Author: Brenton McWilliams
Guide to Family Limited Liability Companies (LLC)
Summary: A family limited liability company provides an effective solution to many of the problems which arise from ownership of property by multiple family members. The family limited liability company provides consolidated management and a mechanism for decision making with respect to the property, protection of the property from the individual family members’ creditors, and a structure to keep the property within the family by extremely limiting the means by which the property may be transferred to a person outside the family.
Why Hold Family Land in a Family Limited Liability Company
In Alabama, people often feel a certain connection to their family land. There are few common scenarios with family property in Alabama. The property may have been used as farmland for multiple generations. The property may be hunting property that carries with it a lifetime of memories of spending time together during hunts on the property. The property may be a refuge representing the life’s work of a couple to build a refuge for their family to keep and enjoy for generations to come.
In all of these situations, the current owners have a common goal of keeping ownership and use of the property within the family for generations to come. However, keeping real estate in the family can be difficult. To allow all members of the family control of the property, ownership must be spread across multiple family members. If ownership is held by only one family member, then that family member has the authority to exclude other family members. However, fracturing the ownership interests over multiple family members poses its own problems. Each owner has the authority to sell their interest to a third party or the ownership interest may be lost to creditors. The ownership interest could be lost to a sale under execution of a judgment or divorce. With multiple owners, there is no consolidated management of the property. Each owner may tend the property as they see fit and each owner has the authority to lease the property or give outside parties permission to use the property. Individual owners also have the authority to bring a sale for division which may result in completely losing the entire property. Co-ownership of property by a large group of people is a recipe for disaster. In the case of shared family property, it gets worse as the ownership interests are fractured through future generations and more owners are added to the mix.
A family limited liability company (LLC) is an effective tool for addressing these concerns. A family limited liability company consolidates management of the property, consolidates ownership of the property within the family and provides a restriction on transfers to individuals outside the family.
How Does a Family LLC Work?
Instead of owning an interest in the property, the family owns a business. Our business and corporate law has evolved to provide a framework for large groups of people to work together make decisions, whereas property law does not set up well for multiple owners. Instead of multiple members of the family owning the property, the LLC owns the property. Through the LLC, the family members work together to manage the property.
Typically, the family LLC uses an LLC manager management format. The manager is selected by the family members. The manager is usually one of the family members. As needed, the manager is given authority to lease the property, cultivate the property and contract with others for maintenance and repair of the property. If the time comes to renew a mineral lease, an oil and gas lease or a timber lease, there is no need to track all of the members down to sign off on the lease. The sole party to the lease and the party with authority to carry out these is the LLC itself. Usually, the manager is given authority to make the leasing decisions on behalf of the LLC.
Since the LLC wholly owns the property, each individual family member cannot sell or transfer any interest in the property. The family members own an interest in the LLC instead of an interest in the underlying property. The interests in the LLC can be transferred, subject to any restrictions on transfers, but the property cannot be transferred without action by the entire LLC which will typically require a unanimous decision among the family members.
Ownership through the LLC also protects the property from creditors of individual family members. If an individual family member is sued, the property is not subject to execution or sale under a judgment. The interest in the LLC (not the ownership interest in the property itself) can be lost in a divorce, but the LLC agreement will typically provide a mechanism to force the interest to be sold back to the family.
Finally, the family LLC will typically feature a restriction on transfers of the LLC membership interests. The transfer restriction works to keep the management and ownership of the property within the family by limiting transfers of the LLC to members of the family. The transfer restriction will typically provide that interests in the family LLC may only be transferred to designated classes, for example: “the issue of Jane and John Do” or to the spouse and children of the member.
Bonus: Although the goal of the family LLC is to consolidate and preserve ownership, there are a few added benefits in other areas. Family members who live outside of Alabama may be able to avoid having to open an ancillary estate in Alabama to transfer their interest in the property. A probate proceeding outside of Alabama is ineffective with respect to real estate located in Alabama. To transfer title to the property located in Alabama, the heirs must open an ancillary estate in Alabama to transfer the property. As previously discussed, after moving the property to a family LLC, the family members will own an interest in the LLC rather than an ownership interest in the underlying property. Since the LLC interest is personal property, even if the interest owner lives outside of Alabama, an ancillary estate may not be necessary to transfer the personal property LLC interest to the heirs of the owner.
Since the family LLC is an LLC, the family LLC carries the usual liability limitation aspects. This may benefit the family members if a situation arises where someone is injured on the property. If liability is imposed on the owner of the property, the family LLC may help shield the family members from individual liability.
If you have questions about forming a family LLC in Alabama or general questions estate planning, please call me at (251) 215-9275 or request a consult on the consult request page to discuss how I can help. I am located in Baldwin County, Alabama serving clients throughout Alabama as well as our local cities of Orange Beach, Gulf Shores, Elberta, Foley and Robertsdale.