The limited liability company (LLC) has become arguably the most popular business structure, because it offers personal liability protection for its member-owners and the flow-through tax advantages of an S corporation. Trusts are popular asset transfer vehicles that provide protection from creditors and probate avoidance. Using these two powerful planning tools together can create even greater asset and liability protection for business owners. So whether you’re still thinking about starting a company or already own an LLC, the benefits of this compelling combo are worth a second look.
Benefits of a trust owning your LLC
- Probate avoidance. Probate is the legal process of settling an estate when somebody passes away. This entails a court ensuring your debts are paid and your assets are distributed to the beneficiaries in your will. Because membership interests in LLCs are personal property, they must pass through the probate process – unless they are owned by a trust. If so, they pass automatically to the beneficiaries under the trust and avoid the probate process, which can take months to complete.
- Privacy. Not only can probate be lengthy and put your business in limbo, the probate process is a matter of public record. That means anyone who knows where to look, including creditors, disinherited heirs, or scammers, can learn details about your estate. Because trusts bypass the probate process, any assets they own are completely private and not exposed to inquisitive third parties.
- Incapacity planning. Most likely your LLC’s operating agreement contains a provision allowing other LLC members the chance to purchase your interest if you pass, but what happens if you are incapacitated due to injury or illness and can’t fulfill your business obligations? If a trust holds your LLC interests, the trust can be structured so that your incapacity triggers the trustee (or successor trustee) to take over your duties, so there is a seamless, even if only temporary, transition of authority.
- Asset protection. Depending on what type of trust owns your LLC membership interests, the trust can make it more difficult for creditors to go after trust assets.
What types of trusts can own LLC interests?
In Texas, both revocable and irrevocable trusts may own membership interests in an LLC, but each type comes with pros and cons.
- Revocable trusts (also known as living trusts) are the most common type of trust used in estate planning. They can be modified easily or revoked during the lifetime of the person who establishes the trust. Most commonly, the grantor names themselves as trustee (i.e., the manager of the trust’s assets) as well as the beneficiary (i.e., the person who receives a benefit from the trust) – but the trustee and beneficiary can be any individual or corporation the grantor desires. A revocable trust avoids probate, can own an LLC, and allows an income stream from the LLC to the beneficiaries of the trust. However, because these trusts are revocable as long as you are alive, the trust assets, including your LLC ownership interests, could be subject to creditor claims.
- Irrevocable trusts, unlike revocable trusts, cannot be modified or revoked after they are created. However, while the grantor loses control of the trust assets, the grantor gains protection from creditors, since the assets are no longer legally those of the grantor. Another downside is that the grantor loses the right to any income from an LLC owned by the trust, since they can’t also be the beneficiary. For high-value estates that require greater protections than can be offered with traditional domestic trusts, an offshore trust might also be considered.
The mechanics of trust ownership of LLCs
Texas law allows a trust to own an LLC, but the LLC’s operating agreement must have language allowing such ownership – and even then, the members’ consent may still be required. If the operating agreement does not have the magic language, it can still be revised with consent of the LLC members. Entrepreneurs who haven’t formed an LLC yet should consider including this language in the operating agreement in advance, as it greatly simplifies the planning process.
Assuming the operating agreement gives the green light for trust ownership of the LLC, the following steps must be taken:
- Transfer the LLC ownership interest into the trust with the appropriate documentation prepared by an attorney.
- Update the LLC operating agreement, the articles of organization, and any buy-sell agreements to reflect that the trust 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. While this step is not formally required, it is good business practice that can bolster the validity of the transfer if challenged down the road.
TrustBridge Legal can help you decide what options are best for you. Contact us for more information or to schedule a free consultation to see if trust ownership of your LLC is right for you.
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