LLC Trust: Everything You Need to Know
An LLC trust provides individuals with ways to manage their assets. An LLC is a business structure that provides liability protections for individually owned assets in some situations, and a trust appoints a trustee to manage the trust.3 min read
An LLC trust provides individuals with ways to manage their assets. An LLC is a business structure that provides liability protections for individually owned assets in some situations, and a trust appoints a trustee to manage the trust. One or more beneficiaries are also named. These individuals will receive the assets included in a trust at a future date.
Family Trusts vs. LLCs
A family trust and LLC both give their creators an outlet to protect their assets and manage their tax obligations, among other things. However, both options have advantages and disadvantages. Learning more about each of these choices can ensure you have the legal and financial protections you need. These are a few of the key differences between these business types:
- In a trust, you name a trustee and the beneficiaries who will receive your assets. The specific details of such a contract are outlined in the trust agreement. You can name family members as beneficiaries, for example, in a family trust.
- An LLC provides liability protections like a corporation, but with the flexibility and tax benefits of a partnership.
- The assets invested in an LLC belong to that business. Moreover, your personal assets aren't at risk should the company have financial issues, such as bankruptcy.
- Though you indirectly own those assets, only the individual members are taxed based on their income. For a corporation, both the members and the business are taxed.
- The members of an LLC can outline rules in the operating agreement about dissolving an LLC, how members can quit, and how assets are distributed.
- A trust transfers assets to a trustee, who is responsible for managing that trust. Unlike a multimember LLC, with a trust, you don't need to file any forms with the government.
- You can file the articles of organization and your operating agreement with the secretary of state. There may be, depending on your state, an initial filing fee plus an additional fee if you file to amend or change the information in these documents.
- A trust and an LLC are both unique in terms of passing through probate. In a family trust, probate court isn't involved if you set up the trust, so it survives your death. Assets counted as part of your estate, however, pass through probate in order to calculate estate taxes.
- In general, an LLC's interest is treated as part of your estate. This means it's passed through probate and taxed accordingly. However, business owners can structure their LLCs so that family members own most of the interest. You can then state in the operating agreement that you are only managing the LLC until your death.
- An irrevocable trust is safe from creditors, except in cases of fraud, to compensate for personal debt. An LLC also provides liability protections. Depending on how you structure your business, you can keep your personal assets safe should the business declare bankruptcy or face a lawsuit.
- The income associated with a revocable family trust is taxed as personal income. The income of an irrevocable trust is taxed independently. Trustees must claim this income on their annual tax returns.
- The members of an LLC are taxed individually, and the business itself isn't taxed. However, LLC members may choose to set up their enterprise up as a corporation. This gives the business more equity and is often done so the enterprise can attract new investors.
Asset Protection Trusts vs. LLCs
To set up an asset protection trust, one must name a trustee, who manages and is legally accountable for an asset, and the beneficiary, who stands to hold the asset at a future date. The trustee has no equitable interest in the trust, and the beneficiary has equitable trust but not the legal right to borrow against the asset or sell it.
Asset protection trusts are always irrevocable. This is one way to keep assets safe from creditors, who can't use those protected assets to settle outstanding debts. An LLC, however, is a business entity. Individual assets are protected from the company's financial liabilities.
If the company invests in an asset, such as land, the LLC holds the title. The individual members don't benefit from the company's assets. This means collectors may claim those assets in the event of a bankruptcy or lawsuit. An individual member of an LLC thus enjoys some liability protection for their personal assets should the company encounter any kind of financial problem.
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