LLC vs Trust: Everything You Need to Know
A Trust and a Limited Liability Company are two types of legal structures created at the state level, but are entirely different legal vehicles.3 min read
2. How an LLC Works
3. Which Is the Better Option?
Updated July 14, 2020:
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.
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.
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.
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.