Asset Protection Trust vs. LLC

By Larissa Bodniowycz, J.D.

Asset Protection Trust vs. LLC

By Larissa Bodniowycz, J.D.

An asset protection trust and a limited liability company (LLC) can both protect assets from the reach of creditors. However, they are different legal structures. An LLC is a type of business entity recognized in all states. It shields business operations and assets from the reach of its owner's personal creditors. If an LLC fails, it presumably does not devastate the owners' (called the members of the LLC) personal finances. An asset protection trust is a term used broadly to refer to any form of trust whose primary goal is to help protect assets from being taken by creditors.

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Formation of an Asset Protection Trust

There are different ways that trusts can form to protect assets. A trust is formed when a person (the settlor) transfers title of assets to another person or entity (the trustee), who holds title to the assets for the benefit of another (the beneficiary). Title to the assets then changes to reflect ownership in trust. The settlor provides the trustee with rules for operating the trust in a written trust agreement or similarly titled document.

In most cases, to provide asset shielding protection, a trust must be irrevocable, meaning that once the grantor transfers assets to the trust, the grantor cannot change his or her mind and pull the assets back out of the trust. The management of the assets becomes irrevocably governed by the trust's terms.

Formation of an LLC

An LLC forms by filing articles or organization with the Secretary of State and paying the applicable filing fee. Information required in the articles of organization and the amount of the filing fee vary by state. Refer to the LLC laws in your state or the website for your Secretary of State (or comparable governing entity) for more information on forming an LLC.

When they initially form, LLCs have no assets. To obtain asset protection, owners must transfer the assets they want to protect to the LLC. The owner of the assets can do this by signing an agreement confirming the transfer of the assets to the LLC and then changing title on the assets to reflect the new ownership.

Limited Protection

The protection of asset protection trusts and LLCs is not absolute. If an LLC or asset protection trust seems like it was created for fraudulent purposes such as tax evasion or to cheat a creditor, courts may disregard the trust or LLC. For this reason, it is advisable to create an asset protection trust or LLC before asset protection is necessary.

Additionally, forming an LLC or asset protection trust does not protect the assets from taxes. The taxes may be less than what they would be if the assets were titled and held by an individual owner, but taxes are still due. Beneficiaries pay taxes on revocable trusts, while taxes on irrevocable trusts come from trust income. LLCs can choose to be taxed on income at the entity level or on the individual owner's tax returns.

Protecting assets from creditors is important for anyone. Before creating an asset protection trust or LLC, first consider your short-term and long-term goals. Understand what types of trusts can and cannot be protected from creditors. Further, you'll have to follow certain steps when creating an asset protection trust or registering an LLC; forms and applicable fees could be different depending the state you live in. You can visit your Secretary of State website to find out what other steps, if any, are required when taking these next steps.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.