Are LLCs Better than Trusts?

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Limited Liability Companies (LLCs) and trusts are both helpful for asset protection.

Asset protection can be a priority for many in their life and estate planning.

This is especially important for those with much to lose as business owners.

Two common tools for asset protection include trusts and Limited Liability Companies (LLCs).

According to a recent Business Report article titled “Trust Vs. LLC 2023: What Is The Difference?,” understanding the key differences is essential to choosing the appropriate legal vehicle for your needs.

LLCs provide asset protection.
LLCs are common among small business owners.

What are the distinctions between trusts and LLCs?

A trust holds assets and allows for these assets to be managed and controlled by a trustee.

The trustee manages and passes assets to trust beneficiaries according to trust provisions.

Trusts are commonly used to avoid probate on property transfers to loved ones.

As a result, the process is typically quicker and more private.

There are three fundamental types of trusts.

The first type of trust is a revocable living trust.

It allows the trust’s creator to maintain control of assets by also serving as the trustee.

This type of trust is attractive for those who want to keep asset ownership trust but are not fully committed to making the ownership transfer permanent.

The second type, as its name suggests, is an irrevocable trust.

This type of trust cannot be altered or terminated by the trustee.

Very few and limited exceptions to this rule exist.

The trustee typically cannot also be the grantor with an irrevocable trust.

The third type of trust is a testamentary trust.

This trust is created under another estate planning document – a last will and testament.

Instead of providing for outright distributions to beneficiaries, a last will may provide instructions for creating a testamentary trust to administer and distribute the inheritance.

Unlike the other two trusts and LLCs, the testamentary trust will only become effective after the death of the grantor and probate of the last will.

As you can see by the descriptions above, knowing a little trust terminology can also be helpful.

The person who creates the trust is known as the grantor.

The person who manages the trust assets according to the trust provisions is the trustee.

The successor trustee is the individual or entity selected to manage assets should the original trustee die or become incapacitated.

The beneficiaries receive assets from the trust as provided by its terms.

Unlike trusts, LLCs are business entities often used for personal asset protection.

LLCs can be multi-member or single-member.

People create LLCs to keep business and personal property separate, reduce possible legal liabilities, own businesses or real estate investments, and simplify management structures while providing liability protection.

Both trusts and LLCs are created on the state level according to state guidelines.

Trusts are primarily entities for distribution, while LLCs are for actively running businesses.

Those who run small businesses may already have an LLC.

An experienced estate planning attorney will provide directions regarding the best option for those who have neither but are seeking asset protection in their estate plan.

ReferenceBusiness Report (April 14, 2023) “Trust Vs. LLC 2023: What Is The Difference?”

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