Should You Use a Trust to Own Your LLC?

Starting a business doesn’t just involve choosing between an LLC or a corporation. Some entrepreneurs have already considered using a trust to own an LLC. This strategy offers several potential benefits; however, it can complicate significant aspects of your business operations.

Today, we’ll discuss whether trusts should be used for LLC ownership and what to consider before making your final decision.

Key Takeaways

• Trusts can own LLCs, but their structure can affect an LLC’s operations.
• Your current financial situation and goals for estate planning and business operations will determine whether you should use a trust for LLC ownership.
• Trust-owned LLCs can help you conduct estate planning and avoid probate. However, factors such as potential tax implications and asset protection levels should be considered before forming these LLCs.
• You should use trusts for LLC ownership if you own significant assets or want a smoother estate planning process.
• When forming and managing a trust-owned LLC, make sure to seek expert advice, draft and maintain the necessary documents, and stay compliant with current legal requirements.

Are Trusts Allowed to Own LLCs?

Trusts are allowed to own LLCs, although they can impact business operations in different ways. It all depends on how the trust is structured.

Instead of you owning the LLC, the trust controls your membership interest. Meanwhile, the trustee manages the trust’s ownership interest for its beneficiaries. Proper set-up can lead to better estate planning, tax management, and liability protection.

Revocable and irrevocable trusts can be used for LLC ownership. Each of these trusts are created for specific purposes, with its own advantages and disadvantages. Whether you set up a revocable trust or an irrevocable trust, you must ensure a well-documented process. Draft a trust agreement that allows your chosen trustee to manage business interests, and state that your trust owns the LLC in the venture’s operating agreement.

What’s the Difference Between Revocable & Irrevocable Trusts?

With a revocable trust, you stay in control of the trust and its assets during your lifetime. Revocable trusts are considered highly appealing for this reason. They’ll let you change your beneficiaries, assets, and determine when the contents of your trust will be distributed.

Meanwhile, an irrevocable trust can’t be managed once it’s established. You can only make changes to this type of trust with all of your beneficiaries’ consent, although they must be approved. The process takes some time and may involve court appearances.

Related Resource

Get a more comprehensive comparison of revocable and irrevocable trusts from NCH.

Should You Use Trusts for LLC Ownership?

So, should you use trusts for LLC ownership? The answer depends on your current financial situation and long-term goals.

If a trust owns an LLC, it gives you benefits like a considerable level of asset protection. Still, you must consider your desired degree of wealth protection and your estate planning and business goals. Consult a financial advisor or attorney with business formation and estate planning expertise to help you make an informed decision.

What are the Advantages of Trust-Owned LLCs?

When properly structured, a trust-owned LLC can offer advantages such as:

Proper Succession Planning

If an LLC owner dies, their stake in the business may undergo probate. The process may create delays and cause conflicts among heirs.

A trust-owned LLC still holds the deceased member’s interest, which can be transferred to beneficiaries according to the trust’s terms. Ultimately, its operations continue while your estate is being settled.

The Reduced Risk of Probate

Probate proceedings are public, time-consuming, and expensive. They can also expose your business to unwanted scrutiny and potentially disruptive legal challenges. Trust-owned LLCs can bypass probate, making the transfer of business interests smoother.

What to Consider Before Creating a Trust-Owned LLC

Trust-owned LLCs also come with some drawbacks, including:

Tax Implications

Depending on the trust established, trust-owned LLCs can complicate taxation.

For single-member LLCs owned by revocable trusts, they’re treated as a disregarded entity. Their income passes through to the grantee’s personal tax return, just like traditional single-member LLCs.

Conversely, irrevocable trusts can make LLC taxation more challenging to manage. LLCs owned by these trusts may pay income taxes or have their income distributed to beneficiaries. The trust’s terms and your LLC’s distribution process determine how the business will be taxed.

