Categories: Estate planning, elder law, asset protection, creditor protection, business formation, trust, trusts, probate.
The LLC has become one of the most popular legal structures for shielding an owner’s personal assets from business liability risks. An LLC owned by a single person, or “member”, is considered a desirable “disregarded entity” by the IRS, which allows the LLC owner to skip filing a partnership return and instead report his LLC income directly on his personal income tax return.
In North Carolina, the personal ownership interest in an LLC, or membership, is classified as an item of personal property. Unfortunately, that classification leads to this not-commonly-known fact: when the individual owner of a single-member LLC dies, the LLC’s necessary ownership transfer to the decedent’s heirs must pass through probate.
While the LLC is passing through probate, its revenue stream flows to the decedent’s estate, not to the heirs. The LLC membership may thus be tied up in probate for months, or even a year or more. This can interrupt a family’s finances. For example, if a retired husband and wife were living on the monthly income from 10 rental properties held in the husband’s single-member LLC, the wife’s access to cash flow from the LLC may be disrupted if the husband dies and his LLC membership passes into probate.
In North Carolina, the best way to keep a single-member LLC’s ownership interest out of probate is to employ a trust. The popular revocable living trust keeps assets held by the trust out of probate because the trust is a separate entity which transcends the trust grantor’s death.
When a grantor’s revocable trust becomes owner of the grantor’s single-member LLC, the LLC Articles of Organization and Operating Agreement are set up so that the trust owns the single membership in the LLC. Because the IRS considers a revocable trust a grantor trust, income from the single-member LLC owned by a grantor’s revocable trust is still reported on the grantor’s individual tax return, maintaining desirable pass-through taxation.
Distribution terms added to the grantor’s revocable trust direct how ownership of the LLC will be transferred to the grantor’s beneficiaries following the grantor’s death. Because trust distribution following the grantor’s death takes place privately outside of probate, the ownership transfer from the grantor’s trust to the beneficiary(ies) can take place almost immediately, keeping the LLC’s cash flow intact and uninterrupted to a needy beneficiary(ies).
Vance R. Parker practices elder and special needs law, and estate planning law at Vance Parker Law, PLLC in Winston-Salem, North Carolina. He is a member of the National Academy of Elder Law Attorneys (NAELA), ElderCounsel, The North Carolina Bar Association Elder and Special Needs Law Section, the North Carolina Bar Association Estate Planning and Fiduciary Law Section, The North Carolina Bar Association Real Property Section, the Financial Planning Association (FPA), and is accredited to practice before the Department of Veterans Affairs (VA.)
Vance holds Doctor of Jurisprudence (JD), Master of Business Administration (MBA), and Bachelor of Arts (BA) in Biology with Honors degrees from the University of Texas at Austin, and holds a Master of Arts in Teaching (MAT) degree from Salem College, Winston Salem, North Carolina.
Vance has a particular passion for elder and special needs law. As an honors biology graduate at the University of Texas at Austin, and a former biomedical company executive, he understands the medical conditions that seniors and special needs individuals face. “I practice elder and special needs law to honor my parents and grandparents, whose quiet integrity and wisdom still guide my life, and whose love never fades,” he says.
Vance gained inspiration for his special needs focus within his legal practice from the special needs students he assisted while teaching Honors Chemistry, Biology, and Scientific Visualization in the Forsyth County and Guilford County, North Carolina public school systems.
The readers of Triad City Beat magazine voted Vance Parker Winston-Salem, North Carolina’s “Best Family Law Attorney” and Vance Parker Law, PLLC “Best Law Firm–Runner Up” in its 2020 “Best of the Beat” reader poll. The Better Business Bureau of Northwest North Carolina rates Vance Parker Law, PLLC “A+.”