Can a Trust Own an LLC?

The answer to this question is yes. Many business owners under-appreciate the importance of estate planning to protect their business. Nevertheless, after years spent building your business, protecting what you have created should go without saying, but it is often overlooked.

One of the most effective ways to protect your business is with a living trust or asset protection trust that will, among other things, provide the ability to legally transfer your membership interest when it is time to turn the reins over to someone else.

Probate Avoidance: When your membership interest in a limited liability company (LLC) is transferred to a trust that you have created, it will not be subject to probate and this will allow for a much smoother transition after you pass away. The time and money your loved ones will save avoiding probate is an additional benefit of your LLC being owned by a trust.

Privacy: The probate process is entirely public. During these proceedings, confidential business information can be made public, as well as, information that can damage your business's reputation.

Incapacity Planning: Equally important to note is that holding your LLC in trust can not only be a benefit when you pass away but also when you become incapacitated due to injury or illness. With your wishes for the management of your LLC spelled out in the trust, you can be confident that operations will continue if you become temporarily unable to run the company for any reason.

A revocable living trust is one that can be changed or modified after it has been established and while you are alive. Consequently, an irrevocable trust is one that cannot be changed or modified after it has been established.

With your LLC owned by a revocable living trust, you will enjoy probate avoidance, retain access and control over the LLC, and can receive income from it during your lifetime. However, because you still have access to the LLC, so will your creditors.

This means a successful judgment or lawsuit can allow your creditors to reach into the revocable living trust and seize your membership in the LLC to satisfy a debt. For this reason, an LLC or any other asset that you wish to protect from lawsuits and creditor’s claims is better served by being transferred to an irrevocable trust that cannot be accessed to satisfy a lawsuit or judgment.

Having an asset, such as membership interest in an LLC, owned by an irrevocable trust will provide you with asset protection. However, you will lose access and control over that asset, as well as, the ability to enjoy discretionary beneficiary interest from the asset i.e. income.

In response to this problem, an even better solution, the asset protection trust, was developed. An asset protection trust, also referred to as a self-settled trust, is an irrevocable trust designed to provide the settlor (the person creating the trust) with asset protection, even though he or she remains a beneficiary of the trust.

Historically, self-settled trusts (trusts that allow the settlor asset protection and beneficial interest in the trust) have been disallowed. Currently, however, 17 states have passed laws supporting asset protection trusts, most notably, South Dakota, Nevada, and Delaware.

An asset protection trust essentially allows you to enjoy the benefits of a revocable trust with the asset protection of an irrevocable trust, specifically:

• Probate Avoidance: An asset protection trust will allow your LLC to avoid probate.
• Privacy: An asset protection trust can benefit those who want anonymity in order to make it more difficult for a creditor to locate their LLC and other personal asset holdings, which can serve as a significant lawsuit deterrent in and of itself.
• Access and Control: The trust document allows you to stay in control of your LLC, receive distributions from it, and specify to whom your membership interest in the LLC should be transferred when you die.
• Asset Protection: An asset protection trust severely limits a creditor's ability to bring a claim to access the assets in the trust. For example, if you establish an asset protection trust and fund it with your membership interests in an LLC, and are later sued by a third party, that third party’s access to your membership interest in the LLC that is held by the trust will be barred.
  The only exception to this rule is if the third party can prove that 1) the original transfer of your membership interest to the trust was fraudulent as to the specific claim at the time of the transfer, or 2) that the transfer violated a contractual obligation you owed to the claimant or a valid court order.

An asset protection trust is a great tool for business owners and real estate investors, but can also be extremely beneficial for those engaged in professional practices such as doctors, dentists, lawyers, accountants, chiropractors, engineers, etc. that have a risk of personal malpractice liability.

The bottom line is that you have worked really hard to create a successful business and it makes sense to protect your LLC. Addressing this concern, a more resilient solution emerged—the asset protection trust. An asset protection trust, also referred to as a self-settled trust, is an irrevocable trust designed to provide the settlor (the person creating the trust) with asset protection, even though he or she remains a beneficiary of the trust. Working with an experienced estate planning attorney to set up a trust that will own your LLC is an excellent way to begin safeguarding your livelihood and most important assets.

Here are the responses to commonly asked questions about LLCs and trusts.