Asset Protection Levels

Each type of trust has different levels of asset protection. Hence, you must consider these factors when deciding whether to set up a trust-owned LLC.

Revocable Trusts

Revocable trusts can’t protect your assets from creditors or legal claims because you hold the power to amend and revoke the trust. As a result, you continue to control and own the assets placed in a revocable trust. Creditors can pursue your assets in the trust just as they would with your other assets.

Irrevocable Trusts

Since irrevocable trusts can’t be changed after creation, they can help you protect your assets. This can keep creditors from pursuing assets placed in an irrevocable trust. Nevertheless, establishing this type of trust limits your control over the assets.

Domestic & Offshore Trusts

Domestic asset protection trusts (DAPTs) and offshore trusts are also available to LLC owners.

DAPTs created in states like Nevada keep assets within the U.S. They’re set up according to specific legal frameworks with added protection.

If you establish a DAPT in Nevada, take note that the Silver State doesn’t recognize exception creditors. These creditors can pursue the assets in a DAPT after the statute of limitations expires for public policy reasons. Also, other jurisdictions might not be able to protect assets in a Nevada DAPT.

Meanwhile, offshore trusts are established outside of your LLC’s location. They also shield your assets from creditors, although you may want to create a domestic trust if you’re conducting estate planning. And, most importantly, domestic trusts are more accessible and flexible than offshore trusts.

Related Resource

Watch this Ask NCH video to know which type of trust can help you protect your assets.

Operational Impacts

Using a trust to own an LLC can also increase the company’s operational and administrative burden.

• Trust-owned LLCs must open business bank accounts in the trust’s name. You’ll need to give the trust’s taxpayer identification number to your bank and ensure that all financial transactions under the trust’s name are made successfully.
• Your LLC may also find it difficult to secure financing if it’s a trust-owned entity. In this case, some lenders may ask you to submit additional documents or impose higher loan rates on your business.
• When operating a trust-owned LLC, you must keep its operations separate from you. This involves:
  • Maintaining separate records for the trust and LLC
  • Avoiding commingling of personal and business funds

When Does Using Trusts for LLC Ownership Make Sense?

Using trusts for LLC ownership can make sense if you own significant assets and want a smoother estate planning process. Alternatively, you can form a traditional LLC with business liability insurance and basic estate planning. The structure suits smaller businesses with limited assets or simple ownership structures.

Related Resource

If you’re a real estate investor, learn whether LLCs or trusts are right for you.

How to Form & Manage a Trust-Owned LLC

If you decide to set up a trust-owned LLC, here’s how to form and manage it.

Seek Professional Advice

Before LLC formation, talk to trusted experts about having a trust own the entity. They include:

• Business formation experts
• Lawyers specializing in estate planning and trusts
• Tax advisors focused on trust taxation

The expertise of these professionals are essential to proper setup and ongoing compliance with state and federal laws. Your lawyer drafts the trust’s documents, while your tax advisor discusses how the trust will be taxed.

Finally, business formation experts can help you form your trust-owned LLC. Professional services like NCH file an LLC’s formation documents on the company’s behalf.

Form an LLC Today

Draft the Necessary Documents

Trust-owned LLCs must draft documents to ensure that they’re managed well. At the very least, you should have comprehensive trust documents outlining trustee and beneficiary rights. An operating agreement is important as well since it states how the LLC will be run under your trust.

Ensure Compliance with Current Laws

Once your trust-owned LLC is formed, it must stay legally compliant. This involves proper record-keeping and management of business operations. For the latter, consider implementing procedures for:

• Signing contracts with potential partners
• Making major business decisions
• Handling financial matters

Ultimately, you can keep yourself and your assets separate from the LLC, strengthening its legal protection.

Frequently Asked Questions

What types of trusts can be used for LLC ownership?

The types of trusts that can be used for LLC ownership are revocable and irrevocable trusts. Both can help you conduct estate planning and avoid probate, although each trust has its own advantages and disadvantages. Your choice mostly depends on your specific goals and whether you want to control your assets or not.

