Estate Planning with a Delaware LLC

In an LLC, the members are free to organize the LLC in whatever manner they choose, with near-total freedom to define the relationship among the members and the terms governing the operation of the entity. The fundamental terms of an LLC’s ownership, operation and management are set forth in its LLC agreement. The LLC agreement has been a popular topic in many other blog postings. This posting will focus on the LLC’s potential as an estate planning tool, highlighting just how flexible the Delaware LLC can be!!!

The LLC agreement not only governs terms such as sharing of income and liabilities, it also sets forth the terms governing the liquidation of the entity and the replacement of members.  An LLC does not have a fixed life term, and can remain in existence, even after the death of one or more members. A carefully drafted LLC Agreement can help to ensure a smooth transition of control after the death of a key member, making the LLC an attractive vehicle for family estate planning. The LLC agreement will allow control over the LLC, its assets and/or its business to be passed along to surviving family members.

Here's how estate planning with an LLC works:

• The initial members, which are often the grandparents, will form and file the LLC and appoint themselves as Class A member internally within the LLC agreement. These Class A members have all the rights and responsibility to manage the assets of the LLC.
• The Class B members are often the offspring of the grandparents; these family members initially have no responsibility or rights in the LLC.  When all the Class A Members have passed, these Class B members will become the Class A members, granting them all the rights and privileges associated with the Class A member status.
• The Class C members , which are typically the grandchildren, are a dormant class  Class C members have no responsibility or rights in the LLC until the passing of both the Class A and Class B members. New classes of member interests can be established at any time, so the Class B or Class C members can, when they ultimately obtain control over the LLC, create additional classes to continue the chain of ownership and control over the LLC to even more distant generations.

It is important to remember that an LLC Agreement is not filed or otherwise provided to the state of Delaware, and is not available for public inspection or part of the public record.  Thus, the confidentiality of family affairs is maintained.

Structures such as these can be used for holding of real estate, passing along of a family business or any large asset. The structure allows the family business/asset to be transferred from one generation to another, in theory, forever!  The long and costly procedures associated with probate and interpretation and implementation of wills can be avoided, allowing for a quick and seamless transition in the event of a passing.

This structure is an example of how flexible the Delaware LLC can be while providing the members’ freedom of contract with one another upon whatever terms they deem best suited to their circumstances and goals.