Understandably, you may be wondering how to best protect your hard earned assets from creditors, minimize taxation, maintain privacy, and perhaps avoid probate. Trusts and Limited Liability Companies are two legal vehicles that allow you to manage and protect your hard earned assets, but these vehicles each come with their own benefits and limitations. Whether a Trust or an LLC is a better vehicle for you may depend upon the type of asset(s) you hold, but–sometimes–you don’t even have to make that choice because LLCs can be placed into Trusts. Before we get into the weeds, it is important that you understand the primary differences between Trusts and LLCs.
What is a Trust?
A Trust is a legal agreement whereby you transfer certain of your assets to a Trustee, who will manage those assets in accordance with the terms of a Trust Agreement that you (and your attorney) will create. Many kinds of assets can be placed into a trust: real estate, bank accounts, life insurance policies, intellectual property, etc. There are many different types of Trusts, but the two major categories of Trusts are Revocable and Irrevocable Trusts.
Revocable Trusts allow the Settlor (the creator of the Trust) to retain control of the assets placed into the Trust during the Settlor’s lifetime. Assets properly placed in such Trust will likely avoid probate, and the terms of the Trust Agreement will remain private. However, Revocable Trusts do not offer the Settlor asset protection as they assets are still “under the control” of the Settlor and therefore are vulnerable to creditors. These trusts are generally used by those who want to avoid probate (whether due to cost, family tensions, or out-of-state properties) but who are not concerned with asset protection.
Irrevocable Trusts, on the other hand, when correctly structured, offer maximal asset protection. Assets properly titled in the name of the Trust no longer belong to the Settlor and therefore are not vulnerable to the Settlor’s creditors (such trusts are often used for long-term care planning or to shield assets for someone with special needs or for tax planning purposes). However, the tradeoff for such robust protection is that the Settlor gives up all control of the Asset once it is transferred to the Trustee of the Irrevocable Trust. These trusts are also taxed differently, which can be a positive or negative for the Settlor depending upon his/her unique circumstances.
A trust is largely a vehicle for asset protection, avoidance of probate, and privacy. It is not usually the best vehicle for active business operations as the Settlor technically no longer owns the assets he/she places into the Trust.
What is an LLC?
An LLC is a business entity that provides liability protection to its owners and avoids double taxation. In an LLC structure, the LLC (usually*) protects its owners’ personal assets from business-related liabilities. They are useful structures for small-to-medium businesses, including those involved in real estate, professional services, and retail. And, tax-wise, the LLC can choose to be taxed as either a pass-through or as a corporation, which gives the owner(s) more flexibility for tax-planning.
LLCs can own assets, such as real estate, vehicles, tools, equipment, and intellectual property, and just about any type of asset can be transferred to an LLC (including cash and bank accounts).
LLCs are created by the filing of articles of incorporation with the secretary of state and paying a filing fee. The members will have their attorney draft an operating agreement and sometimes other foundational documents, and there are ongoing requirements – such as reports – that have to be filed biennially in New York in order for the LLC to maintain its status.
There are some “downsides” to LLCs: State filings mean that LLCs are not “private” in the way that Trusts are. And, if the members of an LLC fail to follow the state requirements, or if they commingle personal and business assets improperly, their liability shield can disappear (Courts can “pierce the corporate veil” if members act improperly and commingle assets.) Further, LLCs are more expensive to maintain as they require ongoing filings and reports.
So which is right for me?
As with most things, there are trade-offs to using a Trust or an LLC for your business. The Trust offers privacy and asset protection (if you use an Irrevocable Trust), but such Trusts take the assets out of your control. The LLC allows the owner to control the business while offering asset protection (so long as the owner is careful to keep his personal and business dealings separated), but the LLC offers less privacy. Of course, you can always place the LLC into a Trust to obtain more privacy – and perhaps more importantly – an additional layer of asset protection.
How the trust or LLC is structured can also help minimize the risks of the chosen vehicle while maximizing its efficacy. We proudly assist our clients to choose the entity that best suits their needs and circumstances and then draft the agreements that align with their goals. We would be pleased to help you with your business needs.
