Trust vs. LLC
When You Want More
Trusts and LLCs are both legal entities that you can create to protect and manage your assets. But, are there advantages or disadvantages to creating a trust vs. an LLC? Generally, if you’re concerned about retaining control over your assets and having liability protection, forming an LLC might be your best option. Trusts, on the other hand, are relatively simple to create and require little maintenance. Nevertheless, to get there, we need to understand what trusts and LLCs are and how to form each one. So, let’s dive in.
What is a trust?
A trust is a legal entity used to hold assets for the benefit of another. Essentially, a trust is a box you can put your assets in—think cash, stocks, real estate, or your prized stamp collection—to be gifted to someone else. The items within a trust may be physical goods, intellectual property, or virtual goods, like cryptocurrency or NFTs.
There are three major types of trusts:
- Revocable Trust: A revocable trust can be updated or dissolved at anytime during the creator’s lifetime. Assets placed in a revocable trust are not subject to probate—the legal process for distributing assets. Creditors can go after assets placed in a revocable trust.
- Irrevocable Trust: An irrevocable trust typically can’t be altered or dissolved once it has been created— not without third-party approval, such as from a court judge. Assets transferred to an irrevocable trust are owned by the trust and protected from creditors during your lifetime.
- Testamentary Trust: A testamentary trust is created through your will and won’t come into effect until you pass away. Your assets are protected until distributed to the beneficiary. A court typically determines the trust’s authenticity and oversees distributions.
Regardless of what type of trust you create, you’ll need to include the following: :
- Grantor/settler: The grantor (or settler) is the person(s) creating the trust.
- Trustee: The trustee manages the trust on behalf of the beneficiary. Your trustee can be one person, multiple individuals, an entity such as a bank, or yourself.
- Successor trustee: The successor trustee is whoever will take over if the first trustee passes away or can no longer perform their duties.
- Beneficiary: The beneficiary is who benefits from the trust. You could name a person, several people, a business, a charity—even your favorite pet. It’s common for individuals to serve as a trustee and beneficiary. For example, a married couple could list one another as trustee and beneficiary. However, a sole beneficiary can’t serve as the sole trustee.
- Corpus: The assets inside the trust make up the corpus. For example, you may list your home, a family business, exotic fish collection, or your favorite cherry tree.
What is an LLC?
A Limited Liability Company (LLC) is a type of business entity that offers limited liability protection (like a corporation) and the management flexibility of a partnership. LLCs are taxed as pass-through entities by default (meaning the owners report profits or losses on their own tax returns). LLCs aren’t required to hold annual meetings or keep extensive corporate records.
People typically form LLCs for to give their businesses increased liability protection and tax options. However, LLCs can also be used for estate planning, much like a trust.
Should I create a trust or an LLC?
Here’s a list of things to consider before deciding:
- Most trusts are 100% private and don’t usually require filing any public paperwork. In fact, living trusts are commonly used for estate planning instead of wills to avoid probate—which is public record. Your successor trustee simply manages your assets as directed in your living trust without need for courts or an executor. In Montana, creating a trust for business purposes requires filing Articles of Formation for Domestic Business Trust ($70) and listing the trustee’s name and residential address—this becomes public information.
- LLC filings are public record. So unless you take a few proactive steps—such as hiring a registered agent service—personal information like your name and home address could be available to potential litigators and the public.
- An irrevocable trust is the only type of trust that protects your assets from creditors. However, creating an irrevocable trust requires relinquishing ownership of whatever you place in the trust—and the protection only lasts while you are living. Once your assets become the personal property of your beneficiaries, they are at risk.
- An LLC protects assets from personal liabilities and creditors. Unlike an irrevocable trust, an LLC allows for a lot of control over the entity that holds your assets. LLC asset protection varies in strength from state to state, but Nevada and Wyoming offer strong protections.
