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Why You Should Consider Putting Your LLC Into a Trust

Key Points:

  • Placing LLC membership interests in a trust combines liability protection with estate planning benefits.
  • Trusts help avoid probate, protect assets, and plan for incapacity.
  • There are three main types of trusts for LLCs: revocable, irrevocable, and asset protection trusts.
  • Check your LLC operating agreement and obtain consent in multi-member LLCs before transferring interests.
  • Consult Littleton Legal for proper structuring and documentation of trust-owned LLCs.

Table of Contents:

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 some paperwork. In multi-member LLCs, you may also need consent from other members. Nevertheless, a well-planned transfer can reduce risks, protect your business affairs, and support 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 among your most valuable assets. Protecting your LLC and creating a contingency plan ensures continuity if you cannot manage your affairs.

Key benefits of placing LLC interests in a trust include:

  • Probate avoidance: Probate is the legal process of settling an estate when someone passes away. Overseen by the court, probate ensures debts are paid and your assets—including business interests—are allocated to your beneficiaries. Assets placed in a trust generally avoid probate, which can take weeks or months. During probate, operational issues could arise if no one manages your business interests.
  • Privacy: Probate is public, so creditors, disinherited heirs, and scammers can access your estate details. Trusts bypass probate, allowing assets to pass to your beneficiaries quickly, efficiently, and privately.
  • Incapacity planning: Accidents or illness may prevent you from fulfilling business duties. A trust can immediately authorize a trustee to take over, ensuring your LLC continues to operate smoothly.
  • Asset protection: Depending on the trust type, it can make it more difficult for creditors to claim trust assets, protecting your LLC membership interests.

Types of Trusts for LLCs

Three main trusts commonly hold LLC assets: revocable trusts, irrevocable trusts, and asset protection trusts. Each type has advantages and disadvantages.

Revocable Trusts (Living Trusts)

Revocable trusts can be changed or canceled during the grantor’s lifetime. The grantor can serve as both trustee and beneficiary. Revocable trusts avoid probate, allow you to control the LLC, and provide income to the beneficiary during your lifetime. Upon death or incapacity, a new trustee and beneficiaries can be named. While you control the trust, creditors could still claim its assets.

Irrevocable Trusts

Irrevocable trusts cannot be changed after creation. Creditors cannot claim assets, but the grantor loses access and control over the LLC. Any income also goes to the trustee and beneficiaries.

Asset Protection Trusts

Asset protection trusts (self-settled trusts) combine the control of revocable trusts with creditor protection of irrevocable trusts. They allow distributions to beneficiaries and specify who receives LLC interests upon death. Not all states permit domestic asset protection trusts; offshore options are possible.

Other Considerations When Placing Your LLC in a Trust

Placing your LLC interests in a trust means the trust—not you—becomes the legal LLC member. Verify that the LLC operating agreement allows trusts as members. In multi-member LLCs, you may need other members’ consent, which could require a majority or unanimous vote.

Steps to Transfer Your LLC into a Trust

  • Transfer the LLC using proper documentation prepared by an attorney.
  • Update LLC documents, including the operating agreement, buy-sell agreements, and articles of organization, to show that the trust is now a member.
  • Execute a resolution signed by LLC members that formally recognizes the change of ownership. This step is not required but reinforces the validity of the transfer.

Weigh the advantages of a trust-owned LLC against potential disadvantages. Carefully review the LLC’s operating agreement, buy-sell agreements, and transfer restrictions to uncover any unforeseen consequences.

Contact Littleton Legal

Littleton Legal can guide you in deciding whether transferring an LLC interest to a trust is the right move. Our team can help select a trust structure and document the transfer. For assistance with LLC trusts and other business law matters, contact Littleton Legal today at (918) 608-1836.

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