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Series LLCs: Tax Planning and Wealth Transfer Opportunities

Segregating Asset Ownership and Business Lines, QBI Deduction, State Law Comparisons

Note: CLE credit is not offered on this program

Recording of a 110-minute CPE webinar with Q&A

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Conducted on Wednesday, April 24, 2019

Recorded event now available

This course will provide tax professionals and family office advisers with a practical guide to the tax, business operations, and wealth transfer planning opportunities of using series LLCs. The panel will provide an overview of series structures in various states, discuss the accelerating evolution of series structures, and offer examples of practical uses. The webinar will provide examples of the approaches business and asset owners are using to treat series LLC structures for tax purposes in light of limited IRS guidance. The panel will discuss various state law issues surrounding series entities and offer concrete tools for achieving optimal treatment of series LLC entities.

Description

Series LLCs continue to gain in popularity, but the entities also confront professional advisers with both planning opportunities and compliance challenges. Application of the Section 199A pass-through qualified business income (QBI) deduction likely will increase both the use and the complexity of determining tax treatment of these asset portfolio tranches.

A series LLC is a type of limited liability company structure that provides for internal segregation of assets, like a vault with separately keyed lockboxes. The members of the series LLC have the power to establish these internally protected series, provided they do so in an LLC operating agreement and carefully track the asset ownership records. Most states do not require additional filings or fees to establish these internally protected series.

Once the members form the series LLC and establish the protected series, assets can be funded into a portfolio of asset tranches with separate liability protection. The series LLC structure is intended to segregate the assets and liabilities of each protected series, so that the debts, liabilities and obligations of any given series may be enforced only against the assets of that protected series and not the assets of any other protected series or the LLC itself. This enables the series LLC founders to add members associated with some protected series without the new members being associated with other protected series therein. Series LLCs were initially used for mutual funds and captive insurance companies but have become popular with real estate investors and to a lesser degree other types of businesses.

The IRS took the position in proposed regulations issued in 2010 that each series may qualify to be classified as a separate entity at the federal income tax level. This likely will lead pass-throughs earning income ineligible for the 199A deduction to set up series to try to segregate income eligible for the 20% QBI deduction. However, numerous state questions remain as to the tax treatment of separate series for state income and franchise tax purposes. Fourteen states have some version of series LLC legislation, so using the series LLC in non-series states also causes some questions about recognition of out-of-state law. Tax advisers must be aware of the federal and state tax implications of series LLCs.

Listen as our panel discusses the planning opportunities and tax planning and compliance challenges of structuring series LLCs.

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Outline

  1. History of the series LLC and its recent rapid evolution
  2. Potential benefits of series LLCs
    1. Operational
    2. Funding
    3. Wealth transfer
    4. Liability protection
    5. Varied ownership interests
  3. Tax treatment of series LLCs
    1. Federal tax treatment
    2. IRS regulations
    3. Check-the-box framework
    4. Employment tax and employee benefits
  4. Section 199A QBI and using series LLCs
  5. Impact of IRS centralized partnership audit regime on series LLCs
  6. State law and tax treatment of series LLCs
    1. The Delaware series LLC--protected series vs. registered series
      1. Delaware LLC division as “escape hatch”
    2. Overview of Uniform Protected Series Act and state variations on the series LLC
    3. State tax treatment
    4. State tax treatment in California and other jurisdictions that have issued regulations on taxation of series LLCs
    5. Foreign series LLC--good standing certificates and filing a certificate of authority
    6. Franchise and net receipts taxes

Benefits

The panel will discuss these and other important topics:

  • State law person vs. entity--protection and liquidation questions
  • Series LLC records requirements
  • How Section 199A may encourage advisers to service provider companies to utilize series LLCs to try to take advantage of QBI deduction on eligible activities
  • Impact of IRS centralized audit rules for partnerships on tax reporting of series LLCs
  • Disparate state tax treatment of series LLCs
  • Employment tax issues with series LLCs

Faculty

Goode, Michael
Michael S. Goode
Special Counsel
Lewis Thomason

Mr. Goode focuses his practice on the tax, business and estate planning needs of families and businesses. On an...  |  Read More

Grace, Michael
Michael J. Grace
Consulting Counsel
Wiley Rein

As both a lawyer and a CPA, Mr. Grace has represented domestic and foreign companies in a broad range of tax...  |  Read More

Williams, John L.
John L. Williams
Partner
The Williams Law Firm

Mr. Williams is experienced in negotiating transactions, drafting documents, and advocating for clients in all Delaware...  |  Read More