A trust can act as a fiduciary and oversee assets on your behalf. Trusts are commonly used to manage generational wealth with guidelines so heirs can use the money more effectively. Trusts can also become members of LLCs and manage business assets within the account. This guide will explore how to turn a trust into a member of a limited liability company (LLC), along with the pros and cons.
Understanding Trusts and LLCs
Trusts manage assets for individuals and can oversee them for an heir. Trusts can distribute assets based on a set schedule and manage money to generate higher returns. Some trusts are members of limited liability corporations. These business structures allow you to separate your personal assets from business assets. Your personal assets will be safe from any legal liabilities your business incurs.
Can a Trust Be a Member of an LLC?
Trusts can legally become members of an LLC. If your LLC has multiple members, they must all give their approval for the trust to be added as a member. Trusts have two categories: revocable and irrevocable. Each category has several rules in place that impact your ability to access assets or for someone else to make changes to the current structure. You will have to review local laws and your LLC’s operating agreement to determine if a trust can become a member of your LLC.
What Is a Revocable Trust?
A revocable trust is an arrangement between an individual and the trust. The trust can manage assets, but the individual can still access their assets and make their own decisions. It’s possible to withdraw funds from your LLC on your own accord, even if you enter a revocable trust. It is easy to modify the arrangement at any time. When you pass away, the trust will decide how to distribute money to your heirs (i.e., lump sum payments or timed distributions).
Benefits of a Revocable Trust as an LLC Member
Revocable trusts offer several benefits. Here are some of the perks you can expect:
- Flexibility: You can easily modify or exit the arrangement and access your assets. You still have control over your resources.
- Avoid probate: Including a trust as a member of your LLC can help your company avoid probate. Avoiding the legal process ensures a quicker transfer of resources. A business stuck in probate can lose customers and market share while the process unfolds.
- Privacy: Your estate’s details, including assets and wealth, are kept private. These details only become public during probate. If these details become public, non-beneficiaries can discover the size of your wealth and how much you gave to the beneficiaries.
Drawbacks of Revocable Trust as an LLC Member
Revocable trusts have several advantages, but individuals should also know about the disadvantages before committing to them.
- Extra complexity: Adding a trust as a member of an LLC adds more complicity and paperwork to your business. If your LLC has multiple members, you will have to receive approval from each member before adding the trust as an LLC member. You will also have to manage the revocable trust while they are a member.
- Creditors’ claims: Since you have control over the assets, they can become subject to creditors’ claims if you fall behind on payments.
A revocable trust may not be suitable for business owners who intend on selling their businesses when they retire. Selling the assets and retiring eliminates the need for a trust to manage your LLC. Having a trust may also not be necessary if you do not have any heirs. Revocable trusts are optimal for business owners who want to pass their companies onto their heirs and avoid probate. It’s best to consult with legal and tax professionals before adding a trust as a member of your LLC.
What Is an Irrevocable Trust?
An irrevocable trust moves assets out of your control and cannot be modified once you set the terms. Irrevocable trusts move assets out of your estate, which can result in lower estate taxes.
Benefits of an Irrevocable Trust as an LLC Member
While these trusts can’t be undone, they have several advantages that make them a top choice for many LLCs.
- Your assets are protected from legal disputes: No one can touch the assets in your irrevocable trust. Even if your business gets hit with a lawsuit that drains your assets, the plaintiff filing against you cannot touch any assets in your irrevocable trust. The assets in an irrevocable trust are heading to the finish line and getting dispersed based on the set terms.
- Tax benefits: The assets in your irrevocable trust are no longer a part of your estate. That means lower estate taxes for your heirs.
Drawbacks of an Irrevocable Trust as an LLC Member
Irrevocable trusts have several advantages, but it’s important to know their drawbacks as well. These are some of the disadvantages to keep in mind.
- Assets cannot be easily accessed: You can’t withdraw assets in an irrevocable trust for your personal use. It’s far more difficult to end an irrevocable trust than it is to get out of a revocable trust.
- Extra complexity: Irrevocable trusts and revocable trusts both increase the amount of paperwork and nuances.
Steps to Forming an LLC with a Trust as a Member
Forming an LLC with a trust as a member is a straightforward process. You have to start by forming an LLC and then adding a trust as a member in the future. Each state has different rules and paperwork required for forming an LLC.
You will have to register your business name and work with an agent to start your LLC. After crafting an LLC operating agreement and filing LLC Articles of Organization, you will have to get an EIN for your company. Some states and professions may require licenses and permits before you can submit your application. Once you have an LLC, you can add a trust as a member. If your LLC already has multiple members, they must all approve your request to have the trust added as an LLC member.
Fortify Your Assets with a Trust
A trust can simplify how your generational wealth gets distributed to your heirs. Depending on how you set up your trust, you can also minimize your estate taxes. However, it all starts with an LLC, which offers personal liability protection and other perks.
If you want to get started with an LLC, doola’s LLC formation services can help. doola can walk you through the process to help you start, grow, and manage your LLC.
Can any type of trust be a member of an LLC?
Yes, any type of trust can be a member of an LLC.
Are there any limitations to having a trust as an LLC member?
You have to receive approval from every member of an LLC if it has multiple members. Beyond that, you should check your local laws to see if there are any limitations.
Can a trust be the sole member of an LLC?
Yes, a trust can be the sole member of an LLC.
Can multiple trusts be members of the same LLC?
Yes, multiple trusts can be members of the same LLC.
Can a trust be a managing member of an LLC?
Yes, a trust can be a managing member of an LLC.