Can I be both the trustee & beneficiary of a trust that owns an LLC?

Yes, you can serve as both trustee and beneficiary of a trust that owns an LLC. This allows you to control the trust and the LLC’s operations while enjoying advantages such as proper succession planning and no probate.

How does trust ownership affect an LLC’s tax treatment?

Single-member LLCs owned by revocable trusts are treated as disregarded entities for federal income tax purposes. In short, the LLC’s income and losses pass through to your personal tax return.

For LLCs owned by irrevocable trusts, taxation may be complicated. These LLCs may pay income taxes or distribute income to beneficiaries.

Does a trust-owned LLC provide liability protection?

Yes, a trust-owned LLC provides liability protection, as long as it maintains proper corporate formalities. They include keeping accurate records and separating personal and business finances. Otherwise, you may be held personally liable for the LLC’s legal obligations.

What happens to a trust-owned LLC if it gets sued?

If a trust-owned LLC gets sued, the court may decide to “pierce the corporate veil.” Before doing so, it’ll conduct a two-part test that determines whether the LLC was used to commit a wrongful action. Depending on the court’s verdict, the LLC’s owner may be held personally liable for its legal obligations.

Can I transfer an existing LLC into a trust?

Yes, you can transfer an existing LLC into a trust by setting the latter’s membership interest. However, you must amend your LLC’s operating agreement to state that the trust now owns the business.

Transferring an LLC’s ownership to a trust can also complicate taxation. This depends on the trust you’ve established.

Does putting an LLC in a trust affect daily business operations?

In most cases, placing an LLC in a trust doesn’t affect daily operations. The key is to set up the trust properly.

With a well-structured trust, your LLC can keep conducting business. Just make sure that all important decisions, distributions, and transfers follow the trust’s terms. This may need additional documents and your oversight.

Do I need separate tax ID numbers for my trust & LLC?

Yes, you need separate tax ID numbers for your trust and LLC. The Internal Revenue Service (IRS) issues an Employer Identification Number (EIN) to these entities.

If a trust holds income that must be reported on its specific tax return, it needs an EIN. Certain grantor-owned revocable trusts aren’t required to obtain an EIN.

How much does it cost to form & maintain a trust-owned LLC?

The cost of forming and maintaining a trust-owned LLC varies depending on your chosen trust and your jurisdiction’s requirements. It may include:

• State filing fees for LLC formation
• Registered agent services
• Legal fees for trust-focused attorneys
• Costs for taxation assistance

Should new entrepreneurs use a trust for LLC ownership?

New entrepreneurs can use a trust for LLC ownership if they want to conduct estate planning, protect their assets, and avoid probate. However, it can cause legal issues and complicate taxation.

For LLCs with simple operations or limited assets, the drawbacks of being owned by a trust may outweigh the benefits.

Expert Tips From NCH

1. Set your specific goals for starting a trust-owned LLC. This will help you choose the best type of trust to use and can affect the formation process.
2. Keep separate records for your trust and LLC. By doing so, you can maintain the legal protection offered by LLCs and avoid potential issues during audits or litigation.
3. Review and update your trust documents and your LLC’s operating agreement regularly. Consider amending these documents after major life events or changes in tax laws or your business structure.
4. Before forming a trust-owned LLC, consult financial, legal, and tax professionals. Their assistance ensures that the formation process meets your specific needs and creates little to no unintended consequences.

Make the Best Decision for Your LLC

While using a trust to own your LLC offers significant benefits, it might not suit your current situation. That’s why considering factors such as your estate planning goals and potential tax implications is important. After all, running a trust-owned LLC requires your full attention, especially since it must comply with state and federal laws.

If you’re planning to form a trust-owned LLC, NCH’s business formation and estate planning experts are here to help.

Talk to Our Experts Today

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.