A family trust and a limited liability company, or LLC, are both created under state law, but they are two very different legal vehicles. People contribute assets to these legal vehicles to obtain advantages such as asset protection, avoidance of probate and preferential tax treatment. Both vehicles offer distinct advantages and disadvantages.
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A trust allows you to put your assets under the care of a trustee you name and to designate beneficiaries to receive distributions of trust assets under terms you spell out in a trust agreement. In a family trust, family members are named as beneficiaries. A trust can be either revocable or irrevocable. If it is revocable, you can amend or dissolve it at any time. Once you place your assets into an irrevocable trust, however, it is no longer considered your property, and the irrevocable trust normally cannot be revoked without a court order.
An LLC is a legal entity that enjoys the limited liability of a corporation along with the operational and managerial flexibility of a partnership. You can even form a one-person LLC. Although the LLC is designed for operating a business, you can form an LLC and then contribute property to it, which then legally belongs to the LLC. Nevertheless, as long as you own the LLC, you indirectly own its property. Owners may dissolve an LLC at any time and take back any assets that are not owed to LLC creditors. Owners can also receive periodic distributions of any LLC profits.
You form a trust by creating and signing a trust document that names a trustee and at least one beneficiary, transfers property to the trust and instructs the trustee on how to manage the trust property. You don’t need to file this document with any governmental authority. You form an LLC by filing Articles of Organization with state government, usually the secretary of state's office, and paying a filing fee. LLCs are typically governed by operating agreements that may be amended with the consent of the owners.
If you form a family trust, its assets do not go through probate as long as the trust document allows the trust to survive your death. The assets of a revocable trust, however, are counted as part of your estate for the purpose of assessing estate tax. In contrast, the assets of an irrevocable trust are not counted as part of your estate. Your interest in an LLC passes through probate and is considered part of your estate assets when you die. You can, however, structure your LLC so that you own only a small part of it, while your family members own most of it, and retain managerial control over the LLC, in accordance with the operating agreement, until you die. In this way, you can control LLC assets but still keep them out of your estate to avoid estate tax.
If you form a revocable family trust, your personal creditors can come after trust assets. However, if your trust is irrevocable, absent fraud, your creditors can’t come after trust assets to satisfy your personal debts. You can also structure an LLC in a way that prevents personal creditors of LLC owners from seizing LLC ownership interests to satisfy a debt. Creditors can attach any distributions made to you by the LLC; however, LLC owners decide whether or not the LLC ever distributes any of its assets.
The income of a revocable family trust is taxed as your personal income. If your family trust is irrevocable, its income is taxed independently and the trustee must file a trust tax return. Estate tax is not assessed against irrevocable trusts. With an LLC, normally each owner is taxed on his proportionate share of LLC profits at individual income tax rates. An LLC may choose to be taxed as a corporation, however.
References & Resources
- CNNMoney: What Kinds of Trusts are There?
- The Presser Law Firm, P.A.: Trust Basics
- Koldin Law Center, P.C.: Irrevocable Trusts
- Bay Financial Associates: The Irrevocable Trust
- Smith and Condeni LLP: Estate Planning and the Limited Liability Company
- Proffessional Development Network: Succession Planning, Part 1: Using a Family Trust
- The Tax Prophet: Use of Revocable and Irrevocable Trusts
- American Academy of Estate Planning Attorneys: The AB Trust: Still the Gold Standard
- Epilawg: Limited Liability Company in Estate Planning
- Stockbyte/Stockbyte/Getty Images