Estate and Business Planning for the Farm and Ranch Family - Use of the LLC - Part 1

Roger A McEowen ( August, 2020 )

Summary

In the family business planning context for a farm and ranch, the key to success is for the senior generation to clearly express goals. Doing so assists the planning team in using entities and associated tax planning techniques to satisfy those goals. For business transition/succession purposes, the use of the limited liability company (LLC) is one entity structure that can work in the right situation and with the right set of facts. Utilizing an LLC as part of farm/ranch business succession – it’s the topic of today’s post – Part One of a two-part series.Business/Succession Planning GoalsI have worked with farm families on estate and business succession plans for almost 30 years. Each situation is unique. There is no “one size fits all.” However, I can make an observation concerning what are typical goals of the farm or ranch family, at least from the senior generation’s perspective. The senior generation typically wants to retain control of the operation for as long as possible. But, along with that goal of retaining control is often the desire to transfer equity ownership in the operational entity to other familymembers. Any transfer is often required to be with restrictions that bar transfer outside the family. Limited liability is commonly desired, as is flexibility in any entity form to deal with changes in the family structure and the tax landscape. Also, it is a common desire to minimize taxation both upon entity formation and throughout the future; maximize government payments; and create the potential for valuation discounts – both for gifted interests and for the interests retained by the parents at death.An LLC – What is it?An LLC is an S corporation with fewer eligibility requirements and more flexibility with regards to the capital structure. When an LLC is taxed as a partnership, it can be more advantageous than an S corporation –debt can be included in member basis; there is more flexibility given to multiple classes of interest; and distributions are more tax advantageous. As compared to a limited partnership, LLC members can

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