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Family LLC vs Trust: Differences That Matter

Max Smith

Reading Time: 7 minutes

When it comes to ‘family LLC vs trust,’ you must choose the right option for your needs. Both of those are popular options, as they both have benefits. But they serve different purposes. 

You have the option to choose both Family LLC and Trust for better facilities. In fact, a living trust can own an LLC. They are great for your rental property, but it’s important that you analyze and decide whether to choose one or both. 

So, without further ado, let’s read through to understand trust definitions and their differences, how to use them together, and what to do in situations like rental properties.

A trust is a legal arrangement that manages your wealth and helps you pass it on to your beneficiary successfully. It’s about more than transferring the property to the next generation. In fact, a trust is a great way to avoid probate and minimize estate taxes. 

 Surely, the trust manages and protects assets. The asset can be a property, cash, NFT, or any kind of wealth. You can give your estate to a trust with the assurance that it will transfer your property to your beneficiary after your death, like your son or daughter.

Moreover, a trust can also include a business entity like an LLC. Do you wonder what an LLC is? Then read our next section!

What is an LLC?

A Limited Liability Company (LLC) is a legal business entity that secures your assets from business liabilities. It protects your assets from any business lawsuits. The LLC only uses its business assets to fulfil its debts.

Moreover, LLCs avoid double taxation. It does not pay corporate tax. In fact, it transfers business profits to its owner’s personal income tax. As a result, there is no double taxation.

You must provide the Articles of Organization, operating agreement, and other documents to apply for registration. Also, you may need a registered agent and EIN to create & run your LLC. Lastly, follow your state-specific rules to run your LLC successfully.

You may continue your family business through an LLC. In addition, an LLC can also gain property, cash, or wealth for its business if you wish. When you die, your family business will pass on to your heirs.

If you want to avoid complications, you can get a trust. Yes, a trust can have an interest in an LLC. Lastly, the trust will transfer LLC interest to the beneficiaries or your heirs.

Now, you may think a trust can be a business entity or not. Let’s find it out in our next section!

Is a Trust a Business Entity?

No, a trust is not a business entity, not in a traditional sense. Instead, a trust is a legal arrangement. Moreover, there are two parties in a trust:

The Trustee: This party holds the assets.

The Beneficiaries: This party is the one for whom the assets are held.

The trustee holds the assets to benefit the beneficiaries in a trust. This trust can carry out financial operations, but only following the terms of the trust agreement.

However, a trust cannot act like corporations, partnerships, or limited liability companies. Which means you cannot use trusts to run business operations. But you can use them for:

Lastly, the qualities of a trust distinguishes it from other entities, like a family trust. Do you know the differences? If not, then read our next section.

What Is the Difference Between Family LLC vs Trust?

Family LLC

Trust

An LLC provides personal liability protection

A revocable trust does not provide liability protection, but an irrevocable trust does.

LLCs can avoid probate

Assets held inside a trust are typically shielded from probate.

LLCs are expensive as you need to pay filing fees, annual fees, and maintenance costs.

Trusts are generally less expensive to create & operate.

LLC filing records are open to the public.

100% private to secure your information.

Members can control an LLC

Only a trustee can control everything.

It protects assets from liability

It protects assets and safely passes them to a successor. 

Transfers ownership

Directly transfers the assets.

Straightforward tax implications

A bit complicated tax implications

Maintain additional administrative obligations when managing an LLC

Trust offers customization in managing and maintaining assets.

A family LLC and a trust are both legal entities but differ significantly in specific ways. Below I will discuss those differences.

1. Control and Ownership

Family LLC: Members of a family LLC own interests in the business. This indicates that one or more individuals are allowed to practice control. So, you can oversee LLC affairs, choose to make investments, and divide profits as a member.

Trust: A trustee holds assets on behalf of beneficiaries. That individual is not able to decide according to their judgment. Instead, they are to follow the terms and instructions outlined in your trust agreement.

2. Asset Protection

Family LLC: If you properly structure the family LLC by limiting the members’ liability, the asset will be protected. Creditors cannot claim your personnel assets. Undoubtedly, an LLC protects your personal assets from any business debts.

Trust: Your trust assets can also get creditor protection, depending on the trust type and jurisdiction. However, that protection will focus more on the beneficiaries’ creditors, not the grantor’s.

