Q: My wife and I have farmed our entire married lives and we are nearing retirement. Several years ago, we formed a Kansas Limited Liability Company (LLC) for our farming operation and now we would like to begin to gift LLC membership units to our three adult children. One of our sons is the LLC manager but the other two children are not involved in the farming operation. I’d like the children to receive only distributions of income from the LLC at this point, not voting rights. What is the best way to make this happen?
A: You and your wife can each gift up to $15,000 per child, per year, without federal or state gift tax consequences. Therefore, you can gift each child a combined total gift of up to $30,000 worth of LLC units each year. Unless your existing Operating Agreement established a value for each LLC unit or a method of valuation, we would recommend that you contact a certified appraiser to establish the current value of your LLC. Based on information from your appraisal, you will be able to determine how many units you can gift to each child and still avoid federal and state gift tax consequences.
Before you proceed to gift any LLC units, you should have your Operating Agreement thoroughly reviewed by an attorney experienced in corporate law to determine whether your existing Operating Agreement
stipulates specific guidelines that must be met before such a gift can transpire. Assuming you are the only members of the LLC, you can easily revise and update your Operating Agreement so that your goals can be accomplished. We also advise allowing your attorney and your accountant to coordinate plans prior to making these gifts to ensure your retirement income goals will not be adversely impacted and all IRS regulations have been properly satisfied. If gifting of LLC units is made improperly, your family could face unnecessary and substantial taxation.
In order to acknowledge the contributions made by a child who has been instrumental in the success of a farm operation, many parents choose to gift more LLC units to that child and provide equalizing, non-LLC assets, to the non-farming children. Your attorney and accountant can provide options to accomplish this based on your unique asset portfolio. This would also be a good time to check that all your LLC annual reports have been properly and timely filed with the Kansas Secretary of State. You would be surprised how many LLC owners neglect to file annual reports, which can lead to penalties. When you file your next annual LLC report, be sure to include any member owning 5% or more of the LLC at the time your report is due.
Finally, because you stated that you are near retirement, you also should investigate how your gifting strategy may impact your long-term care planning options. Unless a couple has abundant assets to cover the costs of future long-term care expenses, any farmer who wishes to keep their real estate in the family should consult a long-term care planning attorney as they near their senior years.
If you need assistance with gifting your LLC units, reviewing your existing LLC Operating Agreement, or a long-term care plan consultation, contact Davis & McCann, P. A., Dodge City, KS. We are members of Wealth Counsel, a national consortium of Estate Planning Attorneys and the National Academy of Elder Law Attorneys (NAELA). We focus our practice on providing clients with the best legal advice on estate planning, Medicaid and long-term care planning, business formation, family business/small business succession planning, probate, trust administration, real estate, and related matters.
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