Death of single member of disregarded entity

[mbigelow]

A client of mine is considering putting his business real property, which is expected to appreciate considerably in the upcoming decades, into a single member LLC and file as a disregarded entity. He asks how the real property will be treated upon his death, as he plans to leave it to his children. I'm finding some conflicting information regarding its income tax treatment and whether it will receive a stepped-up basis. It does seem that in CA it will need to pay transfer tax, but beyond this, the waters look muddied. I don't have much experience with estate tax filings, so any insight would be greatly appreciated. Thank you.

[ATSMAN]

What is the purpose of transferring ownership of the business property into a disregarded entity? If it is to make it creditor proof, I don't think that will work?

I believe for tax purposes except for payroll, it will follow the individual tax treatment so stepped up basis upon death should be available. Perhaps someone can cite an exception.

I am not at all sure about state law treatment.

[Burke]

Putting it into an SMLLC does provide some liability protection and possibly creditor protection. It does not change the tax status (income tax or estate tax) at all for federal purposes. I cannot attest to the state issues in CA. The owner reports the income on his tax return annually and any capital gain if sold. It will be considered part of his estate when he dies, gets a stepped-up basis, and pass-through of ownership is controlled by the will.

[ATSMAN]

Putting it into an SMLLC does provide some liability protection and possibly creditor protection. It does not change the tax status (income tax or estate tax) at all for federal purposes. I cannot attest to the state issues in CA. The owner reports the income on his tax return annually and any capital gain if sold. It will be considered part of his estate when he dies, gets a stepped-up basis, and pass-through of ownership is controlled by the will.

I am not an attorney so my information is second hand from other attorneys. It is my understanding that a SMLLC (depending on the state) may not provide any protection from a practical perspective to the sole owner compared to a MMLLC where only the member who is charged can have their interest attached. In a SMLLC 100% of assets belongs to that one member. Many courts have allowed the judgement creditor to force a dissolution of the LLC and attach the assets.

[Burke]

That is a legal question and may vary from state to state and court precedents. I have heard the same thing, so one would need to examine thoroughly the LLC organization provisions that each state requires when it is set up. The SMLLC from a tax standpoint is simply disregarded for federal tax purposes.