Article on Linda Kotis: Your Heirs May Find Your Single Member LLC Taxing

Linda Kotis recently published an Article entitled, Linda Kotis: Your Heirs May Find Your Single Member LLC Taxing, Wealth Strategies Journal (2018). Provided below is an abstract of the Article:

I. SMLLC Scenario and Potential Consequences
Archie and Edith were married for 50 years. After Archie’s death, Edith sold their home in Queens, New York for a tidy profit. Archie also named his wife as the beneficiary of a large insurance policy he bought when he first started working at the loading dock. Edith’s financial advisor recommended that she invest the gain from the sale of her home along with the insurance proceeds in a Manhattan duplex. Edith wasn’t interested in staying in New York, so about five years ago she moved to Arlington, Virginia to be closer to cousins on Archie’s side of the family. The duplex is currently owned by a New York single member limited liability company (“SMLLC”). Gloria and Mike, her daughter and son-in-law, live in one of the property’s units, and her grandson, Joey, lives in the other. Each family pays rent to the SMLLC for its unit. The current value of the duplex is $6.5 million.

Edith was advised to create the SMLLC to avoid ancillary probate and New York state estate tax. Unfortunately, the SMLLC may not accomplish either of those purposes. Edith is looking at her estate plan again and wants to know what will happen to the SMLLC at her death.

This SMLLC may create costly and unintended consequences for Edith’s estate. Depending on the duplex’s value, there may be a New York State (NYS) estate tax liability. Even if no estate tax is due, the estate may still have to file a NYS estate tax return. This is a complex task which raises the cost of estate administration and could have been avoided. Furthermore, filing the NYS estate tax return requires submission of information to New York tax authorities that may trigger inquiries into Edith’s residency status. Ancillary probate may be required if the death of Edith as the sole member causes the dissolution of the LLC. This also adds to the burden of estate administration, both increasing time and cost.

This article will: (i) review taxation of limited liability companies at the federal and state levels; (ii) address treatment of a SMLLC for nonresident New York estate tax purposes; (iii) discuss ancillary probate and estate administration; and (iv) offer potential solutions to minimize potential state estate tax liability and burdens of estate administration.