Family LLC vs. Trust

Mark Pierce
Mark Pierce is the founding partner of Wyoming Trust and LLC Attorney. He is an estate planning and small business structuring expert with over 40 years of experience.

The main difference between a family LLC and a family Trust is that an LLC is a business entity and a trust is an entity that provides for estate planning. A trust can take care of your family’s finances that may or may not include a business.

Limited Liability Companies and trusts are both created under state law, but each has fundamentally different purposes. While each is created for asset protection, avoiding probate, and minimizing tax liability, each comes with a unique set of advantages.

What is a Trust?

You can consider a trust as a “will substitute.” A will states who gets which assets from your estate after you pass away, under what circumstances, and who oversees making that happen. A trust does the same thing, but there are important differences between wills and trusts.

A will must be filed with the state probate court and reviewed and approved before any estate assets can be distributed. Wills are also a matter of public record, and the probate process can be time-consuming.

Trusts, however, are private documents that only the named beneficiaries are entitled to see. Additionally, the trustee can immediately distribute the trust assets without having to go to court.

Who is a Good Fit for a Trust?

Estate planning and trusts are not just for the wealthy. If you value your privacy and want your estate to pass smoothly to your beneficiaries, a trust may be right for you.

How Does a Trust Work?

While the trustee of the trust is the legal owner of the assets titled in the trust, the trustee owes fiduciary duties to the trust. In other words, the trustee must act in accordance with the guidelines and purposes outlined in the trust.

Trusts can help protect your assets from creditors and are great for providing for beneficiaries who are minors or have special needs.

What is an LLC?

A limited liability company (LLC) is a business entity structure established under state law. LLCs can own many assets which makes them quite useful for families with diverse portfolios. LLCs are sophisticated legal entities that must be created and maintained properly to ensure the specific terms and conditions of the LLC are respected by the IRS.

LLC Advantages

Using an LLC for estate planning purposes allows its owner(s) to retain control over assets while also enjoying protection from creditors. It can also reduce the cost and difficulty of transferring wealth among generations. For high-net-worth families, an LLC can provide significant estate and gift tax benefits when properly utilized.

How Does an LLC Work?

As a practical matter, an LLC works like any other business entity. This means that after you spend a considerable amount of time, money, and effort to establish the LLC, you need to spend even more effort to properly administer the LLC, just like you would with any business.

If you don't properly administer the LLC, you risk losing the benefits that an LLC business structure offers. But when administered properly, an LLC works like a charm for transferring large estates and reducing the overall gift or estate tax liabilities of such transfers.

Which is the Better Option?

While a trust and an LLC each offer clear advantages for family estate planning, you may need to consult with an experienced estate planning attorney to determine which is right for your family.