Putting an LLC Interest in a Trust Could Reap Benefits
When we think of the things that we own that we want to protect from creditors, or which we want to make sure go where we want them to go when we pass, we usually think of tangible items. Cars, houses, the art collection and the cash in the bank account are usually the first things we think of.
But interest in a business is an asset that needs to be considered as well. And if you don’t have a business, you may want to consider forming one for the purpose of protecting assets through a trust-business combination.
Having a limited liability corporation (LLC) or an interest in an LLC, and putting your interest in the LLC into a trust instead of owning it individually, could yield beneficial tax and asset protection advantages.
LLCs are popular corporate vehicles because of their flexibility and their benefits. An LLC doesn’t have the formality of a corporation. No corporate minutes or resolutions are required (although it’s sometimes good practice to use them), and there are no restrictions on the number of members. Profits between LLC members can be divided as the members see fit—an even 50-50 or 33-33-33 divide is not required.
LLCs also have the benefit of single taxation. Unlike with traditional corporations, where income could be taxed both at the corporate and individual level, with LLCs, income is taxed only once (“pass-through taxation”).
The LLC provides the natural protection that companies tend to provide—namely, the separation between the person (member) and the company. Individual assets are not exposed when the company is sued, and vice versa.
Holding an interest in an LLC in a trust can provide many advantages. The first advantage is asset protection—both the protections that the trust itself provides, as well as the advantage that the LLC provides.
As we have discussed here in the past, trusts can be set up that are protected from creditors. Much of that protection depends on whether the trust is revocable or irrevocable, whether the settlor and beneficiary are different, and how much control the settlor maintains over the assets put in the trust. But when minding these details, property in a trust may not be available to creditors in the event of a lawsuit judgment, bankruptcy, or death.
Any payments that you receive from the LLC would continue to your beneficiaries after death, and your beneficiaries may be considered members of the LLC by operation of law, assuming the trust documents are drawn up that way. If the trust is irrevocable, the interest in the LLC won’t be subject to estate taxes.
You can use this vehicle even if your LLC is single member—that is, even if you’re the sole owner and manager of the LLC. You can set up an LLC with the trust as the sole managing member, and receive all of these benefits.
As with many things, this delicate arrangement can also work against you if the documents aren’t drawn up carefully, and according to what you’re trying to accomplish. Don’t use forms off the shelf. In many cases, documents may have to be drawn up according to your specific circumstance. Contact Tampa business, asset and probate attorney David Toback to discuss a comprehensive tax and estate plan.