By: LAW OFFICE OF JASON R. PAGE, PLLCLimited Liability Companies ("LLCs") are a form of business entity that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. The owners are referred to as members. Members are entitled to their share of distributions, but they have no control over company operations. The management of the organization is vested in one or more managers. Members may or may not be managers. The initial owners are sometimes family members who wish to preserve a family farm or other assets. In other situations, the initial owners are a husband and wife who wish to shift assets to their children without losing control. Sometimes this is done through gifting shares. However, under current tax laws, it is sometimes better planning to leave membership interests as an inheritance. When used for estate planning purposes, family LLCs usually take advantage of the separation of control from ownership and utilize a restrictive operating agreement. Those members who are managers control all business decisions, including the power to buy and sell LLC assets, without interference by other members. However, members who are not managers generally have no right to participate in management, may not withdraw unilaterally and receive cash for their membership interest, and are subject to restrictions on transfer of their membership interest. Placing real estate in an LLC converts an interest in real property to personal property. This is particularly helpful when property is owned outside of North Carolina, because ownership does not change at your death. This prevents the need for an ancillary estate or even a deed. An interest in a family LLC is also clearly identifiable as separate property in the event of a divorce. If all or a part of the membership interest is inherited rather than gifted, the membership can be owned by a trust for your beneficiary's benefit, giving extra protection. We can also use buyout provisions to ensure that if an interest in the LLC is considered marital, the other family members may buy that interest. The operating agreement may also provide for rights of refusal in an effort to keep family assets within the family. These are often used to protect family farms or vacation homes. The operating agreement may also address resolution of family disputes related to the assets. So the operating agreement can explain exactly how the members share a vacation home, and how they resolve disputes if unanticipated problems arise. LLCs provide a streamlined mechanism for transfers of interest in family assets, which simplifies the estate planning and gifting process. For purposes of valuing a membership interest given to a family member, the value of the assets are sometimes discounted to reflect the fact that the donee has no control over business decisions and that his or her interest cannot easily be sold to a third party. A more restrictive operating agreement provides for higher discounts. In North Carolina, a charging order is the only remedy a court can use to seize assets from an LLC. This means that any distributions otherwise payable to the debtor/member must instead be paid to the creditor. However, a Court cannot order a distribution of assets. It is usually best for LLCs to have more than one member if possible, because a multi-member LLC provides stronger asset protection than a single member LLC. Family LLCs are an effective estate planning tool in certain situations. However, the key to their effectiveness is making sure the operating agreement addresses your needs.Tenancy by the EntiretiesTenancy by the entireties is a simple way to protect real estate from creditors and avoid probate upon the death of the first spouse. Tenancy by the entireties and liability insurance should be the first line of creditor protection. In North Carolina, any conveyance to a husband and wife while they are married will constitute a tenancy by the entireties in the property unless the conveyance specifically states that some other type of ownership is intended. We often see couples who purchased property together prior to their marriage, and do not re-convey the property after they are married. In this case, they own their land as tenants in common and none of the protections discussed below apply. A simple deed from husband and wife to husband and wife will establish a tenancy by the entireties. One of the most important benefits of tenancy by the entireties is that it grants special creditor protection over that real property. With the exception of federal tax liens, property owned as tenants by the entireties is subject only to the joint creditors of the couple and not the sole creditors of only one spouse. It is important to note that this applies only to real property. In the past, this creditor protection was one reason that some couples elected not to convey real estate to their revocable trusts. However, beginning in 2015, North Carolina law provides that any real property held by a husband and wife as a tenancy by the entireties and conveyed to their revocable or irrevocable trusts still has the same immunity from the claims of their separate creditors as if they had continued to hold the property as a tenants by the entireties. This continues as long as the spouses remain married, the property continues to be held in the trusts, and the spouses remain the beneficial owners of the real estate. It is important to remember that upon divorce, the tenancy by the entireties is immediately severed and the property is held by the former spouses as tenants in common. Therefore, judgments of one spouse can attach to that spouse's ½ undivided interest immediately upon entry of the divorce decree. We once collected on a judgment after several years when the debtor divorced. When he and his wife sold their vacation home after their divorce, the judgment had to be paid in order to clear title. When one spouse dies, his or her property interest is extinguished and title to the property immediately vests solely in the surviving spouse. This allows real estate to pass to the surviving spouse without being subject to the creditors of the deceased spouse. On the other hand, the judgment creditors of the surviving spouse attach to the property immediately upon death of the first spouse. Tenancy by the entireties is an important tool when a spouse dies without a will. In a recent case, our client wished to sell her house after her husband's death. The property had belonged to her husband prior to their marriage. They later conveyed the property to themselves as husband and wife. Unfortunately the deed was executed and recorded prior to their marriage. Therefore, they owned the property as tenants in common. The husband died without a will. At his death, his wife continued to own her one-half interest, as well as one-third of his interest. However, their four children inherited two-thirds of his one-half interest. The one child who was over the age of 18 was able to deed her interest to her mother. However, three of the four children were minors. In order to sell the property, the wife had to become guardian of the estate for her three minor children and petition the court for approval to sell the property. This could have been avoided if the deed had been recorded after their marriage. For more information that may assist you, follow me on twitter @jpagelaw, like my Facebook page, or search my website, www.jpagelaw.com. Sincerely,Jason Page
