Should Your LLC be Owned by a Trust?
The limited liability company (LLC) is a popular business structure that offers liability protection and avoidance of double taxation. Trusts are popular asset transfer vehicles that allow you to avoid probate and keep assets out of the hands of creditors. By placing LLC ownership interests (referred to as membership interests) in a trust, business owners can combine the two types of legal entities and enjoy the best of both worlds.
Whether you are the sole owner of the LLC or are co-owner, your LLC ownership interests are considered personal property and could be subject to probate upon your death and can potentially be seized by your creditors. You should proactively ensure that you are protecting your LLC now and have a plan for what will happen to the business when you are not around or can no longer manage your affairs.
The following are some of the key benefits of placing LLC ownership interests in a trust:
Probate avoidance at death
Incapacity planning while living
Privacy
Asset protection
LLC ownership interests can be held in either revocable or irrevocable trusts, each type comes with pros and cons.
Revocable trusts (also known as living trusts) are the most common type of trust and can be easily changed or revoked during the lifetime of the person who established the trust. Using a revocable trust allows you to avoid probate, control the LLC, and receive income from the trust as the beneficiary during your lifetime. The trust can be set up in such a way that, upon your death or incapacity, a new trustee and a new beneficiary (or beneficiaries) are named. However, as long as you are still alive and maintain control over the trust, the trust assets, including the LLC ownership interests, could be subject to creditor claims.
Irrevocable trusts, unlike revocable trusts, cannot be easily changed or revoked after they are created. One of the main advantages of an irrevocable trust is asset protection. However, this often comes at the loss of control over the asset. However, an irrevocable trust drafted as a domestic asset protection trust will allow the LLC owners to enjoy both the ownership and control benefits of a revocable trust and the asset protection benefits of an irrevocable trust. Not all states allow domestic asset protection trusts, but you do not have to be a resident to establish a trust in a specific state. Foreign, or offshore, asset protection trusts are another possibility.
Although the law will allow a trust to own an LLC, the LLC operating agreement may not. Therefore, you will first need to check whether the operating agreement allows for this arrangement and if not, obtain the consent of the other owners. Even if the LLC operating agreement permits a trust to be an owner, you may still need to obtain consent from the other owners before transferring your interest to the trust.
Assuming you can proceed with the transfer of your LLC ownership interest into a trust you will then need to take the following steps:
Assign the LLC ownership interest into the trust with the appropriate documentation prepared by an attorney.
Update LLC documents, including the operating agreement, buy-sell agreements, and the articles of organization, to reflect the fact that the trust (not an individual) is now a member.
Have the LLC owners sign a resolution that formally recognizes the change of LLC ownership from an individual to a trust. This is not required, but it is a good business practice that can underscore the validity of the transfer of your LLC ownership interests.
The advantages of having a trust-owned LLC should be weighed against the disadvantages. Our attorneys can help you decide if transferring your LLC ownership interest to a trust is the right move for your situation. If you choose to proceed, we can also help you select a trust structure and document the transfer. For assistance with these and other business law matters, please contact our office and schedule an appointment.
This post is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.