Quote:
Originally Posted by StoneCrab
Silversailor,. What does an LLC provide?
I understand that the point of a trust is to hold ownership and provide direction or limitations to the trustee under certain life or death triggers, but adding the trust to an LLC is a concept that I am not familiar with.
Would the LLC pay income taxes prior to my death? Would that be at the individual or corporate rate?
Did you convert ownership of your investments and IRA's to the LLC as well?
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This is a LONG reply, FOR GENERAL BACKGROUND INFORMATION ONLY. I am a retired lawyer (licensed in only 1 of the 50 United States), and I hope this will be helpful generally to those reading this thread. BUT IT IS NO SUBSTITUTE FOR
LEGAL ADVICE, AS STATE LAWS AND INDIVIDUAL CIRCUMSTANCES WILL VARY. CONSULT A COMPETENT LAWYER IN YOUR STATE OF DOMICILE FOR SPECIFIC
LEGAL ADVICE.
In the US, an LLC, or limited liability company, is a creature of state law that blends some of the main desirable characteristics of general partnerships and corporations. This blend of characteristics is the main reason why LLCs came to be in the mid-to-late 20th century.
Like a general (ordinary)
partnership (and unlike a corporation), there is no entity-level taxation of the LLC, so taxable
income items "pass through" to the individuals or other entities (called "members") that own the LLC, in proportion to their percentages of ownership (although other allocations can occur by written agreement of the members). This taxation scheme avoids the double taxation of profits (as happens in corporations).
Like a corporation (but unlike a partnership), the LLC also has limited liability, meaning any claims against the LLC are limited to its own assets (typically even if it owns a
single asset), and do NOT "pass-through" to the individuals and other entities that own the LLC.
In other respects the typical LLC looks more like a small corporation than a general
partnership, with its "members" being the equivalent of shareholders and "managing member/s" being the rough equivalent of corporate officers or board members. There are fewer legal "formalities" to be observed in an LLC than a corporation, so there's less paperwork. There are also single-member LLCs (unlike a partnership that requires at least 2 partners, and much like a sole proprietorship, but with limited liability). State law limits the maximum number of LLC members, usually to somewhere between 10 and 50 or so.
The likely main reason to have an LLC for a boat is limited liability (though that's not a panacea, given the possibility for negligence claims against an individual
captain, etc.). Unless a boat is used in a business, the LLC's taxation benefits are usually irrelevant.
A living or revocable trust is used to avoid the necessity of probating a will, or administering an intestacy (a state's default plan for distributing assets for those who die with individually-owned property but without a will). Both of these require certain
fees and court oversight and approval to pay claims, determine beneficiaries, distribute assets, etc. Using a trust allows all these things to happen directly, through a named Trustee/s, without the necessity of court involvement, and as specified in the written trust instrument or document.
SilverSailor's plan combines an LLC that owns the boat, and a living trust that owns and is managing
member (and maybe sole member) of the LLC, with SilverSailor controlling the living trust that owns the LLC. So SilverSailor effectively controls the boat in lifetime, and at his/her death (and probably, disability) the boat remains in the LLC, which itself is held, managed, and distributed, or
sold with its net proceeds distributed, by the Trustee as is provided in the trust.
A living or revocable trust (like a will) can be changed at any time its originator (called the Settlor or Trustor) determines during his or her lifetime, and typically becomes fixed or irrevocable (like a will) when that person dies (or if provided in the trust instrument, becomes disabled). It has no effect on estate or inheritance
taxes, which become due on property in the trust at the same rates as if the property was owned by the individual.
Typically a living trust is accompanied by a "pour-over" will, written as a backstop in case an individual does not transfer some of his/her eligible property to the trust before dying, so that certain property remains individually owned at death. Any such individually owned property requires a probate process, though all that property then would be distributed by the pour-over will to a
single beneficiary, being the trust, for distribution.
Some assets, however, require neither a trust nor a will to pass on death to the owner's intended beneficiaries.
Pensions, IRAs,
insurance policies, annuities, etc. will make payment on death directly to beneficiaries specified by the owner in beneficiary designations filed with
sponsor company, and these pass outside of probate and are not governed by the trust or any will/estate, unless it is a named beneficiary.
Some states also
permit POD (pay on death) or TOD (transfer on death) title designations to be made by an owner, and these operate like beneficiary designations, passing title to that asset outside of any living trust (unless it is named in the TOD form) and avoiding any probate process (unless an estate is named in the TOD form, which is not advisable).
TODs are often used for bank accounts, certificates of deposits, and vehicles - which MAY include
boats. This depends on state law.
Property that is jointly owned "with right of survivorship" or between spouses also passes to the surviving owners outside of any trust or probate process. Property that is jointly owned "as tenants in common" does not, however - each owner's share of that property is considered individually-owned property that requires probate (unless the joint owner is a living trust, or there is a state-authorized TOD process). This is the case in most "common law" states that originally derived their probate, trust, and estate laws from
England, primarily
east coast and midwestern states. Certain "community property" states, usually western states, and other states whose legal origins are not in
English common law, such as Louisiana, may treat property passing at death differently. State law should be consulted in each case.
Finally, AGAIN THIS SUMMARY IS NO SUBSTITUTE FOR LEGAL ADVICE IN YOUR STATE OF DOMICILE. It is simply background info so that you can better understand legal advice from a competent lawyer in your state.
Regardless of which means you choose to transfer your boat, or other assets, on your death, retaining a lawyer and making a suitable plan ahead of time is the right way to do it, and to avoid unpleasant surprises. Good luck!