By: Andrew Bechel, Esq.
Given the current societal and economic upheaval due to the COVID-19 pandemic, it is a good time to ensure that all of your estate planning documents are up to date. This will include looking at all your named fiduciaries (and their named successors) to ensure that you are still comfortable with those fiduciaries serving on your behalf as well as the dispositive provisions of your plan to verify that your assets are ultimately distributed in accordance with your wishes. This is a good time to engage in additional estate planning due to historically low interest rates and depressed asset values (at least with regards to certain assets) combined with a high estate tax exemption amount ($11.58 million for individuals and $23.16 million for married couples in 2020). This perfect storm could enable you to move significant assets out of your taxable estate, which will cause significant estate tax savings after asset values inevitably increase in the future after this crisis has fully passed.
One significant area that everyone should focus on is to consider converting any general partnerships and limited partnerships used in estate planning and business planning structures to limited liability companies. While there may be certain business reasons that necessitate the use of general partnerships or limited partnerships, we have seen many clients that set up structures years ago before limited liability companies were common still using limited partnerships and general partnerships. Now that limited liability companies are commonly used in every state in the country, these entities should be converted into limited liability companies because limited liability companies have significant advantages over general partnerships and limited partnerships.
Entities may be used for many reasons in the estate and business planning context (such as easing the transfer of certain assets, the ability to aggregate family investments into one entity, to allow younger generations more input into family business), but one particular use that is of significant benefit right now is as a liability shield. Due to the current pandemic, there is a lot of uncertainty concerning what the future of the country (and the world) will look like. Certain industries may change forever and certain other industries may be eliminated entirely. In uncertain environments like this, litigation risk increases and it is important to ensure that your assets are protected to the maximum extent possible. Limited liability companies offer significantly more protection than either general partnerships or limited partnerships, making them an ideal vehicle to use in the current uncertain environment.
The biggest benefit of limited liability companies as compared to general partnerships and limited partnerships is the vast amount of flexibility the limited liability company structure allows while still providing all of the company’s members with limited liability (i.e., the members are not personally liable for the debts of the company). In a general partnership, all of the partners may participate in the management of the partnership or delegate their management duties to any person, but all of the partners also are subject to general liability, which means that each partner is personally liable for the debts of the partnership and any claims against the partnership. Limited partnerships have two classes of owners, limited partners and general partners. The limited partners do get the benefits of limited liability, but the limited partners are limited to simply being passive investors. If a limited partner participates in any management decisions, the limited partner’s liability shield will likely be pierced, thus making the limited partner personally liable for the debts of the company. The general partners of a limited partnership control all management decisions, but the general partners are subject to general liability.
In a limited liability company, all members can participate in management decisions while still retaining limited liability. The members may also elect to have a manager manage the company’s affairs and such manager need not be a member of the company, but if a member is named as the manager that member will still be protected by limited liability. Limited liability companies also offer some structural advantages typically found in corporate structures, such as the ability to have multiple classes of ownership (i.e., voting and non-voting classes, classes with priority returns, etc.), varying distribution rights among members, unique management structures, etc. These rights can all be determined in the company’s operating agreement and can be customized depending on the company’s purposes, such as running a family business, aggregating investment assets, facilitating gifting strategies, or any other purpose permitted by law.
This added flexibility combined with superior liability protection has made limited liability companies extremely popular in the estate planning and business planning context. As a result, if you still have a general partnership or limited partnership in your estate planning or business planning structure and you are not required for any reason to continue to operate that entity as a general partnership of limited partnership, you should consider converting the entity to a limited liability company. Furthermore, even if you are required to maintain an entity as a general partnership or limited partnership, you can consider having the ownership interests in such general partnership or limited partnership transferred to one or more limited liability companies so that you can still receive the benefits of a limited liability company even though the underlying entity is still a general or limited partnership.
With the uncertain outlook due to the current pandemic, now is the right time to ensure that all of your estate planning documents are up to date and in accordance with your intentions. One extremely important aspect of this is to update older entities contained in your estate planning and business planning structures to ensure that the entities provide you with the maximum protection possible. Times of significant economic uncertainty can lead to greater litigation risks, which means that you should ensure that you are not leaving yourself unprotected.
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