Key Takeaways

  • Trusts are ideal for estate planning, probate avoidance, and controlled wealth transfer, while LLCs are better suited for liability protection and business operations.
  • A trust separates ownership from control, while an LLC offers flexible control structures and may shield assets from creditors.
  • Trusts do not go through probate and offer privacy; LLCs must be probated unless structured otherwise.
  • Both structures can be combined strategically for optimal asset protection and estate planning.
  • Tax treatment differs: Trusts can be pass-through or separate entities, and LLCs enjoy flexibility in taxation (sole proprietorship, partnership, or corporation).
  • Trusts are generally less costly to maintain annually but offer no liability protection, whereas LLCs offer protection but require ongoing compliance.
  • Consulting a qualified attorney is recommended to tailor these tools to your needs—UpCounsel can connect you with top legal professionals.

A Trust and a Limited Liability Company are two types of legal structures created at the state level, but are entirely different legal vehicles. People form these legal vehicles in order to gain access to advantages like preferential tax treatment, avoid probate, and protect assets. Both have advantages and disadvantages that need to be evaluated before forming either legal structure.

How a Trust Operates

A trust is formed by creating and signing a document that names a trustee along with a minimum of one beneficiary. Your property is transferred to the trust and you instruct the trustee on how that property is to be managed. This document does not require filing with a government agency or authority. In contrast, to form an LLC, you must register the Articles of Organization of the LLC with the state and pay a fee for filing it.   

The main benefit of a trust is that it doesn't count as part of the estate of the person who guarantees the trust. It's a way of alleviating the tax burden for heirs as it decreases the value of the personal assets. Families choose trusts in order to avoid estate taxes, manage the assets within, and make sure that assets are passed to designated heirs. Some situations may be better served by forming a Family Limited Liability Company (FLIC). The person who has the responsibility of making decisions for the trust is called the trustee. 

A manager or trustee and their successor can be selected through the trust agreement or through the operating agreement of the FLIC. The trust also has the option to split control and let the beneficiary make certain major decisions instead of the trustee. This usually includes the decision to sell property or use it to secure a loan. 

Trusts are either revocable or irrevocable. A revocable trust allows the trustee to modify the trust or dissolve it at any time. Assets placed into an irrevocable trusts can no longer be considered personal property. This kind of trust cannot be dissolved or revoked without a court order.

When a Trust Makes the Most Sense

A trust is often the preferred legal vehicle for individuals focused on preserving family wealth across generations and avoiding probate. It is particularly advantageous in the following scenarios:

  • Estate Planning Goals: Trusts allow for the seamless transfer of assets without the delays and public record of probate court.
  • Beneficiary Protection: Trusts can hold assets for minors or beneficiaries who may not be financially responsible.
  • Tax Strategy: Irrevocable trusts can potentially reduce estate tax liability by removing assets from the taxable estate.
  • Special Needs Planning: A special needs trust ensures care for disabled beneficiaries without jeopardizing government benefits.
  • Privacy: Trusts are private documents, unlike wills or LLC probate proceedings, which may become part of the public record.

How an LLC Works

An LLC is a legal entity that offers the limited liability protection of a corporation along with the managerial and operational flexibility of a partnership. It is something that an individual can own solely or partially. No employees are required apart from the owner and there's no need for a board of directors. It's primarily used for running a business, but an individual can form an LLC and place property in it. The property then legally belongs to the LLC. As long as the individual owns the LLC, he or she also own the property indirectly. An owner can dissolve the LLC at any time and regain ownership of assets that are not owed to creditors of the LLC.

In the event the owner or member of the LLC passes away, the interest in the LLC passes through estate probate and is considered an asset of the estate. It's also possible to structure the LLC so the founder owns a small portion while the family members own the rest and keep managerial control in accordance with the operating agreement until the owner passes away. An LLC can be structured to prevent personal creditors of the owners of the LLC from taking ownership of the LLC in order to satisfy outstanding debt. Creditors have the right to attach any distributions made by the LLC, but owners can make the decision whether the LLC makes a distribution of assets or not.

When to Choose an LLC Over a Trust

An LLC is best suited for scenarios where asset protection, business operations, and flexibility in ownership structure are priorities. Here are common use cases:

  • Real Estate Holdings: Many investors place rental properties or commercial real estate in an LLC to limit personal liability.
  • Business Operations: If income is being generated through active business, an LLC provides both operational flexibility and protection from business-related lawsuits.
  • Creditor Protection: LLCs can shield assets from personal creditors, particularly in states with strong “charging order” protections.
  • Tax Flexibility: LLCs can elect how they want to be taxed (as a disregarded entity, partnership, or corporation), providing adaptability for different financial strategies.

