What is a Family LLC and how does it work for estate planning?

A Family LLC is a limited liability company owned by family members — typically parents and children — that holds family assets such as investment accounts, real estate, or a closely held business. How it works for estate planning: 1. Parents (the senior generation) create the LLC and transfer assets into it 2. Parents retain managing member interests — maintaining control over the LLC's assets and operations 3. Parents gift non-managing member interests to children and grandchildren over time, using the annual gift tax exclusion ($19,000 per recipient in 2026) and/or the lifetime exemption 4. Because non-managing member interests carry restrictions on transferability and lack control, they are valued at a discount — typically 20–40% below the pro-rata value of the underlying assets 5. This valuation discount allows more wealth to be transferred with less gift tax Example: If the LLC holds $1 million in assets and a 25% non-managing member interest is gifted, the interest might be valued at $175,000 (25% × $1M × 70% for a 30% discount) rather than $250,000 — transferring $250,000 of economic value while using only $175,000 of gift tax exemption.

Who are Family LLCs appropriate for?

Family LLCs are for people with a net worth in excess of $3 million and no debt — using the estate planning definition of net worth. Net worth for this purpose specifically excludes your paid-off primary residence, your fully funded retirement accounts, your paid-off primary vehicle, and six months of personal emergency cash savings — because all of those are needed for you to live now and in the future. Net worth, for estate planning purposes, is what you can lose and still live at the same level you are living now. Christopher's recommended order of operations: 1. Pay off student loans, house, car, credit cards, and medical bills 2. Build cash savings 3. Then consider Irrevocable Trusts, Family LLCs, and investment products to avoid Washington Estate Tax

What are the valuation discounts available in a Family LLC?

Two primary valuation discounts apply to non-managing member interests in a Family LLC: 1. Lack of Control (Minority Interest) Discount — 15–25% A non-managing member cannot force a sale, make investment decisions, or compel distributions. This lack of control reduces the value of the interest compared to an outright ownership stake. 2. Lack of Marketability Discount — 10–20% A non-managing member interest in a closely held LLC cannot be easily sold — there is no public market for it. This illiquidity reduces the value of the interest. Combined, these discounts typically range from 20–40% of the pro-rata value of the underlying assets. The exact discount must be supported by a qualified appraisal from a certified business valuator. IRS scrutiny: The IRS closely examines Family LLC valuation discounts. The LLC must have a legitimate business purpose beyond estate planning, must be properly maintained as a separate entity, and the discounts must be supported by a qualified appraisal. Failure to meet these requirements can result in the IRS disallowing the discounts and assessing gift tax on the full pro-rata value.

How does a Family LLC protect assets from creditors?

A Family LLC provides asset protection in two ways: 1. Charging Order Protection — Washington law (RCW 25.15.255) limits a creditor of an LLC member to a 'charging order' — the right to receive distributions that would otherwise go to the member. The creditor cannot: • Force a sale of the LLC's assets • Become a member of the LLC • Vote on LLC decisions • Compel distributions Because the managing members control whether distributions are made, they can simply stop making distributions — leaving the creditor with a charging order that produces no income. In some states, the creditor may even be required to pay income tax on the member's share of LLC income without receiving any cash. 2. Separation of Personal and Business Assets — assets held in the LLC are not directly owned by the individual members. A creditor of a member can only reach the member's interest in the LLC — not the LLC's underlying assets directly.

How does a Family LLC interact with a Revocable Living Trust?

A Family LLC and a Revocable Living Trust work together as complementary tools: • The Trust holds the LLC membership interests — so the interests pass at death without probate • The LLC holds the family's investment assets, real estate, or business interests — providing valuation discounts and asset protection • The Trust provides the incapacity planning and succession mechanism — naming a Successor Trustee who steps in to manage the trust (and thus the LLC interests) if the grantor becomes incapacitated Typical structure: 1. Grantor creates a Revocable Living Trust 2. Grantor creates a Family LLC 3. Grantor transfers assets into the LLC 4. Grantor transfers LLC membership interests into the Trust 5. Grantor gifts non-managing member interests to children's trusts over time This structure provides probate avoidance, incapacity planning, valuation discounts, and asset protection — all in a single coordinated plan.

What are the ongoing requirements for maintaining a Family LLC?

A Family LLC must be maintained as a legitimate, separate entity to preserve its estate planning and asset protection benefits. The IRS and courts will disregard an LLC that is treated as the alter ego of its owners. Ongoing requirements: • Annual Report — file with the Washington Secretary of State ($60/year) • Separate bank account — the LLC must have its own bank account; never commingle personal and LLC funds • Separate records — maintain separate books and records for the LLC • Operating Agreement — must be in writing and followed; document all major decisions • Legitimate business purpose — the LLC must have a purpose beyond estate planning (investment management, rental property management, or business operations) • Arm's-length transactions — any transactions between the LLC and its members must be at fair market value • No personal use of LLC assets — do not use LLC assets for personal expenses without proper documentation and compensation to the LLC Failure to maintain the LLC as a separate entity can result in the IRS or a court 'piercing the veil' — treating the LLC's assets as if they were owned directly by the members, eliminating the valuation discounts and asset protection.

Christopher S. Mulvaney, Esq. — Attorney-and-Counselor-at-Law — Professionalism with Integrity — WSBA#33595 — Licensed Only in Washington State

[email protected]Bellevue, WA

Family LLCs

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RCW 25.15 — Washington Limited Liability Company Act

A Family Limited Liability Company (Family LLC) is an advanced estate planning tool for clients with a net worth in excess of $3 million and no debt. It allows parents to transfer wealth to children and grandchildren at a discount, reduce the taxable estate, maintain control over family assets, and protect those assets from creditors — all within a single entity.

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