Family Trust Vs. LLC

By David Carnes

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.

Family Trusts

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.

Ready to start your LLC? Start an LLC Online Now


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.

Asset Protection

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.

Ready to start your LLC? Start an LLC Online Now
Can a Living Trust Be a Member of an LLC?



Related articles

Living Trusts & Bank Accounts

You can place your bank accounts and other assets in a living trust so they bypass probate when you die. Avoiding probate generally saves time and money for the beneficiaries of your estate. You must physically change the titles of your assets from your individual name to the name of your trust for them to skip the probate process upon your death.

Can Creditors Get Property Put in Trust Before a Bankruptcy?

The law is full of questions that have both yes and no answers, particularly when it comes to bankruptcy and trusts. Some trusts can protect your assets from creditors, while others cannot. You may lose property in one type of bankruptcy, but not in another. Successfully using a trust to shield assets before you file depends on a lot of factors.

Family LLC Operating Agreements

Many families that have accumulated sizable assets are concerned about how to preserve their estates for their children, grandchildren and future descendants. A family limited liability company is one means to ensure that a family enterprise, such as management of a parcel of forest woodlands, can continue even after some family members have passed away. A family LLC operating agreement spells out its day-to-day operations. Families may draw up LLC operating agreements on their own, with the help of an attorney or by using a third party legal-document service.

LLCs, Corporations, Patents, Attorney Help

Related articles

LLC Vs. Irrevocable Trust

A limited liability company, or LLC, is a business entity to which property can be gifted and managed. An irrevocable ...

Can Forming an LLC Protect Your Personal Property?

The limited liability company is one of several types of legal entities that people often use to protect their personal ...

Family Trust Planning Guide

A family trust is an estate planning tool that allows you to appoint a trustee to administer assets on behalf of ...

Can You Form a LLC With Your Multi-family Property?

Starting a business is an exciting undertaking. There are many things to consider when creating a new business, ...

Browse by category
Ready to Begin? GET STARTED