Can a Trust Own an LLC?Everything You Need to Know
When business owners contemplate what type of business entity they would like to form, a frequent question asked is whether a Trust can be an owner of an LLC.
The simple answer is yes.
What is an LLC?
An LLC is a business entity that provides limited liability protection to its owners, and also protects the income generated that might be subjected to double taxation.
LLCs and limited partnerships both benefit from the protection of double taxation.
Unlike LLCs, partners in a limited partnership are not privileged by limited liability protection.
LLCs are popular in real estate industries because owners enjoy limited liability protection and other tax benefits.
There is no maximum number of members in an LLC, to which an individual or a business entity can be a member.
For taxation purposes in a single-member LLC, the income generated will be passed on to its member, and the member will declare the pass-on amount as their income which will now be subject to taxation.
In a multi-member LLC, the income distribution to each member will be reported first on Schedule K (Form 1065) before they will transfer the same amount from form 1040 (personal return).
To avoid any long and complicated process a court imposes on estate assets, the investor can put their assets into a revocable living trust to easily pass the same assets to their beneficiaries.
There are other ways to make any trust transactions more convenient for investors:
Living Trust as a Sole Member
LLC may provide limited liability for a sole member, but it won’t have any significance in estate planning.
The only benefit of executing a living trust alone is to have favorable estate planning but investors won’t have the privilege of limited liability protection.
But when an LLC has a living trust member, it may enjoy both limited liability protection and a fast and easy transfer of assets to the member’s beneficiary.
Partnership and Trust
An LLC can be either a sole proprietor or a partnership to obtain other favorable tax benefits.
LLC formation will protect the business and personal assets such as real estate property, bank accounts, and other valuable assets from being seized by creditors.
A living trust formation provides an easy transfer of assets without the court interfering whenever the death of one partner arises.
The most important detail members must not omit when making an operating agreement is to include all ownership interests in a trust.
Other inclusions in an operating agreement are:
- Successor or Trustees’ legal rights as a manager or LLC member
- Complete list of managers and LLC members
Due to the financial and banking institution’s strict rulings regarding who is qualified to obtain an interest in an LLC whenever the death or incapacitation of a member arises, it is better to construct a clear and concise operating agreement to avoid any complications in decision-making.
Another way to avoid probate in Trust transactions is by investing an interest than the allowable amount.
But before making such a big move, the member must consult first with the experts in the field like an estate planning attorney.
The Legal Status of Living Trusts
The legal status of the living trust will be based on its formation.
There are two types of legal status:
- Revocable. The grantor has the right to redeem ownership and terminate the original trust agreement whenever they want. Legally speaking, the trust will deem part of the grantor’s asset and in essence, a part of its liabilities.
- Irrevocable Trust. A grantor will not be able to easily terminate the trust with an irrevocable trust. However, it will protect the assets from creditors who are after the assets of the grantor.
Due to the recognition of single-member LLCs today, it is now possible for a living trust to be a sole member of an LLC.
And since owning an interest in LLC is recognized as an asset, it can legally be possible for a trust to acquire an interest in an LLC.
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California State University "THE USE OF TRUSTS AND LLCS IN ASSET PROTECTION " White paper. October 28, 2022