Can a Trust Own an LLC? A Detailed Guide

Whether you’re doing estate planning or trying to protect assets, a common question that comes up is “Can a trust own an LLC?” The short answer is yes, a trust can own an LLC. However, there are some important factors to consider before putting your LLC into a trust.

In this comprehensive guide, we’ll cover everything you need to know about trusts owning LLCs. We’ll look at the benefits and drawbacks, examine different trust structures, and provide tips for properly setting up the ownership. By the end, you’ll understand if having a trust own your LLC is the right choice for your situation.

What is an LLC?

Before looking at trusts, let’s review what an LLC is. LLC stands for limited liability company. It’s a business entity that combines traits of partnerships and corporations.

Some key characteristics of LLCs:

• Limited liability – Owners aren’t personally responsible for business debts and liabilities. These remain at the company level.
• Pass-through taxation – Profits and losses “pass through” the business to owners’ personal tax returns. The LLC itself doesn’t pay taxes.
• Flexibility – LLCs are less restricted than corporations in terms of ownership structures and management.
• Asset protection – Properly structured LLCs help shield owners’ personal assets from lawsuits and creditors.

LLCs make it easy to separate business assets from personal assets. Property, bank accounts, and other holdings get compartmentalized under the LLC’s ownership.

This protects your personal finances if the business faces lawsuits or bankruptcy. Creditors can seize LLC assets but can’t touch anything owned individually.

What is a Trust?

A trust is a legal arrangement where assets are transferred to be managed by a trustee for the beneficiaries. There are different types of trusts with varying structures and rules.

Some common kinds of trusts include:

• Revocable living trusts – The grantor can modify terms or revoke the trust. Used for estate planning since assets avoid probate.
• Irrevocable trusts – Cannot be changed once established. Better asset protection but loss of control.
• Bypass trusts – Created at death to hold assets for surviving spouse but ultimately transferring to heirs.
• Charitable trusts – Used to make donations and leave money to causes. Can provide tax benefits.

Trusts allow you to dictate exactly how your assets pass to beneficiaries. Property left in trusts doesn’t have to go through probate. Trusts also shield assets if beneficiaries have debts, marriage issues, or other financial complications.

Can a Trust Own an LLC?

So can trusts and LLCs be combined together for ownership purposes? Yes, this is perfectly legal and valid. The trust acts as the member-manager of the LLC and takes on all corresponding rights.

Nearly all U.S. states explicitly allow trust ownership of LLCs. The trustee is empowered to exercise full member rights over the LLC on behalf of trust beneficiaries.

With single-member LLCs, the trust can be the sole member. For multi-member LLCs, the trust takes on partial ownership along with other members.

Some reasons for trusts owning LLCs include:

• Estate planning – Assets transfer to heirs without probate.
• Asset protection – Shield assets from creditors, lawsuits, and divorces.
• Privacy – Trusts not public record unlike wills going through probate.
• Guardianship – Designate trustees to manage assets if incapacitated.

While trusts can own LLCs, it requires careful planning to use this structure effectively. There are also downsides to watch out for.

The Pros and Cons of Putting an LLC into a Trust

Below we’ll examine the biggest pros and cons of having a trust own your LLC.

The Pros

• Avoid Probate – Assets in trusts don’t pass through probate. Your LLC can transfer smoothly to beneficiaries.
• Controlled Distribution – Trust terms dictate exactly when and how beneficiaries receive distributions.
• Asset Protection – Irrevocable trusts especially can shield assets from creditors and lawsuits.
• Tax Benefits – Certain trusts are structured for optimal tax treatment, like bypass trusts.
• Guardianship – If you become incapacitated, trustees still manage your LLC so it’s not neglected.

The Cons

• No Charging Order Protection – Putting an LLC into a revocable trust removes this critical asset protection.
• Loss of Control – Irrevocable trusts mean giving up power over assets and distributions.
• Cost – Lawyers are needed for proper trust creation and LLC setup within it.
• No Step-Up Basis – Assets don’t get stepped-up cost basis when transferred through trusts.
• Successor Issues – Naming trustee successors smoothly is imperative for continuity.

As you can see, there are good reasons to use trusts for LLC ownership. But the cons highlight notable loss of control and asset protection.

