Can a trust own an LLC?
This question is common among business owners having difficulty deciding which type of business entity they should form.
The short answer to the question is yes! Business owners can use a trust to protect their business.
However, many business owners do not recognize the importance of estate planning to protect their company using a trust.
But with over 2 and half decades of experience as a financial coach, I’ll help you learn the benefits of a trust owning your LLC.
Benefits such as protecting your hard-earned assets and avoiding the probate process.
Let’s learn more about a Trust and an LLC!
What is a Trust?
A trust is an essential estate planning tool.
It is a legal agreement between three parties:
- The Grantor – also known as Settler or Trustor, is the one who wants to establish a trust and will name other parties involved in the arrangement.
- The Trustee – manages the trust and is responsible for the distribution of assets
- The Beneficiary(s) – anyone who benefits from the trust.
A Trust is a common way for business owners to transfer legal title of assets to other individuals.
Trusts are usually connected with estate planning and can also benefit business management.
What is an LLC?
A Limited Liability Company or LLC is a midsize business entity that offers partners better membership options than sole proprietorships and partnerships.
However, LLCs have fewer membership options in comparison to corporations.
corporations.
LLCs are popular with business owners, medical professionals, and other affluent individuals since they can help limit personal liability in case of a lawsuit and avoid double taxation.
In an LLC, there are no restrictions on the number of members. Members can be individuals and corporations.
Benefits of Trust Owning an LLC
Whether you’re the LLC’s sole member or a co-owner of an LLC, your LLC ownership interests are deemed personal property.
Whether you own a single-member LLC or are a co-owner of a multimember LLC, your LLC ownership interests are considered personal property.
Business interests are one of the most valuable assets. You’ve worked hard for years for these assets and should now protect them.
Business owners should also plan for the future if something happens to them or the business.
That’s where trust comes in. A trust can safeguard your hard-earned assets.
Here are a few benefits of placing your LLC into a trust:
Avoiding the Probate Process
What’s a probate?
Probate is a legal process of settling an estate when someone passes away. This process can take weeks or months.
This process is supervised by the government, where an executor collects your assets, pays off any remaining debts, and then distributes the remaining assets to your heirs or close family members, depending on the terms of your will.
But if you put your LLC into a Trust, the assets inside generally avoid probate and save a lot of legal fees.
Added Privacy
As we’ve tackled earlier, probate can be a long process, and it is a matter of public record, which means anyone who knows where to research can learn these details about you.
This can be a problem since creditors and scammers are everywhere.
Fortunately, all your trust transactions are not public records.
A trust owning your LLC can also give an extra layer of privacy, making accessing assets easier for the assigned beneficiaries.
Incapacity planning
You now might have a plan for what will happen to your assets when you die. However, what will happen if you get in an accident or get an illness that causes you to be incapable of doing your business obligations?
Luckily for you, if your LLC is owned or held in a trust, the trust can be arranged so that your incapability instantly activates the authorization of another person, like your trustee, to take control on your behalf.
Asset protection
Placing your LLC membership interests in a trust can help protect your assets from creditors.
However, there are many types of trust. For instance, there’s the irrevocable trust, where assets held here are generally safe from creditors, lawsuits, and even divorce settlements (depending on conditions and jurisdiction).
Another effective way to protect your business assets is with an Asset Protection Trust or APT.
APTs can also provide the power to move your membership interests legally.
Types of Trusts You Can Use for an LLC
There are various types of trust out there. Each has different purposes and benefits.
Below are three types of trusts that are mostly used with LLC asset transfers:
Revocable trusts
Revocable trusts or living trusts are trusts that can be altered or revoked during the grantor’s lifetime.
In this trust, the grantor can also name themselves the trust beneficiary and the trustee.
However, as long as the Grantor is alive and has control over the trust, the trust assets can be subject to creditors’ claims.