- Trusts tend to be cheaper to create and maintain. However, cost depends on where you live and whether you hire an attorney. Attorney fees range between $100 and $400 an hour. You could draft your trust agreement using an online service for around $70. Most trusts won’t require any ongoing maintenance fees.
- To form an LLC, you’ll need to pay your state’s filing fee—this can be as little as $40 (Kentucky) or as high as $500 (Massachusetts). Most states also require LLCs to file annual reports or biennial reports with the Secretary of State. You can think of them as little check-ins that typically require a fee. Some states are low-cost ($12.50 in Hawaii), but others are expensive (like Massachusetts—$500 again). But if liability protection is a priority, the cost might be worth it.
- Assets placed inside a trust are usually exempt from probate, but any assets outside the trust will likely be subject to probate, even if you put them in a will.
- LLCs can avoid probate by making specific provisions in the operating agreement. Your LLC operating agreement is a document created by the LLC’s owner(s) outlining the rules of the business. For example, you could stipulate that your business income goes to your children after you pass. Most states don’t require LLCs to have an operating agreement, but having one is helpful when planning for the future.
Bottom Line
Both trusts and LLCs can be beneficial when managing assets and shielding them from taxation and liability.
Trusts are an inexpensive and low-maintenance tool for managing valuables such as cash, insurance policies, or family heirlooms—anything that doesn’t create a liability risk.
LLCs can be effective for managing assets such as rental property, a vacation home, or a family business. Although LLCs typically require yearly maintenance, they offer the benefit of liability protection.
Frequently Asked Questions
Trusts are created by forming a trust agreement—this is a document that you can create yourself or with some legal assistance. A trust agreement should include the people involved (grantor, trustee, successor trustee and beneficiary), the type of trust, a list of assets to be held, and any provisions the trustee must follow. The agreement should be signed and notarized. Once the agreement is made, trusts can be transferred to the trustee.
For details on how to form a trust (and transfer your assets), check out our article on How to Set Up a Trust.
Yes. Estate taxes (federal and state) are taxes on property transferred upon death and are based on the total net worth of your assets. However, unless your estate is worth several million, you probably won’t be affected.
The minimum threshold for estate taxes is relatively high. For example, the estate tax in Maryland only applies to estates worth $5 million or more. In Oregon, the minimum threshold is $1 million. Surviving spouses in both states are exempt from paying estate taxes regardless of how much they inherit.
The federal estate tax only applies to estates worth $11.7 million or more.
If your estate puts you over the threshold, you might consider creating an irrevocable trust or an LLC. Once you transfer ownership of your assets to a trust or LLC, the total value of your personal estate will go down.
No, but only six states assess an inheritance tax—the federal government only charges an estate tax.
The six states that have an inheritance tax are:
- Iowa
- Kentucky
- Maryland—the only state that has an estate tax and an inheritance tax
- Nebraska
- New Jersey
- Pennsylvania
Although it will vary from state to state, typically surviving spouses, children (including adopted, step, and half-children), and grandparents are exempt. So, even if you live in a state that assesses an inheritance tax, there’s a good chance your beneficiaries won’t have to pay it.
Because it can create many liability risks, many people prefer to put rental property in an LLC. Although irrevocable trusts offer asset protection, they can only protect assets placed inside the trust—which you’ll have less control over. Putting your rental property in an LLC casts a broader net of protection with more control.
The short answer is yes. Combining a trust with an LLC can add an extra layer of protection for your assets. It’s like double-bagging your groceries—if a creditor manages to pierce through one layer, there’s another layer there to protect your assets.
However, you won’t get much privacy protection unless you hire outside help. For example, you could hire a business formation company to form the LLC for you. Often, these companies will act as your registered agent and sign the Articles of Organization or Certificate of Formation as the organizer—allowing you to keep your address (or sometimes even your name) off public record.
Most people choose to place their personal home in a trust. Because owning your home typically doesn’t create liability risks, a trust will allow you to avoid probate and pass down your assets without the costs and hassle of maintaining an LLC.
Now that you know the differences between a trust and an LLC…
