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 explained by the article “Trust Vs. LLC 2023: What Is The Difference?” from Business Report.
A trust is a fiduciary agreement placing assets under the control of a trustee to manage assets, so 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 or to protect the value of the home from nursing care costs, if the goal is to pass the home on to the children. The trustee manages the home as an asset until the transfer takes place.
There are several different types of trusts:
A revocable trust is controlled by the Grantor, the person setting up the trust, who may also be the Trustee, as long as they are mentally competent. This flexibility allows the Grantor to hold ownership interest, including real estate, in a separate entity while retaining the right to amend or revoke the trust.
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 extremely limited 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, this type of trust only becomes active when the Will'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 is in charge of any distributions. 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-member or single-member LLC could be created to own your home or business, to separate your personal property and business property, reduce potential legal liability and achieve a simplified management structure with liability protection.
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.
Your estate planning attorney will be able to judge whether you need a trust or an LLC. If you own a small business, it may already be an LLC; if you own rental property, it may already be titled in an LLC. However, there are likely other asset protection vehicles our attorneys here in Berks County, Pennsylvania, can discuss with you.
Reference: Business Report (April 14, 2023) “Trust Vs. LLC 2023: What Is The Difference?”
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