some property according to instructions that are in an operating agreement for the benefit of the beneficial owners. Who could be whoever.  

    Those are pretty analogous concepts. I mean, both are ways to hold property with instructions.  

    Reasons for Different Treatment in the Law

    Now trusts are specially favored in the law because, you know, we’ve got an elaborate trust code on how to create them, how to administer them, how to deal with situations where they’re not administered properly. How to change them if they’re not doing what you want to do, right? Lots of protections in the trust code. And. That kind of comes from. That comes from history, obviously. UM. But it’s not… Like… in an average smooth trust administration, do you need it? But the trust code is kind of a way of hedging around the fact that trusts are highly favored in the law, right? I’ve talked before about how trust is a legal fiction, right? There’s no reason the government needs to let you use a trust at all, much less use a trust to avoid probate, for instance.  

    Well, you know what? How is an LLC different? Couldn’t you in theory make an LLC have an operating agreement with succession terms in the operating agreement. Make the interest in the LLC transferable on death. And then at death, you know, you avoid probate because it’s immediately payable to your successor interests. Your successor operator knows what to do and follows the operating agreement, and then you use the corporate code, you know, running a business for the benefit of the shareholders, basically like you use the, the, the corporate fiduciary code. As a like enforcement mechanism, if you need it.  

    How is it different?  

    I don’t think so… That’s just a funny idea… I don’t seriously recommend that anyone try it, and if you came to my office asking for it. I’d probably say no. But it’s an interesting thought experiment.  

    It’s like, OK, what are we doing here? We are giving instructions. What do we want? We want the instructions to be followed. We want there to be an enforcement mechanism if it’s not, and we want to do it as privately as possible.  

    Practical Reasons NOT to Use an LLC as a Trust Substitute

    So the only advantage to using an LLC and having like this totally separate set of rules would be if you thought there was some advantage in… If there were like simplicity gains or cost effectiveness gains, right? Because people write their own LLC operating agreements all the time, most people would not dream of writing their own trust.  

    But then it’s like, OK, by the time you’ve got an LLC operating agreement sophisticated enough to be a trust substitute, it’s like, OK, you need professional advice anyway. And so that’s where you come back to: If you walk to my office and you want to plan using that instead of a trust, I probably won’t.  

    But it’s a fun idea. And I think I might be the only person kind of floating it, but it’s one way of thinking. It’s a lot and I hope it’s entertaining. And if you are an attorney and you do this, I would love to hear about it. And if you are a client or someone’s setting up your estate plan, and you either have done this or you’ve seen someone who does this, or you’re interested in trying it. I would love to hear. Because it sounds fun.  

    OK, that’s all. A goofy one for today, but reach out if you want to talk about it. This is not advice, this is a theoretical discussion. OK? That’s all for today. Bye now.

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  • Estate Planning for LLCs

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    Hi folks, it’s Andy Stautz at Stautz Law. I am back for another talk about Indiana estate planning topic. Today we’re talking about estate planning for LLCs: really, for owners of LLCS. And this is kind of becoming increasingly common for small business owners, self-employed people to have to have their business entity set up as an LLC and then needing to do their estate planning and kind of coming up with a way to do that.  

    What is an LLC Ownership Interest?

    So to start with the very basics: your interest in an LLC is an asset that you own, right? You have equity. If you go out and form an LLC for your company or to be an independent contractor or self-employed… when you form an LLC, you are the owner. Your 100% interest, that’s an asset, right?  

    And we can talk about what that’s worth, but it is worth something.  

    Does an LLC go through probate?

    And unless you do something special, it’s a probate asset. So that means when you’re doing your estate planning, you need to think about the LLC interest, just like a bank account or a house, right? You need a way to figure out who it goes to and how.  

    So if you’ve got a will… Well…. You know, usually your will is going to have a “residuary clause” that’s going to say “Everything else I own,” (you know, maybe you give away some tangible property and maybe you deed the house…) again, the residuary clause has “everything else I own, all my other probate assets are distributed such such such”  

    Do you want your LLC to go through probate?

    OK, so that would catch an LLC interest. But you don’t necessarily want to put your LLC through probate. You might not want to put anything through probate and have to deal with, while the probate estate is being administered, you know your personal representative has to handle either running the business if it’s going to be a continuing operation or winding it up.  

    That can be complicated, you know, no one knows your business as well as you do so. It’s a big ask for your representative.  

    Estate Planning for Your LLC

    So you should probably do some planning in advance.  

    One obvious way to do it, of course, is with a trust. You know you can put an LLC interest into a revocable trust.  

    You can also make an LLC interest at a payable on death, a transfer on death asset. So we’ve talked in the past about transfer on death deeds for houses, payable on death designations for bank accounts, you know, beneficiary designations on retirement accounts. You’re allowed to do that for an LLC interest as well, in Indiana. That’s in the section of the Indiana Code that deals with business associations. I think it’s Title 23. I’ll link it.  

    So one way you could potentially do an LLC administration is by making it transfer on death. That kind of depends on you having an operating agreement. UM, you know, some people like to have, like actual membership certificates to make that transition easier. That’s one option that keeps you away from trust based planning, if for some reason you wanted to do that.  

    Other Considerations: Succession Planning for LLCs

    As I was saying, you know, if it does, if your LLC interest does go through probate, your personal representatives in charge of keeping the business running or winding it up. You’re going to have the same issue if you transfer it on death, or if you put it in a trust, right? So a separate talk needs to be. OK, not only how do we avoid probate, if avoiding probate is what we’re going to do, [but also] how do we do this long? But also, you know, what’s the succession plan for continuing or winding up the business?  

    I think that should be kept for another day. Because that’s a big topic on its own. And that’s a topic that’s more strategy, personal desires and less, you know, legal details.  

    It’s easy enough to give enough power [to your trustee or personal representative] to get it done, it’s just thinking about what you want, how it should go.  

    That’s our overview for today. We’re going to leave it there. We’re at 5 minutes.  

    Conclusion and Key Takeaways

    And just as key takeaways: an LLC interest is an asset. It’s a probate asset if you don’t do anything else. You should look at putting it into a trust or making it payable on death if probate avoidance is part of your plan.  

    And then we’ll talk in future about how succession planning should work in general and you know, maybe a little more on how administration should work in those in those situations.  

    So hope you enjoyed that. It was just a brief overview. If you’ve got more questions, give me a call my phone number and website are right here at the end of the video and I look forward to hearing from you. Have a good one

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