Which Is the Better Option?

The best decision to make is to talk to a lawyer and discuss the needs of the family prior to forming a trust or LLC. The disadvantages of an LLC may outweigh those of a trust and vice-versa. Someone who wants to make sure that their assets are given to a specific heir may be better off forming a trust while someone who wants to protect assets from creditors may find an LLC is the superior option. A lawyer can help the family decide which option makes the most sense and offers the most protection and benefits to all involved.

Trust vs LLC: Which Offers Better Asset Protection?

Asset protection is one of the key reasons people compare trusts vs LLCs:

  • LLCs Provide Liability Protection: Personal assets are typically protected from lawsuits involving business activities or rental properties held in the LLC.
  • Trusts Don’t Shield From Creditors (Unless Irrevocable): Revocable trusts offer no protection from lawsuits or creditors. However, irrevocable trusts can offer some protection, depending on jurisdiction and how the trust is structured.
  • Layered Protection: A layered strategy—placing property in an LLC and transferring the LLC interest to a trust—offers robust protection from both probate and legal liability.

Trust vs LLC: Costs and Ongoing Requirements

Each structure involves different formation and maintenance costs:

  • Trust:
    • Initial setup cost varies ($1,000–$3,000 depending on complexity).
    • No ongoing state filing or annual fees.
    • May require trustee management fees for complex trusts.
  • LLC:
    • Requires filing Articles of Organization and paying state filing fees ($50–$800 depending on the state).
    • Annual reports, franchise taxes, or registered agent fees may apply.
    • May require an operating agreement and EIN registration with the IRS.

If minimal administrative upkeep is important, a trust may be easier to manage long term. However, if legal liability and asset protection are key concerns, the added LLC responsibilities may be worth the benefits.

Can You Combine an LLC and a Trust?

Yes—many estate planning strategies involve combining both a trust and an LLC to maximize benefits:

  • LLC Owned by a Trust: You can place an LLC membership interest into a trust. This allows for operational protection through the LLC and estate planning benefits through the trust.
  • Trust as LLC Member or Manager: The trust can act as a member or even manager of an LLC, allowing for centralized control and succession planning.
  • Multigenerational Planning: This setup is ideal for families looking to pass down assets while avoiding probate, reducing estate taxes, and protecting the family business from creditors.

Trust vs LLC: Taxation Differences

Trusts and LLCs are taxed differently, which can impact long-term wealth strategies:

  • Revocable Trusts: These are considered “grantor” trusts, meaning the grantor is taxed on the income. They offer no tax benefits but provide continuity and privacy.
  • Irrevocable Trusts: These may file their own tax returns and are taxed at higher trust income rates. However, they can shift the tax burden to beneficiaries if income is distributed.
  • LLCs: Single-member LLCs are typically disregarded entities (taxed as sole proprietors), while multi-member LLCs are taxed as partnerships by default. They can also elect corporate taxation (S or C corp) to optimize tax exposure.

The right structure depends on your specific income, asset type, and long-term goals. For instance, an LLC may offer more favorable treatment for business income, while a trust might be advantageous for reducing estate taxes.

Frequently Asked Questions

1. Can a trust own an LLC? Yes, a trust can own all or part of an LLC. This is common in estate planning and provides both legal protection and seamless inheritance.

2. Is a trust or LLC better for real estate? An LLC is typically better for real estate investments due to liability protection. However, transferring the LLC interest to a trust can help with estate planning.

3. Which is better for avoiding probate: trust or LLC? A trust is better for avoiding probate. Assets held in a trust pass directly to beneficiaries, while LLC ownership interests may still go through probate unless pre-arranged.

4. Do both trusts and LLCs offer tax benefits? Both can be used strategically for tax purposes, but they differ. Trusts can minimize estate taxes, while LLCs provide operational and income tax flexibility.

5. Should I consult a lawyer before setting up a trust or LLC? Absolutely. Each situation is unique, and the wrong structure could result in tax penalties or missed opportunities. You can find experienced attorneys on UpCounsel for personalized guidance.

If you need help with forming a trust or an LLC, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.