Living Trusts: Legal Status
The legal status of a living trust depends on whether it is revocable or irrevocable, a distinction that is normally written into the trust document that creates the trust. If the trust is revocable, the grantor can terminate the trust at any time and regain ownership of the property. A revokable trust is treated as an appendage of the grantor – for example, creditors can seize the trust's assets to satisfy the grantor’s debts and the grantor must pay tax on the trust's income. If a trust is irrevocable, the grantor cannot easily terminate the trust. Its assets are usually protected from the grantor’s creditors and it must file its own tax return.
State trust statutes authorize trustees, on behalf of a trust, to exercise legal ownership rights over nearly any asset an individual can own. Since an ownership interest in an LLC is an asset, a living trust may become a member of an LLC. Since all states now recognize single-member LLCs, a living trust can even serve as an LLC’s only member. In this way, an individual can own a business through the twin vehicles of a living trust and an LLC.
Combining a trust with an LLC allows you to run a business and take advantage of the flexibility of a trust at the same time. By holding your LLC membership interest in trust, your trustee can provide for your beneficiaries long after you die, but will be restricted to the terms of the trust document that you drafted. Payments to your beneficiaries can continue after you die, which gives your beneficiaries a de facto share of the LLC business. If the trust is irrevocable when you die, it will not be counted as part of your estate for estate tax purposes. Neither your creditors nor your beneficiaries’ creditors can touch either LLC assets or trust assets until they are distributed out of the trust.
Many real estate owners prefer to title their real estate in the name of an LLC owned by a living trust. This arrangement has an added benefit: You can provide in your trust instrument that your beneficiaries are allowed to live on the property indefinitely, even though it is owned by the trust. Their right to live on the property may arise either immediately or upon your death, and can continue indefinitely.