Family trusts and LLCs are two types of legal entities, each with different goals and purposes. When deciding whether to create a family trust vs. an LLC, consider what each entity does and why you would pick one over the other.
You can have both a family trust and an LLC, but because they're created for distinct purposes, it's important to know if or why you need each one. In some instances, you may even want to combine a family trust with an LLC as part of your estate plan.
What Is a Family Trust?
A family trust is a type of trust that a settlor or grantor—meaning the person creating the trust—makes to benefit only their family members. This type of trust can include any family members that you, as the settlor, want to include as beneficiaries of the trust. The other members of the trust are the trustee and a successor trustee. A successor trustee's main function is to distribute the trust's assets to your family beneficiaries after the trustee passes.
When setting up the family trust, you'll want to make yourself the trustee so you can use the property in the trust during your lifetime. You can create a family trust that's also a testamentary trust, but a testamentary trust—which you create in your will—doesn't take effect during your lifetime. If you want to use the property in the trust, you can set up a living family trust, which you create separately from your will.
Advantages and Disadvantages of Family Trusts
You can have a revocable or irrevocable family trust. A revocable trust, also known as a living or inter vivos trust, allows you to terminate the trust whenever you want, change beneficiaries, and add additional property to the trust. Many estate attorneys advise their clients to create a revocable trust because of its flexibility and because its advantages outweigh its disadvantages.
Revocable trusts afford you privacy because your property passes to the beneficiaries outside of a will. The contents of a will become public knowledge, but with a revocable trust, the assets in it pass to the beneficiaries without the public having access to what the trust contains and the names of the beneficiaries. Creating a revocable family trust also allows your beneficiaries to receive your assets faster than if you had left assets to them in your will.
Depending on your circumstances, however, an irrevocable trust might be best for you. You can't change an irrevocable trust, which is an important disadvantage, but this type of trust is especially advantageous if you want to protect your assets and avoid losing your property to creditors. Irrevocable trusts also prevent assets from going to your former spouse during divorce proceedings. Additionally, by placing property in an irrevocable trust, you may qualify for certain government programs, such as Medicaid and SSI, because whatever you place in the trust isn't part of your overall assets for qualification purposes.
You can create your revocable or irrevocable family trust so that you control who your beneficiaries are and when they inherit. For example, you can arrange for your children to receive your assets when they reach a certain age or upon a triggering event, such as their college graduation.
What Is an LLC?
A limited liability company, or LLC, is one way to run a business. An LLC is a business entity that's formed to protect the partners, known as members. It's often used for businesses that decide not to incorporate but that would rather run the business more like a partnership than a corporation. LLC members pay taxes for the LLC in their personal income taxes—the LLC itself does not pay taxes. This is known as "pass-through" taxation.
You can run almost any type of business as an LLC, although each state has its own rules as to what an LLC can do. The business can sell goods or services, or both. LLCs are popular because they reduce personal liability to each of their members. For example, if someone sues the LLC, or if they owe money to the LLC, members' bank accounts, personal assets, homes, and vehicles aren't available for creditors to seize.
How Does an LLC Function?
An LLC has more structure than a partnership but not as much as a corporation. You or your attorney file papers with your secretary of state to register the LLC and to secure the name. Once you secure the name, you won't have to worry about another entity in your state using the same name.
The LLC creates an operating agreement, which states which job each member does, and details member compensation, how to retire, and how to leave the LLC. The members must have some meetings and take minutes, but the meetings are usually informal and infrequent. In many states, the LLC must file a report with the state once a year to indicate whether there are any new members or new LLC locations, and what and how the LLC has been doing during the year.
Should You Put an LLC in Trust?
Trusts and LLCs are usually not comparable because the two are distinct types of legal entities. However, it's possible to put your LLC in a trust and have the two entities—a trust and an LLC—work together.
Advantages of an LLC in Trust
With an LLC in trust, the LLC doesn't have to go through probate should any member pass away. This makes putting the LLC in a trust a solid advantage to its members.
In this scenario, the assets in your LLC that you want to give to your beneficiaries are held by the revocable trust, making the trust the owner of the LLC. Trusts can hold LLCs for distribution upon the death of a member so long as the LLC's operating agreement and state law don't prohibit it.
Disadvantages of an LLC in Trust
A disadvantage to placing an LLC in trust is the cost of setting up the trust and the amount of paperwork involved. Because setting up the trust to hold the LLC is tricky, it's often necessary to use an estate attorney. Also, the members must place the LLC in the trust before the death of any member and before any member becomes incapacitated.
The LLC must go through probate upon a member's death if said death happens before you place the LLC in trust, and you'll need a conservatorship upon a member's incapacitation, which is time-consuming and costly.
The LLC must change its operating agreement and initial filing with the state to reflect any changes to the LLC, such as the loss of a member. The LLC may need a business attorney to help it amend these documents.
Family trusts are different from LLCs, but when used together, it's a sound way to set up your estate and protect your assets.
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