Trust Vs LLC 2023: What Is The Difference?
To protect assets effectively, you have to store them in the right legal entity. But that can depend on whether you’re looking to protect business assets, avoid estate taxes, or protect personal assets from legal liability while running a business.
We’ve put together this guide to help you identify which of these two legal vehicles is better for your goals. Keep reading to learn more about the differences between an LLC and a trust.
What is a Trust?
A trust is a fiduciary agreement that places assets under the control of a third-party trustee for the purpose of management so that the assets may eventually be passed to the stated beneficiaries. They’re commonly used when transferring family assets to avoid probate.
For example, a family home could be placed in a trust to avoid estate taxes when the owner dies and wishes to pass the home on to their children. The trustee manages the home as an asset until that happens.
There are several different types of trust assets that are worth considering if you’d like to start managing your assets or ownership interests through one of these legal vehicles. We cover those below.
A revocable trust is one that can be canceled or taken back at any time as long as you’re mentally competent when you choose to do so. They offer flexible ability by allowing you to hold ownership interest and real estate in a separate legal vehicle without having to commit to that legal vehicle for the rest of your life.
As the name suggests, an irrevocable trust is one that you can’t take back. With irrevocable trusts, once you put your assets into the trust, you can’t change or alter the terms of the trust afterward. Because of that, an irrevocable trust should only be used if you’re very sure this is how you want to hold your personal assets or legal business entities.
A testamentary trust is another way of protecting business assets, rental property, and other personal assets and business assets. However, they only become active if the creator of the trust dies.
For example, you may have a business entity that you want to go into a trust after you pass away until your children reach a certain age. You could use a testamentary trust to do that for limited liability companies or any other business entity.
Things to Include When Creating a Trust:
- Grantor/Settler: This is the creator of the trust and typically the owner of the assets before they were put into the trust.
- Trustee: The trustee is the person who manages the owners personal assets.
- Successor Trustee: The successor trustee is essentially a backup to the original trustee who takes over with managing assets and corporate profits if the original trustee perishes or becomes incapacitated.
- Beneficiary: The beneficiary is the person(s) who receives the assets when the terms of the trust are satisfied, and it dissolves.
- Corpus: The corpus is the umbrella term used to define all of the property and other managing assets included in the trust.
What is an LLC?
An LLC is a type of business entity, similar to simplified corporations or a sole proprietorship. It’s a legal entity that’s commonly used for personal asset protection and business purposes.
For example, you could create a multi or single-member LLC to protect your home in the event that your business gets sued or goes bankrupt. The existence separate your personal property and business property, to reduce your potential legal liability and achieve simplified management structure with liability protection, among other benefits.
Pros & Cons of a Trust?
The biggest advance of a trust is that it allows you to avoid the time-consuming probate process so that your beneficiaries get the assets faster. This kind of structure can also help you avoid estate taxes and reduce estate taxes so that less of your fortune goes to inheritance taxes.
Another major benefit of reducing estate taxes with a trust is keeping your assets and filing documents private. You won’t have to put this on the public record, which could help you keep assets from creditors and avoid needing to pay monetary damages commonly seen during the probate process.
The big disadvantage of a trust is that it can take a good amount of paperwork to set one up for both individuals, investment property owners with a rental property, and businesses. It’s worth keeping in mind as you consider whether to pursue this form of asset protection and reduction of income taxes.
Pros & Cons of an LLC?
Both an LLC and a trust are created at the state level. But LLCs are business entities designed for actively run businesses, whereas trusts are pass-through entities for inheritance and for passing dividends directly to beneficiaries while retaining an original owners control over business decisions.
LLCs are great if you want to protect assets while enjoying income tax benefits and avoiding legal liability through a simplified management structure compared to other types of business income structures. But trusts may be a better option if you just want to hold assets from creditors for estate planning purposes.
Trust Vs LLC: Which is Better?
Real estate investors and those simply looking for help with managing estate taxes may need to choose between a trust and LLC. If that’s you, contacting a financial advisor and reviewing your options with a government agency in your state is always a good idea for both an LLC and a trust.
But here’s a quick look at how the two compare in some major categories.
Privacy – Trust
Trusts keep owners’ personal assets 100% private, regardless of whether that’s real estate and rental property or business debts that require filing in non-public settings.
LLCs are typically public record and using them to keep your business organized or for liability protection will make your information available to those who search for it – especially when you pay income taxes.
Business Asset Protection – LLC
If you own real estate or rental property and receive rental income, an LLC is likely the better option. It keeps personal and business assets protected more effectively than revocable trusts. Only irrevocable trusts offer 100% protection for business assets, and they only last until you die.
Costs – Initial and Ongoing Fees – Trusts
Nowadays, you can create a trust online relatively quickly without paying high fees or having to worry about attending annual meetings. LLCs may require annual payments to the state – regardless of whether you have real estate and rental property or not.
Probate – Trusts
A key estate planning feature of trusts is that they help you avoid probate. LLCs can avoid probate as well, but you need to make specific inclusions in the agreement in order to qualify.
The Top 2 LLC Services
If you think an LLC may be right for you, here are two services that are worth looking into.
|ZenBusiness||Northwest Registered Agent|
|Award||Best Overall||Most Affordable|
|Detail||Read Review||Read Review|
ZenBusiness is an LLC formation service that consistently provides some of the best customer service on the market. It also offers support with accounting, taxes, and even business advice, making it a business partner you can benefit from working with for a very long time.
Northwest Registered Agent
Northwest is more affordable than ZenBusiness and offers many of the same services. However, it doesn’t have quite as many features, which is why it’s the slight loser in our comparison.
LLCs and trusts can both be helpful vehicles for controlling assets. However, LLCs are primarily used by active businesses, whereas trusts are meant for individuals who wish to avoid probate and keep their assets private when they pass them on to their heirs.
Frequently Asked Questions (FAQs)
A trust is a fiduciary agreement in which assets can be placed to avoid probate and maintain privacy before passing them to a beneficiary.
An LLC is a type of business entity that can be used to keep personal assets separated from business assets and protected from legal liability.
Trusts are more commonly used by families looking to keep assets private and reduce inheritance taxes, whereas LLCs are meant to help actively run businesses.
An LLC will be a better option if you run a company, but a trust could make more sense if you’re attempting to keep familial assets safe from probate.
ABOUT THE AUTHOR
ABOUT THE REVIEWER
+ 5 sources
Bizreport Advisor adheres to strict editorial integrity standards avoids using tertiary references. We have strict sourcing guidelines and rely on peer-reviewed studies, academic research. To ensure the accuracy of articles in Bizreport, you can read more about the editorial process here.
- Irs.gov. (2017). Limited Liability Company (LLC) | Internal Revenue Service. [online] Available at: https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc.
- Investor.gov. (2023). Real Estate Investment Trusts (REITs) | Investor.gov. [online] Available at: https://www.investor.gov/introduction-investing/investing-basics/investment-products/real-estate-investment-trusts-reits.
- Gsa.gov. (2022). Personal Property Policy Overview. [online] Available at: https://www.gsa.gov/policy-regulations/policy/personal-property-policy-overview.
- Usa.gov. (2023). How to start and fund your own business | USAGov. [online] Available at: https://www.usa.gov/start-business.
- Fdic.gov. (2023). FDIC: Revocable and Irrevocable Trust Accounts. [online] Available at: https://www.fdic.gov/resources/deposit-insurance/trust-accounts/.