While trusts and Limited Liability Companies (LLCs) are very different legal vehicles, they are both used by business owners to protect assets. Understanding their differences, strengths, and weaknesses will help determine which is best for your situation, as the article “Trust Vs. LLC 2023: What Is The Difference?” from Business Report explains.
A trust is a fiduciary agreement placing assets under the control of a third-party trustee to manage assets so that they may be managed and passed to beneficiaries. Trusts are commonly used when transferring family assets to avoid probate.
A family home could be placed in a trust to avoid estate taxes on the owner’s death if the goal is to pass the house on to the children. The trustee manages the home as an asset until the transfer takes place.
There are several different types of trusts:
The grantor controls a revocable trust, the person setting up the trust, as long as they are mentally competent. This flexibility allows the grantor to hold ownership interest, including real estate, in a separate vehicle without committing to the trust permanently.
The grantor cannot change an irrevocable trust, nor can the grantor be a trustee. Once the assets are placed in the irrevocable trust, the terms of the trust may not be changed, with minimal exceptions.
A testamentary trust is created after probate under the provisions of a last will and testament to protect business assets, rental property, and other personal and business assets. Nevertheless, it only becomes active when the trust’s creator dies.
There are several roles in trusts. The grantor or settlor is the person who creates the trust. The trustee is the person who manages the assets in the trust and oversees any distribution. A successor trustee is a backup to the original trustee who manages assets if the original trustee dies or becomes incapacitated. Finally, the beneficiaries are the people who receive assets when the terms of the trust are satisfied.
An LLC is a business entity commonly used for personal asset protection and business purposes. A multi-or single-member LLC could be created to own your home or business, separate your personal and business property, reduce potential legal liability, and achieve a simplified management structure with liability protection.
The most significant advantage of a trust is avoiding the time-consuming process of probate so that beneficiaries may receive their inheritance faster. Assets in a trust may also prevent or reduce estate taxes. Trusts also keep your assets and filing documents private. Unlike a will, which becomes part of the public record and is available for anyone who asks, trust documents remain confidential.
LLCs and trusts are created on the state level. While LLCs are business entities designed for actively run businesses, trusts are essentially pass-through entities for inheritances and to pass dividends directly to beneficiaries while retaining control.
An experienced Austin estate planning attorney will be able to judge whether you need a trust or an LLC. Perhaps you need both. You can put an LLC inside of a trust and avoid transferring the LLC through probate. If you own a small business, it may already be an LLC. However, there are likely other asset protection vehicles your estate planning attorney can discuss with you.
Reference: Business Report (April 14, 2023) “Trust Vs. LLC 2023: What Is The Difference?”
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