Family assets (such as stocks, bonds, farms, ranches, rental property, CDs and family businesses), can be managed under the protective umbrella of a Wyoming Close LLC. In 1977 Wyoming was the first state to enact laws permitting the creation of a Limited Liability Company. An LLC combines the best features of a corporation with the best features of a partnership; among other things the limited liability of a corporation and the ease of management and flow-through income tax treatment of a partnership. In July 2002, Wyoming again led the nation by enhancing its Close LLC statute. This is an LLC designed specifically for a small closely held family business.
The Wyoming statutes provide that the exclusive remedy of a judgment creditor is a Charging Order. This is a court order that instructs the LLC’s manager to pay any income that is distributable to the LLC owner, to the judgment creditor instead. The manager of the LLC may choose not to distribute any income to the LLC owner, thus frustrating the judgment creditor. If a judgment creditor obtains a Charging Order, he may be subject to income tax on the income earned by the LLC, even though the LLC manager may not vote to distribute such income. In other words, the judgment creditor may have to pay income taxes on phantom income.
The term “Close” in a Wyoming Close LLC refers to the “closely held” nature of the entity with respect to Family Control. The owners of the LLC appoint one or more managers of the LLC. Managers may be the owners or non-owners. The managers have 100% control over the business and financial matters of the LLC. For example, if a mother is the owner-manager and her son is also an owner, but not a manger, the son cannot sell his interest in the LLC without the consent of his mother, the LLC manager. Nor can the son give away his
interest in the LLC, nor can the son’s interest be taken away from him in the event of a lawsuit divorce proceeding or bankruptcy.
Simple to Manage:
A Wyoming Close LLC is simple to manage. A Tax Identification Number will be required but the LLC itself will never pay income tax because the income flows through to the owners. Wyoming has not state income tax. Only one checking account is necessary to pay the expenses of the LLC. No formal meetings or minutes are required. The owners may manage the LLC or they may appoint managers that are not owners. For example, a parent may be the owner, but appoint a child to be manager.
A Wyoming Close LLC offers an additional advantage with respect to valuation discounts. Professional business appraisers often say that the value of an owner’s LLC interest is not equal to the value of the assets inside the LLC. Often the discounts can be 30 to 40%, sometimes more, for estate and gift tax purposes. These discounts are the result of restrictive language drafted into the LLC documents to protect the owners from lawsuits, divorce proceedings, creditor, predators, and bankruptcy. Because of these restrictions, a buyer outside the family would not pay the full value for an ownership interest in the LLC. The buyer would not like the fact that he could not sell or give away his interest without the approval of the LLC’s managers, who would probably be individuals who are unrelated to him. The buyer would also not like the fact that he could get income only if the managers voted to distribute income, and in the event no income was distributed, the buyer would still receive an IRS form K-1 that requires the buyer to report the undistributed income on his federal income tax return.
For example, if you were to transfer a $1,000,000 brokerage account into your Wyoming Close LLC, you will still control the funds, but no one will be able to take the funds away from you. And, upon your death, your ownership interest in the LLC will likely be valued at $600,000 – $700,000 rather than $1,000,000 on your estate tax return. This could save your heirs several hundred thousand dollars in estate taxes.
The Andersen Firm is pleased to discuss this technique with you. Book A Call today or call us at (866) 230-2206.