Putting an LLC into a Revocable Living Trust

Many people consider putting their LLC into a revocable living trust for estate planning purposes. But this comes with a significant downside.

Revocable trusts provide minimal protection against lawsuits and creditors. If you’re sued personally, the plaintiff could access trust assets including the LLC ownership interest.

Here’s why…

Revocable trusts allow the grantor to modify terms and beneficiaries at any time. Creditors can step into the shoes of grantors and exercise their rights over the trust.

This means creditors could change the trustee and trust beneficiaries to get control over the assets. With the LLC ownership interest inside the trust, they can seize the LLC as well.

So while revocable trusts help avoid probate, they strip away charging order protection for your LLC. This exposes assets to much greater risk if you ever need lawsuit protection.

For this reason, most asset protection experts advise against putting LLCs into revocable living trusts. Doing so defeats the LLC’s key benefit of shielding your assets.

Using Irrevocable Trusts to Own an LLC

Unlike revocable trusts, irrevocable trusts provide strong protection against lawsuits and creditors. Once set up, the terms can’t be changed even by the grantor.

If structured properly, irrevocable trusts make assets totally unavailable to outside parties. This includes any LLCs owned by the trust.

However, the downside is the loss of control. You must give up your ownership rights and ability to change beneficiaries in the future. Any LLCs owned by the trust are permanently locked in as well.

For irrevocable trusts to own LLCs, all parties must understand this total lack of control and flexibility. You also need an attorney to ensure it is set up correctly.

If you go the irrevocable trust route, one option is having the trust own an LLC that is itself a holding company. This LLC then owns your operating LLCs.

This gives you a bit more management flexibility when needed. You can dissolve and recreate operating LLCs if required while keeping assets safe in the trust’s holding LLC.

Better Alternatives for Inheriting an LLC

Rather than using trusts, there are two simpler options for passing an LLC to your heirs that don’t compromise asset protection:

1. Name the LLC in your will

Wills are public record unlike trusts, but probate issues are minimal for single-owner LLCs. The LLC can transfer smoothly to beneficiaries through a will after your death.

For multi-member LLCs, the operating agreement dictates what happens to the deceased’s share. Typically it either transfers to a beneficiary or is divided among remaining members.

2. Outline succession in the LLC operating agreement

The operating agreement is another place where you can outline precisely how LLC ownership transfers when a member dies.

You can name your intended beneficiary and have your membership interest pass directly to them. This keeps the asset protection intact while avoiding probate.

Both options allow you to plan for inheritance without altering LLC protection mechanisms that serve you while alive.

Tips for Trusts Owning LLCs

If you do opt to use a trust to own your LLC, here are some tips to do it effectively:

• Consult an attorney experienced in estate planning and asset protection. Proper legal advice is a must.
• Carefully weigh whether the benefits outweigh drawbacks like reduced control and lack of charging order protection.
• Consider using trusts to own a holding LLC which in turn owns your operating LLCs. This adds flexibility.
• Designate trustee successors you trust to manage the LLC competently if you pass away or become incapacitated.
• Outline trust terms and LLC operating details thoroughly. Ambiguity causes major issues down the road.
• Review the trust and LLC structuring regularly. Update terms and conditions as your situation evolves.

Conclusion

While trusts can legally own LLCs, it requires meticulous setup to avoid pitfalls. The loss of charging order protection is highly problematic if using revocable living trusts. Irrevocable trusts ensure protection but require permanent loss of control.

In most cases, your needs are better served by options like naming the LLC in your will or outlining succession in the operating agreement. Both allow you to keep asset protection fully intact while planning for inheritance.

Owning LLCs in trusts can make sense in certain situations, but the risks usually outweigh potential benefits. Tread carefully, involve experienced attorneys, and keep LLC protection as your top priority if you move forward. Thorough planning is a must.

Tim Kelly, J.D.

Tim Kelly, J.D., is a legal writer for LawInfo.com. He holds a law degree from Mitchell Hamline School of Law in St. Paul, Minnesota. Tim has a background in retail copywriting and entertainment journalism, with his work being featured in various publications, including the New York Times and EW.com. In 2017, he transitioned into the legal industry, specializing in intellectual property and small business law. Tim resides in the Twin Cities and takes great joy in being a husband, father, and passionate record collector.