Do I Need a Trust if I Have an LLC?
I often hear, “I do not need a trust because my assets are in an LLC”. Although that statement is true, it is not always the complete story.
What is an LLC?
An LLC, or Limited Liability Company, is a business entity created under state law by filing articles of organization with the state secretary of state.
Although an LLC is similar to a corporation and is designed as a vehicle for operating a business, operating an LLC requires far fewer legal formalities (such as the appointment of a board of directors) than a corporation does. In every state, a single member may form an LLC and then gift or sell the property to it.
Typically, but not always, LLCs are used for businesses. The owner of the business will form the LLC and transfer the assets of the business to the LLC rather than keep the business in the owner’s name. While there are several reasons for this, the main reason people form LLCs is to protect their personal assets from any liability of the business. I have also seen this used with vacation properties and recently with a hunting lodge.
Who Owns the LLC?
The owner, or owners, of an LLC, are typically the owners of the business. Ownership can be by one person or several persons who own equal or different percentages of the LLC. It is similar to owning stock in a corporation.
Now that we have defined an LLC...
What is an Irrevocable Trust?
An irrevocable trust, which is created under state law, allows you to place your assets under the control of a trustee for eventual distribution to a beneficiary.
Trust assets can include money, real estate, property, and intangible assets such as intellectual property rights. If the trust document specifies that the trust is irrevocable rather than revocable, the trust assets no longer belong to you — they belong to the trust.
Since an irrevocable trust is an independent legal entity, your personal creditors normally cannot use trust assets to satisfy your debts. Creditors cannot reach these assets even after they are distributed to your beneficiary unless the debt belongs to your beneficiary.
The ultimate question is, “Can my individual creditors or predators come after my ownership in the LLC or a Trust”? With regard to the Trust, the answer is “No”. Neither the Trustee nor Grantor, the person who created the trust, has any ownership interest in the trust property so their creditors and predators have no right to seize the trust assets for debts of the Trustee or Grantor.
The same is not completely true with regard to LLCs. As stated above, an LLC has owners who own a percentage of the LLC. Since they own that percentage in their own individual name, that would make their ownership of the LLC subject to their debts and liabilities. While the creditor or predator could not take over ownership of the business, they could attach any profits that were distributed to the owners of the LLC once those profits are distributed.
Here is an example. Bob and Bill decide to start a cell phone repair shop. Because they do not want any of their personal assets to be exposed to any of the business’ liabilities, they form an LLC. They each own fifty percent (50%). If the business has debt, the creditors cannot go after the personal assets of either Bob or Bill. On the other hand, if Bob were to get into a car accident, the victim may be able to attach or seize his ownership interest in the LLC if he does not have sufficient assets or insurance to cover any liability from the car accident.
It is clear that the LLC would protect one’s personal assets from the LLC’s liabilities. However, your ownership interest in the LLC would be subject to your personal creditors and predators.
For more information, go to https://oakcityestateplanning.com/estate-planning-guide/
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