Earlier this year the Indiana General Assembly passed House Enrolled Act 1394, which takes effect today, July 1, and makes several amendments to the Indiana LLC statute, officially known as the Indiana Business Flexibility Act. This is the first of two articles discussing those changes. This first article addresses some amendments that should enhance the use of LLCs for estate planning purposes, and the second will discuss changes that expressly address the use of officers in the management of limited liability companies.
Permissible Purposes for LLCs
With the new amendments, Section 6 of the Indiana Business Flexibility Act now explicitly states that LLCs may be used not only for business purposes but also for personal and nonprofit purposes. For an example of a personal purpose, a married couple who own a vacation cabin and want it to remain in the family after they are gone might place the cabin in a limited liability company and then, by gift, by will, or by other means, transfer the ownership of the LLC to their children or grandchildren. Because the cabin is not used to generate income, the purpose of the LLC is personal, not business.
Although the circumstances in which the IRS will grant an LLC recognition of tax-exempt status under Section 501(c)(3) are limited, the change to the Indiana Business Flexibility Act confirms that Indiana LLCs may be used for those purposes.
It is debatable whether the amendment actually expands the purposes for which an LLC may be used because the prior language was in fact quite broad; however the new language reduces the uncertainty behind permissible purposes by expressly authorizing personal and nonprofit purposes.
Transferring LLC Interests to Heirs
There are two other changes that should increase the use of LLCs for estate planning, both to Section 10 of the Indiana Business Flexibility Act. One of the changes expressly permits LLC interests to be held in what is known as “joint tenancy with right of survivorship” or simply a “joint tenancy.” A joint tenancy involves two or more people who both own property but with one key difference from other forms of common ownership: the right, upon death of one of the tenants, for the remaining tenant(s) to take the entire property as an undivided whole. In a simple scenario, two spouses own a home as joint tenants – when one dies, the other takes title to the entire home — without going through the sometimes costly probate process.
The other change expressly permits LLC interests to be held as Transfer-upon-death property. This simply means that upon the holder’s death the member interest can pass to one or more named beneficiaries, again without having to go through probate. However, unlike joint tenancy, the beneficiary does not own any interest in the property until the death of the original owner.
Estate Planning with the New Amendments
Historically, a corporation was the standard entity of choice for businesses, and limited partnerships have been one of the frequently used tools of estate ploanning. In recent years, however, LLC’s have overtaken corporations in popularity for businesses. With changes such as the ones to the Indiana Business Flexibility Act, LLCs may also replace limited partnerships in popularity for estate plans.
If you are a small business owner or otherwise interested in learning more about using a LLC for estate or business succession planning please contact our office to schedule an initial consultation.