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When it comes to asset protection, estate planning, and minimizing taxes, two of the most widely used tools are the limited liability company (LLC) and trust. Both can be extremely valuable, but they are quite different entities that serve distinct purposes.
It’s important for individuals and business owners to understand the key differences between an LLC and a trust in order to choose the right one for their specific situation.
What is an LLC?
A limited liability company is a business structure that combines aspects of corporations and partnerships/sole proprietorships. The owners of an LLC are called members, and they are not personally liable for the debts and liabilities of the company. In essence, an LLC offers its owners limited liability protection similar to a corporation.
LLCs are relatively easy and inexpensive to set up and maintain compliance with state regulations. They also avoid the double taxation applied to corporations, as profits and losses can pass through to the owners’ personal tax returns. LLCs enjoy great flexibility when it comes to management and operational issues.
For small businesses and real estate investors, LLCs are an extremely popular entity choice because of these advantages and liability protections. Assets titled under the LLC’s name are shielded from creditors of the individual owners.
What is a Trust?
A trust is a legally binding fiduciary agreement where one party (the grantor) transfers assets to another party (the trustee), who holds and manages those assets for the benefit of a third party (the beneficiary). There are different types of trusts, including revocable living trusts, irrevocable trusts, asset protection trusts, charitable trusts, and more.
Trusts are frequently used for estate planning purposes in order to avoid probate court and minimize taxes upon the grantor’s death. They can protect assets from creditors and lawsuits. Trusts can allow grantors to dictate when, how, and why beneficiaries receive assets, providing control even after passing away.
Trusts must be funded by retitling assets like bank accounts, stocks, real estate, etc. in the name of the trust. This makes those assets legally separated from the individual. But a properly structured trust can achieve outstanding levels of asset protection.
Key Differences Between LLCs and Trusts
While both can offer asset protection benefits, there are some key differences between LLCs and trusts:
Formation and Purpose
An LLC is a business entity owned by members. A trust is a non-entity that holds assets on behalf of beneficiaries. LLCs are created to operate businesses and investments. Trusts are used for estate planning and asset protection strategies.
Ongoing Fees and Complexity
LLCs are relatively inexpensive and simple to set up/maintain compliance in most states. On the other hand, trusts tend to involve higher upfront costs with attorneys and more ongoing accounting/maintenance fees.
Ownership and Structure
LLCs have an ownership structure with members/managers who control operations while a trust has a grantor, trustee, and beneficiaries – the trustee controls the assets per the terms set by the grantor.
Income Taxation
LLC profits and losses are passed through to owners’ personal tax returns but the trusts are taxed differently based on their type – some trusts are subject to different tax rates than individuals.
Asset Protection
Both LLCs and trusts can be used for asset protection purposes. However, domestic asset protection trusts in certain states can provide even stronger asset protection from creditors than LLCs alone.
Privacy
LLCs require listing members/managers on public formation records whereas asset ownership within trusts can be completely anonymous.
Control of Assets
LLC members/managers maintain direct management and control over assets owned by the company. Trustees control all assets owned within a trust agreement on behalf of the beneficiaries.
Duration
LLCs can exist in perpetuity unless otherwise specified, however, trusts have specific terms and conditions dictating when and how they must terminate.
Court Oversight
LLCs are not subject to ongoing judicial supervision while trusts require court involvement and can become a matter of public record depending on the type of trust.
Using LLCs and Trusts Together
While there are clear distinctions between LLCs and trusts, the two can actually be used in tandem as part of an integrated asset protection and estate planning strategy. An LLC owns and controls the assets for liability protection. The trust then owns the LLC to add another layer of protection and enable estate tax planning strategies.
This kind of structure has become popularized as the “Umbrella Trust” for its ability to own and oversee various LLCs and other entities for both businesses and investments. There can be significant tax advantages and heightened levels of asset protection when LLCs and trusts are combined in this way by experienced professionals.
Domestic Asset Protection Trusts
It’s worth highlighting one specific type of trust that can work incredibly well with LLCs for asset protection – the domestic asset protection trust (DAPT). This is an irrevocable trust that allows the grantor to retain some beneficial interests while still protecting assets from future creditors.
DAPTs are currently allowed in 19 U.S. states, with Nevada, South Dakota, and Alaska being some of the most trustee-friendly jurisdictions. When assets are properly transferred into a DAPT, creditors have a very short window of 18-24 months to try and “claw back” those assets after funding the trust. Once that window expires, the assets should receive rock-solid protection from future creditors.
By utilizing both an LLC and a DAPT, individuals can achieve extraordinary levels of insulation from liabilities. The LLC protects from inside liabilities related to the business/investment. The DAPT then shields those LLC assets from outside liabilities like car accidents, lawsuits, etc.
Takeaway
In conclusion, LLCs and trusts are powerful tools that can be leveraged in different ways as part of a comprehensive asset protection and estate planning strategy. LLCs provide operational flexibility and liability protection for businesses and investments. Trusts facilitate detailed control over asset management and distribution for estate planning purposes.
Using both an LLC and trust together can unlock substantial benefits, but also adds complexity. Working closely with qualified legal and financial professionals is critical to properly navigate the rules and tax implications of these entities. With expert guidance, the advantages of LLCs and trusts can be maximized to grow wealth, mitigate risks, accomplish legacy goals, and secure your family’s future over generations.
Alfie Wilson, Esq., is a legal content writer with expertise in business formation, criminal law, veterans disability, family law, DUI law, personal injury, animal welfare, and legal writing. He holds a J.D. from Emory University School of Law and has experience in appellate advocacy and regulatory matters. Alfie’s passion lies in breaking down complex legal topics for a non-lawyer audience. He currently writes for law firms and non-profits on various issues and resides in Arlington, Virginia.