Irrevocable trusts
In contrast to the revocable trust, an irrevocable trust cannot be altered or revoked once it is created.
Irrevocable trust is the way to go to ensure that creditors cannot go after your assets.
However, if the Grantor puts the LLC in an irrevocable trust, he loses control and access to the LLC.
Once the LLC is in the trust, the grantor will also lose income from the LLC.
Asset protection trusts
Asset Protection Trusts (APT) allow LLC owners to benefit from the ownership and control of a revocable trust and the asset protection advantages of an irrevocable trust.
An APT is irrevocable. It allows the grantor to receive allocations from the trust as the beneficiary.
However, the grantor should name someone who will receive the LLC membership interests when he passes.
Should Your LLC Be Owned by Revocable or Irrevocable Trust?
Revocable trusts can be changed even after the trusts have been established (while the grantor is alive).
On the other hand, once the irrevocable trust has been established, it cannot be changed or modified anymore.
If you decide that your LLC will be owned by a revocable trust, you’ll benefit from probate avoidance, control, and access over the LLC and can receive income from it.
Unfortunately, since you still have access to your LLC, a lawsuit can allow creditors to gain access to your trust and terminate your membership in the LLC to pay your debt.
If you want to protect your LLC membership interests or any other assets from creditors, transferring your LLC into an irrevocable trust is best advised.
How to Transfer Ownership of an LLC into a Trust
Transferring ownership of an LLC into a trust will vary depending on which state you live in.
For example, there are differences in documentation, tax implications, public records adjustments, and other requirements in California
- Review the LLC’s Operating Agreement
Before trying to transfer any interest in the LLC, you must first consult with your attorney to comprehensively review the LLC’s Operating Agreement to ensure that you are allowed to transfer your interests.
Any wrong transfer requirements can cause frustration to the beneficiaries and can lead to litigation.
Follow all the provisions to ensure that the LLC transfer is effective.
- Prepare Assignment Of Interest
If your Operating Agreement allows you to transfer your LLC interests, you’ll need to execute an assignment of your LLC interest to your trust.
This legal document allows you to transfer the interest to the trust.
You’ll need to sign this document accepting the interest of the LCC, being the trustee of the trust.
- Amend the Operating Agreement
It is ideal to amend the operating agreement to recognize the transfer of the LLC’s ownership from you to your trust.
The practicality of this step varies depending on the number of members of the LLC and the terms of the Operating Agreement at that time.
- Record the Transfer
Although it’s not required, having the LLC members sign a resolution acknowledging and accepting your interests’ transfer into your trust is also a good idea.
This can help avoid future complications, confusion, and possible lawsuits.
Frequently Asked Questions
What type of trust is best for an LLC?
The best trust for an LLC will depend on what you want to accomplish.
A revocable trust offers benefits such as probate avoidance while still having access and control over the LLC.
On the other hand, an irrevocable trust offers you probate avoidance and protects your assets from creditors, but you’ll have no control over your LLC anymore.
Can a trust distribute to a company it owns?
Yes. However, the trust deed should have a clause allowing this distribution.
Review and ensure that all your beneficiaries are correct.
Can a trustee be a beneficiary?
Yes. It’s not uncommon for a trustee to be a beneficiary since trustees are usually close friends and family members.
There’s no conflict of interest between the roles of a trustee and beneficiary.
Can A Trust Own an LLC?: Final Thoughts
“How can I protect my business? Can a trust own an LLC?”
You’ve spent thousands of hours and hundreds of days to have a successful LLC, and now it’s time to ensure it’s safe and secured from creditors and possible litigations.
A trust, more specifically, an irrevocable asset protection trust, is one of the best ways to safeguard your LLC.
The purpose of this trust is to provide the grantor asset protection while also being the beneficiary of the trust.
There are plenty of benefits of transferring your LLC ownership into a Trust.
For instance, beneficiaries can avoid the probate process, adding an extra layer of privacy and, most importantly, asset protection.