Strengthening Estate and Asset Protection Planning Through LLC Design
Limited liability companies are often viewed as straightforward holding vehicles, but their governing documents can play a critical role in estate planning, asset protection, and tax outcomes. Poorly drafted or inconsistently administered operating agreements can undermine otherwise sound planning, while thoughtful design can help reinforce long-term objectives.
In this webinar, Martin Shenkman, Alan Gassman, and Jonathan Blattmachr explore practical drafting and planning ideas for LLC operating agreements, with a focus on addressing estate inclusion risks, valuation challenges, and creditor protection concerns. Rather than concentrating on a single technique, the discussion highlights how small changes in entity structure and documentation can have meaningful planning impact.
Simplifying Administration with Master Operating Agreements
One of the early themes of the discussion is administrative efficiency for clients with numerous LLCs, particularly those holding multiple real estate assets. Drafting and maintaining dozens of separate operating agreements can make planning impractical and increase the likelihood of errors.
The speakers discuss the use of a master operating agreement with detailed exhibits identifying members, managers, and authorized signatories. By standardizing provisions across entities and isolating unique terms in schedules, advisors can reduce complexity while preserving the separate legal status of each LLC. This approach can make multi-step estate planning transactions more manageable and easier to administer over time.
Defined Value Transfers and Lessons from Recent Cases
The webinar also addresses defined value transfers and the importance of aligning operating agreement provisions with intended valuation mechanisms. While cases like Wandry have upheld formula-based transfers, the IRS’s position in Sorensen underscores the need for consistency between governing documents and reporting.
The speakers explore how operating agreements can be drafted to reinforce fixed dollar transfers, clarify that governing documents control ownership interests, and reduce disputes if valuations are later questioned. Although no drafting approach eliminates all risk, thoughtful alignment can strengthen a taxpayer’s position in the event of scrutiny.
Addressing Estate Inclusion Risk After Powell
A significant portion of the discussion focuses on Estate of Powell v. Commissioner and the estate inclusion risks that arise when a transferor retains control over liquidation or distribution decisions. Even when interests are transferred to irrevocable trusts, retained powers can trigger inclusion under Section 2036.
The panel reviews several planning approaches designed to limit this risk, including the use of special voting membership interests held by independent parties, authorized member structures, and independent fiduciaries responsible for liquidation and distribution decisions. The key takeaway is that drafting alone is not enough—formalities must be respected, approvals documented, and distributions handled consistently with the operating agreement.
Additional Drafting Safeguards and Asset Protection Considerations
The webinar concludes with a series of additional operating agreement provisions that can help prevent unintended tax and asset protection issues. These include savings clauses to address partnership diversification rules under Section 721, provisions preserving annual exclusion gifts in the presence of transfer restrictions, safeguards against accidental termination of S corporation status, and careful coordination with tenancy by the entirety rules in applicable states.
Throughout the discussion, the speakers emphasize collaboration between estate planners and corporate counsel. Operating agreements drafted without consideration of estate and asset protection implications can create hidden risks that surface years later.
Key Takeaways
The overarching message of the webinar is that LLC operating agreements deserve the same level of strategic attention as trusts and other estate planning tools. Careful drafting, consistent administration, and coordination among advisors can significantly strengthen planning outcomes and reduce exposure to future challenges.
Watch the full webinar above to explore these strategies in depth and gain practical insights you can apply when advising clients who rely on LLCs as part of their estate and asset protection planning.