Can a Trust Own an LLC? Everything You Need to Know
This is a common question when business owners are deciding on which type of business entity they would like to form.3 min read
Can a trust own an LLC? This is a common question when business owners are deciding on which type of business entity they would like to form. The answer to the question is yes; trusts are allowed to be owners of an LLC.
What Is an LLC?
An LLC is a popular type of business entity that can provide shareholders with protection from liability while avoiding the subject of double taxation. In a limited partnership, there is also no double taxation, but the partners do not enjoy the limited liability. With both limited liability and more favorable taxation an LLC is a popular choice for real estate.
There is no restriction on the number of members of an LLC. Members can be both individuals and corporations. When it comes to tax purposes, a single member LLC will have the profits from the company pass through onto their personal tax return. In multi-member LLC, each members' portion of the profits will be reported on their Schedule K which will then transfer to their personal 1040 return.
During estate planning, investors can place personal assets in revocable living trusts which will pass to beneficiaries of the trust without the need to go through the scrutiny of a probate court. To determine which set up will work best for your trust, it is important to look at some of the popular options.
- Living Trust as a Sole Member - The formation of an LLC provides limited liability protection, yet will not help with your estate planning. A living trust will aid you in your estate planning but won't provide you with any liability protection. An LLC with a living trust sole member will enjoy the best of both worlds with limited liability and the benefits of enjoying probate.
- Partnership and Trust - An LLC can work as a sole proprietorship or partnership to gain additional tax benefits. In forming, you will protect your business assets over time including property, bank accounts, and other personal assets from lawsuits. When forming a living trust, the property will avoid probate in the event of one of the partner's death and the property will be transferred per your instructions.
When creating an operating agreement for an LLC, it is vital to clearly define all of the ownership interest that is in a trust. Your operating agreement should include:
- Verbiage that the trustee or successor has the full rights as a manager or member of the LLC
- A list of each manager and member of the LLC
Having a well-defined operating agreement is essential as a financial or banking institution may not allow you interest in the business base in the event of a member's death or incapacitation without an operating agreement in place.
Another benefit of putting membership interest in a trust is beneficial if the member's interest in the business will exceed the allowed amount to avoid probate. To find out if your interest will exceed the amount, or to find out if forming a living trust is best for you, consult an estate planning attorney.
The Legal Status of Living Trusts
The legal status of your living trust will depend on how it is formed. A trust can be deemed:
- Revocable - In a revocable trust, the grantor can terminate the trust any time that they want to regain ownership. Because of this, the trust can be considered part of the grantor and will be deemed part of their assets in terms of debt.
- Irrevocable Trust - When a trust is formed as irrevocable the trust cannot be easily terminated by the grantor, but the assets will then be protected from creditors going after the grantor assets.
The statutes of each state will authorize the trustees to be able to exercise legal owner rights over almost any asset an individual can own. Because the ownership interest in an LLC is considered an asset, it is possible for a living trust to become one of the members of the LLC. With all states now recolonizing single-member LLCs, it is possible for a living trust to be an LLC's only member.
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