Income and LLCs: Do I have to give my kids their part of the income of our family LLC?
We see quite a few Limited Liability Companies in which Mom and Dad include the kids as part of their estate plan. There is nothing wrong with that, and often is a great way to have continued family ownership and management of properties that Mom and Dad want to keep in the family. But anyone who is a member of an LLC must receive a proportionate share of the income.
For instance, Mom and Dad have property that is income producing such as oil and gas or other mineral rights. When prices are high, they make the required distributions to the other members. When prices are low they want to take out all the income to themselves. This is not allowed. If a member receives a distribution all members must receive their proportionate distribution.
For example: Four person LLC, Mom 40%, Dad 40%, Brother 10%, Sister%. $100,000 is to be paid out by the LLC the members. Mom and Dad receive $40,000.00 each, Brother gets $10,000.00 and Sister gets $10,000.00.
But now the revenues are $50,000.00. Mom and Dad don’t want to pay out to Brother and Sister. What can they do? The only way to properly pay this out differently from the ownership interests is for the kids to deed their interest or a portion of it back to Mom and Dad. They can just give the money back, but any funds they were to receive are taxable to them.
We also see many LLCs without Operating Agreements. Without an Operating Agreement, there is no provision for what occurs if a Member becomes incompetent, dies, or declares bankruptcy. The Operating Agreement also becomes very important if a Member wants to be bought out. A properly crafted Operating Agreement can prevent a Member from forcing the other Members to pay an immediate full price cash price for his interest.
Let us take a look at your LLC and make sure it is up to date and has provisions for the transfer of Member interests. Contact Us!