Both Limited Liability Companies (LLCs) and Trusts are created under state law. But they have fundamentally different purposes. Both vehicles are created for asset protection, probate avoidance, and to minimize taxes. But each comes with a unique set of advantages.
Read further to examine the difference between a family LLC and a Trust for estate planning purposes.
What is a Trust?
We can think of a Trust as a “Will substitute”. A Will states who gets what from your estate after you pass away, under what circumstances, and who is in charge of making that happen. A Trust does the same thing.
But the critical difference between a Will and a Trust is that a Will has to be filed with a probate court, and reviewed and approved before anyone receives any assets from your estate. Also, a Will is a matter of public record and takes time to go through the probate process.
A Trust, on the other hand, is a private document. No one is entitled to see a Trust except those who are named in it. And the successor Trustee named in your Trust can act immediately to distribute assets to the Trust beneficiaries, without having to go to court, file any documents, or get permission first.
Who is a Trust For?
Trusts are not simply for the wealthy. Instead, they are used for protecting the assets of people from all walks of life. With more people owning their own homes and even second properties, a Trust is the best estate planning strategy to pass assets on from one generation to the next.
Many families already have one or more Trusts without realizing it. A typical example is a family home that is jointly owned by Mom and Dad. This means that both parties are entitled to the entire net value of the home.
Joint tenants of property have to follow certain rules. For example, one owner cannot sell a jointly owned house without the approval of the other. And when one owner dies, the other owner automatically becomes the sole owner of the property, despite whatever the deceased's Will might say to the contrary.
How Does a Trust Work?
Although the Trustee of a Trust is the legal owner of the assets inside the Trust, and makes all the decisions, the Trust assets (and any income they generate) must be used in accordance with the rules you outline in the Trust agreement.
Trusts have many uses and are not only great for protecting young dependents and special needs beneficiaries, but can also prevent unintended parties from getting their hands on your money after you pass away.
When assets are passed to beneficiaries outright, they are at risk of being lost to divorce, separation, bankruptcy, creditors, remarriage, long-term care, and taxation. Simply setting up a Trust can help protect your hard-earned money from any such attacks against your chosen beneficiaries.
What is an LLC?
A limited liability company (LLC) is a business entity structure established under state law. Just about any asset can be owned by an LLC, which makes them very useful for individuals and families that need a way to safely hold ownership of many types of assets.
LLCs are sophisticated legal entities that must be set up and administered properly to ensure that the terms and conditions of the LLC will be respected by the IRS. Thus, specific tax rules must be followed when administering an LLC.
One advantage of using an LLC for estate planning purposes is that it allows its owner(s) to retain control over their assets while enjoying protection from creditors. But the biggest advantage is that it can reduce the cost and difficulty of transferring wealth from one generation to the next.
When properly utilized for high-net-worth families, an LLC can provide significant estate and gift tax benefits. This is especially true concerning the transfer of wealth from one generation to the next.
Transferring substantial assets from one generation to the next often raises concerns about enormous gift or estate tax liabilities. If not managed properly, these liabilities can deplete the overall value of the assets being transferred.
When the asset being transferred from one generation to the next is a business, there are even more factors to consider. And if the transfer is not managed properly, the future of the business may be jeopardized.
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.
Parents can manage the LLC while gifting interest in the LLC to their children. Although you can also use a Revocable Trust to transfer ownership of assets to your heirs while maintaining control of the assets, you won't get the asset protection and tax advantages that an LLC provides.
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.
If you are more concerned about providing for a dependent child or special needs loved one, and ensuring that your heirs don't lose or squander their inheritance, you may be better off forming a Trust. On the other hand, if your primary goal is protecting family assets, such as real estate and business interests, and minimizing transfer taxes, then an LLC might be a better option.
For a more detailed discussion of the issues discussed above or help with creating a comprehensive estate plan for your family, call us to arrange a free consultation with a knowledgeable Wyoming estate planning attorney.