In some cases, a trust can be named the owner of all of an individual’s assets. One of these assets may be a limited liability company (LLC), so the answer is yes, a trust can own an LLC, even as the sole owner if there are no other owners.
What Is a Trust?
A trust is a legal and fiduciary relationship in which an individual, the trustor, grants another individual, the trustee, the right to hold and manage the assets of the trustor for the benefit of others – the beneficiaries of the trust. The trust is basically a way for the trustor to ensure that the assets are protected and distributed to the beneficiaries at the time and manner specified.
What Is an LLC?
An LLC is an increasingly popular business structure for startups, offering liability protection for ownership and greater flexibility than a corporation, particularly in terms of taxes. The LLC itself does not pay taxes. As a “pass-through” entity, income passes through the business to the owner or owners, who report it on their personal tax returns. An LLC is created by filing paperwork with your state, and nominal fees are involved.
An LLC offers its owner or owners, who are called members, considerable flexibility in terms of management. You can choose your management and operational structure and decide how you want to be taxed. Your LLC can have a single member or multiple members, all of whom have personal liability protection, meaning your personal assets are not at risk if you cannot pay business debts or are involved in a lawsuit.
Advantages of Trust Ownership of LLCs
When the trustor of the trust dies, the trustee is able to continue to manage the business of the LLC on behalf of the beneficiaries according to the language of the trust, or the wishes of the beneficiaries. The LLC may also prevent creditors from reaching the assets of the trustor which are owned by the LLC. Also, the LLC assets may avoid probate when the trustor dies. Probate is the court process assets go through after their owner dies, and get distributed to beneficiaries. It can be a time-consuming and expensive process, so probate avoidance is advantageous.
The Operating Agreement
An operating agreement is not usually required but is highly recommended, particularly when a trust is an LLC member. The operating agreement should clearly define the following:
- The percentage of each member’s interests in the LLC, including the trust
- How profits and losses will be allocated to each member
- Each member’s rights and responsibilities
- The management structure and management roles of members
- The voting rights of each member
- Rules for meetings and voting
- What happens when a member sells their interest, becomes disabled, or dies
- Specifications about the trust’s member and management rights of the LLC
It’s a good idea to have an attorney’s help when creating your operating agreement so that you can be sure you’re covering all bases to protect all members, including the trust, and avoid future issues.
Trusts can be complicated, and when an LLC is one of the assets in the trust, it can become even more complicated. It’s crucial to have an attorney involved in the formation and operation of the trust to make sure beneficiaries’ rights and assets are protected.