Transferring Real Property into Limited Liability Companies in Florida: Benefits and Considerations.

• Author: Percopo, Joseph M.

Transferring real property into a limited liability company (LLC) is a popular choice among property owners. This is because LLCs offer several advantages, including liability protection, estate-planning opportunities, and the potential for probate avoidance. However, before transferring Florida real property into an LLC, there are several considerations that property owners must keep in mind. This article provides an overview of the benefits of transferring real property into LLCs, as well as the issues that property owners should consider prior to transferring real property into an LLC.

Benefits of Using a Florida LLC for Asset Ownership

* Liability Protection--Under Florida law, the debt, obligation, or other liability of a limited liability company is solely the debt, obligation, or other liability of the LLC. Members and managers are not personally liable, directly or indirectly, for a debt, obligation, or other liability of the LLC. (1) Therefore, if a liability arises from real property owned by an LLC, only the assets owned by the LLC (and not the personal assets of the members of the LLC) are exposed, provided proper entity formalities are maintained, as discussed below.

* Creditor Remedy Limitation for Multimember LLCs--For multimember LLCs, a charging order is the sole and exclusive remedy by which a judgment creditor of a member may satisfy a judgment from the judgment debtor's interest in the LLC.(2) A judgment creditor of a debtor member may not foreclose on the debtor member's membership interest in the LLC. Moreover, the charging order limits the judgment creditor's recovery against the LLC interest to only those distributions actually made to the debtor member. However, for single-member LLCs, the charging order is not the exclusive remedy, and a judgment creditor may be able to foreclose on the debtor member's membership interest. (3)

* Federal Tax Status Flexibility--The number of members determines the default LLC tax classification. If an LLC has only one member, the LLC's default tax classification is that of a disregarded entity for federal tax purposes. (4) This means that the LLC does not need to obtain its own employer identification number (EIN) or file a separate tax return. (5) Where spouses are the only owners of the LLC and have community property ownership under the law of a state, despite having two members, the LLC may still be considered a disregarded entity. (6) Otherwise, outside of spouses with community property ownership, where an LLC has two or more members, the LLC's default classification is partnership taxation. (7) If the LLC is taxed as a partnership, then the LLC will need an EIN and to file a separate annual partnership tax return. Interestingly, the IRS has not provided guidance on whether a Florida LLC owned solely by spouses as "tenants by the entirety" may be treated as a disregarded entity and not a partnership by default. (8) Regard-less of the default tax classification options, members may elect that an LLC be taxed as a C corporation or an S corporation by filing a Form 2553 with the Internal Revenue Service.

* Tenants by the Entirety Ownership--Tenants by the entirety (TBE) in Florida is a unique form of ownership in which married couples are treated as one marital unit (instead of two separate individuals). (9) When property is owned as TBE, both spouses are required to agree to any transfer while both are alive, (10) and upon the death of the first spouse, the interest automatically vests solely in the surviving spouse (without probate). Additionally, if an asset is owned as TBE, the individual judgment creditors of either debtor spouse cannot reach the TBE asset due to the "one marital unit" treatment under Florida law. (11) As with real property and bank accounts, a married couple may structure their ownership interest in an LLC as TBE and thereby avoid probate on the death of the first spouse to die and insulate the asset from a debtor spouse's individual creditors.

* Estate Planning--Another benefit of transferring real property into an LLC is that an LLC can be used for estate-planning purposes. The LLC's organizational structure, tax-planning opportunities, and ability to maintain control over assets, combine fractional interests, consolidate wealth, restrict unauthorized transfers, provide flexibility in business investment planning, and promote members' knowledge and communication about the LLC assets make the LLC a valuable estate-planning tool. For example, LLCs can be particularly useful for those with large taxable estates looking to transfer assets in a tax-efficient manner for estate-and gift-tax-planning purposes, because valuation discounts for lack of control and marketability are generally available when partial interests in an LLC are gifted or sold. (12)

* Potential for Probate Avoidance --Transferring real property into an LLC can also help avoid the need for an ancillary administration in Florida for non-residents who own real property in Florida. It also may be possible for Florida residents to avoid probate of a Florida LLC after death by including transfer-on-death provisions in the operating agreement. (13) Thus, by owning property through an LLC, the Florida probate process may potentially be avoided, saving time and reducing costs for the property owner's beneficiaries and heirs.

Considerations Before Transferring Florida Real Property into an LLC

* Loss of Homestead--Property owners should be made aware of the consequence of transferring homestead to an LLC. In Florida, real property loses its homestead status when transferred to an LLC. (14) A loss of homestead status results...