[WSBAPT] Out of State Property in LLC

[JOHN J SULLIVAN]

Brent:
 
You were given faulty advice. The state under whose law the LLC is created is irrelevant. In addition, an interest in a legal entity (other than a beneficial interest in a revocable trust), even one that is a "disregarded entity" in the eyes of the IRS, is characterized as intangible personal property. It is sourced under WA's estate tax law to the state of the decedent's domicile. It is not "located" in CA just because it is created under its laws and holds real property there. 
 
The advice that this structure avoids inclusion of the value of the CA real property in the WA estate tax base is faulty because it does the opposite - it ensures inclusion in the base of a decedent domiciled in WA at the time of death. Same result if it's held in a WA LLC, except then you might need to register it in CA as a foreign LLC if it's "doing business." 

To avoid inclusion in the WA estate tax base and ancillary probate under CA's more expensive and intrusive probate system, the real property should not be held directly, with the PC on title. Instead, it should end up in a single purpose (or full purpose if you want) revocable living trust. Then it is sourced under WA's estate tax law to where the dirt is - CA - and eliminated from the numerator for apportionment purposes here. (Last time I checked CA still has not enacted a stand-alone estate tax.) 

One last issue. I call it the tax tail that wags the dog. If you advise the client to restructure how the CA realty is owned, keep an eye on Prop 13. There are nuances that may limit how to transfer the realty from the LLC to the RLT without triggering a revaluation for property tax purposes. And by the way, another reason you might want to hold the realty in a trust with its situs (locus of management) in WA is to avoid CA's income tax down the road if and when the RLT becomes irrevocable and no longer a "disregarded entity.

Cheers.
 
John J. Sullivan
 

> On 05/30/2023 1:55 PM PDT Brent Williams-Ruth <brent at williams-ruthlaw.com> wrote:
>  
>  
> Greetings List Members - 
>  
> I am growing excited for the Mid-Year in Walla Walla coming up this weekend. 
>  
> I recall the DOR changing the rules regarding LLC ownership of property in 2020 (link to guidance for ease of reference - https://dor.wa.gov/sites/default/files/2022-03/sn_20_EstateTaxTreatment.pdf
>  
> Maybe I am reading too much into the words that are not present on the DOR guidance - but does it matter if the LLC is NOT a Washington LLC? Example, lets say we have a Washington resident, who inherited 100% interest in a California LLC that holds four different parcels of land/homes scattered around California. 
>  
> Would that still be treated as intangible property? The guidance does not differentiate on the location of the LLC. 
>  
> For my hypothetical - because my PC is a Washington resident, even if deemed intangible, an out of state LLC holding properties out of State will still be taxed under the Washington estate tax.  Yes?
>  
> What is catching me is WAC 458-57-125 (link for ease of reference) - https://apps.leg.wa.gov/wac/default.aspx?cite=458-57-125
>  
> Because the properties are held by the LLC, and now under the 2020 DOR guidance that LLC is deemed to be intangible property and 458-57-125(3)(c) states Intangible personal property of a decedent is located in Washington if the decedent was a resident of this state at death.
>  
> Just seeking confirmation that I am tracking this right....I am thrown off because this came to my office by someone writing and stating (to start) that by having it as an LLC they can avoid the Washington Estate Tax.
>  
> Thank you! 
> 
> Brent Williams-Ruth (pronouns: he/him)
> Attorney-At-Law
> 
> Law Offices of Brent Williams-Ruth, a division of BWR Consulting, PLLC
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