History

• The limited liability company (LLC) was created by state laws as a hybrid between corporations and partnerships. For a time it was unclear how the IRS would treat such business entities. Eventually, beneficial tax practices towards LLCs became articulated and the LLC grew in popularity, even becoming a form of estate planning that began to eclipse the inter vivos trust. During this heyday, it was possible to retain control of property as a manager of an LLC of which your heirs were the members (owners) while keeping it out of your gross estate after your death. Since then, however, several court rulings have restricted the ways in which an LLC can be used to avoid the estate tax.
  
  

Control and Use

• The central issues regarding estate taxation and LLCs are control and use of the LLC assets. As described in section 2036 of the Internal Revenue Code (IRC), transfers less than three years before your death, or of property in which you retain use or the power to control who inherits or uses the property, will not suffice to exclude the property from your gross estate. This language reflects the basic attitude that the IRS requires legitimate transfers to create complete separation from the assets with no strings attached. The law, structured this way, requires the estates of individuals who wish to retain use and control of their property during their lifetime to pay taxes on the property after they die.
  
  

Estate Planning

• The proper use of an LLC in estate planning must begin with the understanding that it's most likely not possible to avoid estate tax on assets transferred to your heirs during your lifetime in which you retain use and control of the assets. But within this framework, it is not difficult to exclude assets from your gross estate by transfers to heirs through an LLC. The transfer must occur more than three years before your death, and you must have a manager other than yourself in control of the assets. If you use any of this property, such as a house, you should pay normal market rates for use, like rent, and keep careful records documenting that you didn't not enjoy any privileged use or benefit from the property.