Can a trust be a member of an LLC?

If you’re looking to start a business that offers limited liability and probate protection, you might have come across the terms LLC and trust in your research. Each one could solve half of your problem, and now your question is, can a trust be a member of an LLC?

The short answer is yes, but first, you’ll need to understand the relationship between LLCs and trusts. This guide will provide information about trust-owned LLCs.

Can a trust be a member of an LLC?

Yes, a trust can be a member of an LLC. (An owner of an LLC is referred to as a “member.”) Can a trust own a limited liability company (LLC)? In fact, a trust-owned LLC can be a valuable tool in estate planning.

Here’s how it works: an LLC is a business structure offering personal asset protection while avoiding double taxation. A trust is a legal arrangement in which a grantor transfers ownership of assets to a trustee to benefit one or more beneficiaries. Hence, entrepreneurs can enjoy the benefits of both legal entities by placing their LLC membership interests in a trust. 

Whether you’re a single-member or multi-member LLC, your LLC membership interests are treated as personal property. This means your membership interest can be subject to probate upon your demise and could potentially be claimed by creditors. Therefore, it’s reasonable to have a plan to protect your LLC now and control what happens to the business in case of your demise or incapacitation.

LLCs and Trusts 

There are two ways to set up the trust ownership of your membership interests in an LLC. They include LLC revocable trust and LLC irrevocable trust. 

What is an LLC revocable trust? 

An LLC revocable trust is set up such that the grantor still has control over the LLC. The grantor may withdraw assets from the trust. With a revocable trust, the trust can be terminated or changed during the grantor’s lifetime. 

In the event of the grantor’s death or incapacity, the terms of the trust determine what happens to the assets. Most times, the trust’s assets are distributed to the beneficiaries. In some cases, the trust continues to manage the assets and pays income to the beneficiaries. 

What is an LLC irrevocable trust? 

As the name suggests, an LLC irrevocable trust can’t be easily revoked or changed once created. In this case, the grantor loses control or access to the LLC. Someone else is named the beneficiary, and the grantor forfeits any income from an LLC placed in a trust. Since the grantor has no control or access to the trust’s assets, the LLC membership interests are protected from creditors’ claims. 

However, there’s a form of irrevocable trust known as a domestic asset protection trust that allows grantors to keep control over the asset. This means grantors can enjoy the benefits of both irrevocable trust asset protection and revocable trust asset control. Domestic asset protection is restricted in some states, but you don’t need to be a resident to set up a trust in a particular state. 

Revocable Trust as a Member of an LLC 

The law will permit you to transfer your membership interest to a trust, but the operating agreement might not. Hence, it’s imperative that you first confirm if the operating agreement accommodates this transition. If not, you need to seek the consent of other members or amend the operating agreement if you’re the sole owner. Let’s take a look at some of the benefits and drawbacks of having a revocable trust as a member of an LLC.

Benefits 

Avoiding the Probate Process

Probate is the legal process where the court presides over the distribution of an estate when the owner dies. Aside from ensuring that your business interests and assets are awarded to beneficiaries in your will, probate helps ensure your debts are settled. 

The probate period can last weeks or months. Your business interest is left unattended during this period, which increases the risk of operational problems. Placing your assets in a trust makes the transition smoother and saves your beneficiaries from this strenuous process. 

Privacy 

An estate settled through probate is a matter of public records. This means that with some research, non-beneficiaries like disinherited heirs, creditors, and scammers can learn details about your estate. Since trusts cut out the entire probate ordeal, matters concerning your estate are kept private.

Planning for Being Incapacitated

Making plans for how your business interests will be managed upon your demise is great thinking, but sometimes that’s not enough. What happens when an unforeseen circumstance like an accident or a medical condition leaves you incapacitated? You can structure your LLC trust so that a trustee is authorized to take charge on your behalf upon your incapacitation. 

Drawbacks 

Having a revocable trust as a member of an LLC offers liability and probate protection to your beneficiaries upon your demise. However, as long as you’re alive, at full capacity, and still have control over the trust, the trust assets, including the LLC membership interests, could be subject to creditor claims. 

Another drawback to using this strategy is that it could be expensive. To execute this plan, you need to set up an LLC, which involves several expenses. Aside from the initial cost of filing Articles of Organization, you have to consider ongoing costs such as annual or biennial reports. Then you have to consider the cost of setting up and maintaining a revocable trust. 

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Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.