Questions from Doctors. Answers for Doctors.
Questions from Doctors. Answers for Doctors.
- July 12th, 2010By Calvin R. Rasey, President, Physicians Financial Services
Due to the current economic conditions many physicians have found it necessary to look into different strategies to help their hard earned assets from lawsuits, litigation, as well as taxation. In a recent conversation with a physician, the following question was brought to my attention. “Calvin I own a considerable amount of investment property and I don’t know how my assets should be owned in order to provide some protection, as well as tax savings for me and my family?” The answer to this question is complex due to each unique situation.
The Limited Liability Company or the LLC is a fairly new tool to the United States and only in recent years have all the states adopted LLC laws. The LLC is hybrid between a corporation and a partnership and over the years many Financial Planners, Attorneys and CPA’s have been apprehensive about the LLC because it was unclear how the IRS would classify such an entity. Over the past few years however, the IRS rulings have made it clear that an LLC will be treated as a partnership as long as it has a minimum of two members. However, owners can make an election through the IRS to be taxed as a sole proprietorship, partnership, a C Corporation or an S Corporation.
But does it provide any asset protection?
Yes, the LLC, like a corporation, provides protection for its owners. The owners or members of an LLC are not personally liable for debts or liabilities of the company. However, each owner will have liability up to the amount each has invested in the company. Thus, an LLC that holds real estate will protect its owners from personal liability from lawsuits. In addition, a foreclosure against the company will not create personal liability for the members either, unless the owners or members have personal loans or notes. Also, for many years the Family Limited Partnership was the preferred vehicle for estate planning and creditor protection. The popularity of FLP was that a creditor could not take partnership property or attach a partners’ interest without the consent of the general partners. This limited remedy would force a creditor to possibly settle with a partner for pennies on the dollar. But the problem with limited partnerships, for holding real estate, is that the general partner has personal liability. This problem was often solved, by using a general partner, which is a corporation. This, of course, creates added expense and paperwork. However the LLC affords its members the same creditor protection as a limited partnership, but no member has personal liability. An example of this simple, yet effective protection is shown below:
Medical & Office Building
Vacation & Rental Property
Retail Property
Dr. Smart or his Family Limited Partnership
In this example Dr. Smart does not need to file separate tax returns for each of this three LLC’s. However, if a tenant in his rental property is injured, he has limited his personal liable, as well as the risk of losing his other rentals in a lawsuit.
Will the LLC Provide any Favorable Tax Treatment?
Yes, because like a partnership, the LLC provides “pass-though” tax treatment. This means that the company in not taxed on its profits; all profits of the company “pass-through” to its members. A regular corporation or a C corporation is taxed at the corporate level. The shareholders are taxed again on the income they receive from the company.
Can the LLC provide any estate planning features?
Yes, the LLC can provide a vehicle for passing wealth to younger family members without having to re-title the real estate. Once real estate is transferred into an LLC, the members interest is converted to personal property, which is represented by their LLC “shares.” These shares can be transferred incrementally to children as tax-free gifts ($12,000 worth per year in 2008). The process for transferring LLC shares is very simple compared to filing a new deed each year. The parents can still retain control of the property during the lifetime by acting as “managers” for the company.
As I stated earlier, each situation is unique, what may work for one individual may not be appropriate for another. Asset protection, tax reduction and estate planning are all strategies that must be carefully planned and tailored by an experienced advisor to suit individual needs. If you would like more information on this topic or other wealth management strategies please feel free to give me a call. When your patients need advice they call on you, because of your specialty, doesn’t it make sense when you need advise to call someone that specializes in you? Physicians Financial Services has been advising the medical community for over 20 years, if you have questions we have answers.
For more information about the author or Physicians Financial Services, call 502-893-7001 or 1-800-928-8834.
Securities Offered Through Securities America, INC.*Member FINRA/SIPC·Calvin R. Rasey·Registered Representative
Advisory Services offered through Securities America Advisors, INC. A registered Investment Advisor. Calvin R. Rasey. Investment Advisor Representative
Securities American & its representatives do not provide tax or legal advice. Tax-law is subject to frequent change; therefore it is important to coordinate with your tax advisor for the latest IRS rulings and specific tax advice, prior to undertaking and investment plan.
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