LLCs vs. Trusts For Estate Planning

Limited liability companies (LLCs) and Trusts are very different legal entities, each conceived to achieve different primary objectives. However, they can both be used by families to manage and protect their assets.

Whether an LLC or Trust is the best option for your family’s particular needs will depend on the kind of assets you need to protect and your specific estate planning objectives—for example, to avoid probate, protect your assets from creditors, or minimize estate taxes.

LLCs For Estate Planning

A limited liability company is a business entity that is established under state law. Almost any type of asset your family owns can be placed in an LLC, but they are most often used to hold real estate and business interests, which can be extremely useful if your family owns a lot of property or a family-run business.

As a practical matter, how an LLC is used for estate planning works like any other business. In other words, after you spend the time, money, and effort necessary to form the company, you will need to spend even more time and effort to maintain the company. If not, you risk losing the liability protection and tax benefits bestowed upon the LLC by the state and the IRS, which will entirely defeat the purpose for which the LLC was formed.

On the whole, however, an LLC is a great device to retain control over your family’s assets and to enjoy protection from creditors as well as estate tax benefits.

Trusts For Estate Planning

A Trust is essentially a legal contract between the person who creates the Trust and transfers property into it (the Grantor), and the person who will manage those assets (The Trustee) on behalf of others who will benefit from them (The Beneficiaries).

You can place almost any asset into your Trust, from properties and cash to stocks and bonds. The more assets you put into your Trust the more effective it will be.

You can also establish rules for the management and distribution of the Trust assets. This might include restrictions on how the Trust assets can be invested and terms for how the beneficiaries may use the assets.

A Trust can dictate how your family’s assets will be managed when you are alive and well, incapacitated due to illness or injury, and after you pass away. Most importantly, a Trust will enable the property it holds to bypass probate and be transferred to your beneficiaries quickly and efficiently after you pass away.

However, for a Trust to be most effective, it must be fully funded with your assets. Furthermore, a Trust needs to be reviewed and updated regularly to ensure that it remains properly funded and in line with your most current estate planning wishes.

How LLCs and Trusts Compare For Estate Planning

• Asset Protection – Both LLCs and Trust can be used to protect your family’s assets. However, while an LLC is good for real estate and business-related assets, a Trust is good for virtually any type of asset.
• Probate Avoidance – Probate is the court-administered process by which a deceased person’s assets are distributed after they pass away. Probate can be consuming and expensive and should be avoided whenever possible. In general, both Trusts and LLCs can be used effectively to avoid probate. However, some states, including Virginia, will require your membership interest in an LLC to be probated if it is not addressed in your Will, Trust, or otherwise.
• Taxes – Income generated by an LLC passes through to its owners/members, who pay taxes on their share of the LLC’s income at the individual tax rate. What’s more, LLCs are not subject to federal estate taxes. On the other hand, Trusts are generally taxed at the highest federal tax rate and must pay taxes on retained income (income that the Trust does not distribute to its Beneficiaries). Furthermore, unless the Trust is Irrevocable it will be subject to federal estate taxes.
• Asset Management – With a Trust, you can choose someone to manage the Trust assets for you. This is the Trustee. You can even act as Trustee yourself and choose a person you know or a third party, such as a financial institution, to succeed you as Trustee when you die or become incapacitated. An LLC can be managed by its members or by someone hired to manage the LLC on behalf of its members.

Whether you find a Trust or an LLC the better option in this respect will largely depend on the type of assets being managed, for example, real estate, investments, a family-run business, etc.

• Personal Liability Protection – An LLC creates a barrier between your family’s personal assets and liabilities associated with assets owned by the LLC. For example, if a business owned by your LLC incurs a debt or judgment against it, the creditors won’t be able to take your family’s home or other personal property to satisfy that debt. Conversely, if you incur a personal debt or liability, your creditors won’t be able to take your business. When it comes to Trusts, only an Irrevocable Trust will approximate this level of personal liability protection. A Revocable Trust will not.

Consult with an Experienced Virginia Estate Planning Attorney

Whether you choose to create a Trust or an LLC (or both) to manage and protect your family’s assets, the assistance of a qualified estate planning attorney can be invaluable. An experienced attorney can help you draft a Trust and make sure that it includes the specific terms by which you want your assets to be managed and distributed. Likewise, your estate planning attorney can help you form an LLC and ensure that it is set up properly so that it can be operated and managed the way you want.

To learn more, please call us at (703) 553-2577 or use the contact form on our website to arrange a consultation with a knowledgeable and experienced Virginia estate planning attorney.

The information on this site is for general informational purposes only. The information presented in this site is not legal advice or a legal opinion. You should seek the advice of legal counsel of your choice before acting upon any of the information in this site.