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LIMITED LIABILITY COMPANIES (LLC):
One entity that offers most real estate investors what they are looking for in terms of insulation from personal liability, exemption from double taxation, and flexibility is the limited liability company (LLC).
An LLC is an entity formed under state law to conduct a business or investment activity. It is created by filing articles of organization with the appropriate state agency in a manner similar to a corporation. When properly structured, an LLC is treated for federal income tax purposes as a partnership, and therefore no tax is owed at the partnership level but only by individual partners.
As the name implies, an LLC puts only the assets of the company at risk. In a partnership, on the other hand, the general partner or partners must accept personal liability. However, like a partnership, a LLC permits its members significant freedom in making disproportionate allocations of income, gain, loss, and cash flow.
A major advantage an LLC has over an S corporation is that there are no limitations on the types and numbers of owners. Corporations and partnerships, for example, may be members of an LLC.
A LLC cannot have perpetual life; it dissolves at the end of a stated term, at the agreement of its members, or upon death, retirement, insanity, bankruptcy, or expulsion of a member, unless all remaining members consent to continuing in business.
IRREVOCABLE LIFE INSURANCE TRUST (purchasing new policy)
To compensate for the tax liability on your estate upon the second of you to die, the creation of an Irrevocable Life Insurance Trust and purchase of survivorship insurance may be wise. To ensure the insurance proceeds are excluded from your estate, there must be no incidence of ownership by either of you, and the estate per se must not be named beneficiary.
By assigning the ownership to an irrevocable trust, you would remove the assets from both of your estates. The trust agreement should provide that the trustee be empowered with the authority to buy assets from or lend money to the executors of your estate. This, in effect, will enable the trustee to place the life insurance proceeds back into your estate for payment of taxes and debts without subjecting the insurance proceeds to tax or claims of creditors.
A portion of the yearly gift tax exclusion of $12,000 per person can be used to avoid gift taxes upon payment of premiums. If the beneficiaries of the trust are your children, the gift will be to them. The beneficiaries of your life insurance trust can be your children, charity or others, as you specify, and the funds can be distributed in varying degrees at certain ages as you determine best. The amounts, of course, depend on the amount of life insurance coverage carried at the time of both of your deaths.
IRREVOCABLE LIFE INSURANCE TRUST (donating currently owned policy)
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To avoid having your present life insurance proceeds added to your estate tax liability, the insurance proceeds can be removed from your taxable estate. To remove the insurance proceeds, one must transfer all incidence of ownership to a person or entity (such as an irrevocable trust) other than the insured, and the estate per se must not be named beneficiary. There would be gift tax consideration based upon the cash value of the policy, since premium payments become gifts to the trust beneficiaries.
By assigning the ownership to an irrevocable trust, you would remove the assets from both of your estates. The trust agreement should provide that the trustee be empowered with the authority to buy assets from or lend money to the executors of your estate. This, in effect, will enable the trustee to place the life insurance proceeds back into your estate for payment of taxes and debts without subjecting the insurance proceeds to tax or claims of creditors.
The beneficiaries of your life insurance trust could be your children, charity or others, as you specify and the funds could be distributed in varying degrees at certain ages as you might determine best. The amounts would, of course, depend on the amount of life insurance coverage carried at the time of both of your deaths. This could be supplemented by annual gifts.
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