New York Estate Planning-Property Held By Single-Member LLC Treated As Directly Owned

New York Estate Planning-Property Held By Single-Member LLC

Treated As Directly Owned

 

      An opinion from the Advisory Opinion Unit of the Office of Counsel, New York State Department of Taxation and Finance dated May 29, 2015, addressed the treatment of property held through a single-member LLC for New York State estate tax purposes. It would ultimately determine that property held in a single-member LLC would be treated as directly owned by the single-member.

      This opinion was issued in the context of an individual who planned to contribute his condominium, located in New York, to an LLC, and to then move to another jurisdiction. Although not expressly recited in the opinion, it is presumed that the question involved whether, upon the death of the single-member, the condominium itself or the interest in the LLC would be treated as in the decedent’s estate.

      While a condominium is treated as real property and subject to the New York State estate tax, where the real property is held by a corporation, partnership or trust, the decedent’s estate is treated as holding an intangible interest in the business organization.  Further, New York law prohibits the imposition of an estate tax on the intangible property of a person not resident in New York, even if that intangible property is located in New York.

      All that said, in reliance upon the “Check the Box” regulations providing, inter alia, that absent election to treat a single-member LLC as a corporation, it will be “disregarded, its activities [] treated in the same manner as a sole proprietorship, branch, or division of the owner.” 26 C.F.R. § 301.7701-2(a), the opinion concludes that:

Under the circumstances presented by the Petitioner, interest in the SMLLC owned by Petitioner would not be treated for estate tax purposes as an intangible asset. Instead, the condominium held by the SMLLC would be treated as real property held by the Petitioner for New York State estate tax purposes.

       This determination is troubling in a number of respects. First, the treatment of a SMLLC as a “disregarded entity” under the Check the Box regulations relates to income tax classification. It was never intended to address estate planning questions.

      Second, this opinion conflicts with the numerous statutes and decisions which have held, inter alia, that notwithstanding disregarded entity tax classification, a SMLLC has a real existence, and the sole member and the LLC are not to be treated as one.  This is a topic I covered in Regarding the Disregarded Entity, 14 J. Passthrough Entities 39 (March/April 2011).  HERE IS A LINK to that article.

      Third, notably absent from the discussion was any reference to New York LLC Act. Specifically, it provides:

A membership interest in the limited liability company is personal property. A member has no interest in specific property of the liability company.

It is, at best, difficult to reconcile a statement that the member will be treated as the owner of the SMLLC’s property when the New York LLC Act provides to the contrary.