3. Asset Transfers

Family LLC: When you transfer assets into a family LLC, you usually transfer ownership but not the assets themselves. This transfer may have some tax ramifications. Furthermore, you will also have to be mindful of state law compliance.

Trust: When you transfer assets directly into the trust, ownership will be passed to the trustee. This is a straightforward transfer. You can also avoid probate and maintain your privacy.

4. Tax Implications

Family LLC: In a tax situation, you can treat the LLC as any of the entities, like a corporation, partnership, or disregarded company. So, the LLC income will be passed through members to be taxed at their rates.

Trust: Trusts may have different tax implications. Some trusts pass income on to beneficiaries. Some do so as distinct legal entities. Undoubtedly,  trust taxation is complicated, so you might need professional help.

5. Flexibility and management

Family LLC: Members can actively participate in business management because of the flexibility of the LLC. But you will have to maintain additional administrative obligations, too.

Trust: A trust also offers flexibility in asset management and distribution. You can customize the document according to the grantor’s desires and goals. Moreover, administering a trust is easier than running an LLC.  

Besides, there will be situations where you will wonder, between an LLC and a trust, which one should you choose for your rental property. So let’s talk about that.

Should I Put Rental Property in a Trust or LLC?

The answer to whether you should put rental property in a trust or an LLC depends on your priorities.

From a trust, you will get the benefits of:

  • Estate planning,
  • Avoiding probate,
  • Assistance in the asset transfer & more.

On the other hand, if you choose an LLC, there will be:

  • Limited liability protection,
  • Tax flexibility,
  • Direct management supervision & more.

So, there is no direct answer for every situation. The decision depends on your individual goals and conditions. We suggest you consult with a legal advisor. He will weigh both options and devise a strategy appropriate for your condition.

But it would be fantastic if you could get both of their benefits. Do you wonder how? Let’s learn about that in the following section.

Can a Living Trust Own an LLC?

Yes, a living trust can own an LLC. Not only is it legal, but it can also be a powerful strategy.

While an LLC will hold ownership of a property, a trust can own the membership interest of that LLC. This arrangement is called a ‘trust-owned LLC, and this is how it works:

  • First, you create a living trust, a revocable one.
  • Then, you create an LLC, where the trust is the owner.
  • Here, you will serve as both the trustee and beneficiary.
  • Besides getting the LLC benefits, you will score estate planning targets.

Conclusion​

In the end, it’s clear that there is no one-size-fits-all answer when the question is ‘family LLC vs trust.’ The answer depends on your unique goals and priorities. 

You can choose a trust or family LLC for your rental property. In fact, a trust can also own a family LLC to give you better opportunities, 

So, analyze trust and family LLC differences, how to use them together, and what to do in situations like rental properties to find out what will suit you the best.

Key Points

  • A trust is a legal arrangement, not a business entity.
  • There are 2 parties in a trust. One is the trustee who holds the assets, and the other is the beneficiary, who is the one for whom the assets are held.
  • A family LLC is different from a trust. You can find the differences in various areas, for example, controlling power, asset protection & transfer, taxation, flexibility, and more.
  • Your priorities depend on whether you should put rental property in a trust or an LLC. Assess the benefits of both options and then decide which is better for you.
  • You can choose to get benefits from both by creating a trust-owned LLC.

Frequently Asked Questions

Is a family LLC superior to a trust?

The answer depends on your current situation. An LLC is an excellent choice for protecting assets from debt. On the contrary, a trust is a better way to manage assets and avoid probate. Your situation will make an LLC or trust superior for you.

What is the downside of a family LLC?

Maintenance complexity and expensiveness can be the downsides of a family LLC. You may also need experienced legal counsel to set up a family business.

How does a family LLC benefit tax-wise?

Family LLC features a pass-through entity nature. It helps to gain preferable income tax treatment, which is significantly beneficial. Family LLC passes on the assets to the next generation without hassle, maintaining a legacy and avoiding tax complications.

Max Smith - LLC Formation

He is a seasoned entrepreneur and legal expert at LLC Formation Hub. With a stellar track record in both business and law, Max simplifies the complexities of LLCs. His practical insights, featured on LLC Formation Hub, empower entrepreneurs across the USA. Max merges business finesse with legal acuity to guide businesses toward success.


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