Why You Should Consider Putting Your LLC into a Trust

The limited liability company (LLC) is a popular business structure that provides liability protection and prevents double taxation. Trusts are popular asset transfer vehicles that allow you to avoid probate and keep assets out of the hands of creditors. By placing LLC membership interests in a trust, business owners can combine the two types of legal entities and enjoy the best of both worlds.

Transferring an LLC to a trust requires a bit of paperwork, and, in multi-member LLCs, may also require the consent of other members. Nevertheless, a well-planned transfer can help reduce risks, keep your business affairs out of government hands, and facilitate your broader estate planning goals.

Benefits of Placing LLC Interests in a Trust

Whether you own a single-member LLC or co-own a multi-member LLC, your LLC ownership interests are considered personal property. Likely, your business interests are one of your most valuable assets. As such, you must ensure your LLC is safeguarded and establish a contingency plan for the business when you can no longer manage your affairs.

The following are some of the key benefits of placing LLC interests in a trust:

• Probate avoidance. Probate is the legal process of settling an estate when somebody passes away. Overseen by the court (e., the government), probate ensures that your debts are paid off and your assets—including business interests—are allocated to the beneficiaries you specify in your will. Assets that are placed in a trust generally avoid probate, which can take weeks or months to complete. During the probate process, operational problems could arise as there may be no one managing your business interests.
• Privacy. Not only can probate be lengthy and cause your business to languish, a probated estate is a matter of public record. That means anyone who knows where to look (e.g., creditors, disinherited heirs, and scammers) can learn details about your estate. Trusts, on the other hand, bypass probate, and the assets they contain pass to your beneficiaries more quickly, efficiently, and privately.
• Incapacity planning. Even if you have a plan for what happens to your business when you die, such as having a trusted family member take over or an agreement allowing other LLC members to buy out your interest upon death, problems could occur if an accident or illness renders you incapable of fulfilling your business duties. If your LLC interests are held in a trust, the trust can be structured so that your incapacity immediately triggers the authorization of another person (i.e., the trustee) to take over on your behalf.
• Asset protection. Depending on the type of trust in which you place your LLC membership interests, the trust can make it more difficult for creditors to go after the trust assets.

Types of Trusts You Can Use for an LLC

The three main types of trusts commonly used for LLC asset transfers are revocable trusts, irrevocable trusts, and asset protection trusts. Each type has pros and cons for holding LLC assets.

• Revocable trusts (also known as living trusts) are trusts that can be changed or canceled during the lifetime of the grantor (the person who establishes the trust). The grantor can name themselves as the trust beneficiary (the person who receives a benefit from the trust) as well as the trustee (the person who has the right to manage trust assets, including any business interests). A revocable trust allows you to avoid probate, control the LLC, and receive income from the trust as the beneficiary during your lifetime. The trust can be set up in such a way that, upon your death or incapacity, a new trustee and new beneficiary (or beneficiaries) are named. However, as long as you are still alive and maintain control over the trust, the trust assets could be subject to creditors’ claims.
• Irrevocable trusts, unlike revocable trusts, cannot be changed or canceled after they are created. The advantage of an irrevocable trust is that creditors cannot go after the assets of the trust’s grantor. Then again, if an LLC is held in an irrevocable trust, the grantor loses access and control over the LLC since somebody other than the grantor will presumably be named trustee and beneficiary. This also means that the grantor loses any income from an LLC that is placed in an irrevocable trust.
• Asset protection trusts (also called self-settled trusts) allow LLC owners to enjoy both the control benefits of a revocable trust and the asset protection benefits of an irrevocable trust. These types of trusts are highly specialized and quite complicated from a legal standpoint. Though they are required to be irrevocable, asset protection trusts can still allow you to receive distributions from the trust as the beneficiary and specify who will receive your LLC membership interests when you die. Not all states allow domestic asset protection trusts, but you do not have to be a resident to establish a trust in a specific state. Foreign, or offshore, asset protection trusts are another possibility.

Other Considerations for Placing Your LLC in a Trust

Placing your LLC interests in a trust means that the trust—not you as the business owner—is the legal LLC member and party to the LLC’s operating agreement. Although the law permits a trust to own an LLC, the LLC operating agreement may not. Therefore, you will first need to check if the operating agreement allows for this arrangement.

Even if the LLC operating agreement permits trusts to be members, you may still need to obtain consent from the other members in a multi-member LLC. Obtaining consent could require a unanimous or majority vote, depending on the rules outlined in the operating agreement.

If you can proceed with the transfer of your LLC into a trust, resulting in the trust becoming the LLC member, you will need to take the following steps:

• Transfer the LLC into the trust using appropriate documentation prepared by an attorney.
• Update LLC documents, including the operating agreement, buy-sell agreements, and the articles of organization, to reflect the fact that the trust (not an individual) is now a member.
• Execute a resolution signed by the LLC members that formally recognizes the change of LLC ownership from an individual to a trust. While this is not required, it is a good business practice that underscores the validity of the transfer of your LLC interests.

The advantages of having a trust-owned LLC should be weighed against the disadvantages, including any unforeseen consequences that can only be uncovered through a careful evaluation of the LLC’s operating agreement, buy-sell agreements, and transfer restrictions.

Littleton Legal can offer guidance in determining whether transferring an LLC interest to a trust is the right move for your situation, including selecting a trust structure and documenting the transfer. For assistance with these and other business law matters, contact Littleton Legal today at (918) 608-1836.