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Trust vs. LLC: What’s the Difference?
Trusts and limited liability companies (LLCs) are both legal vehicles that can be used to protect assets. Both are also created at the state level but they have different features and different uses. Trusts are primarily used to avoid taxation when transferring family assets from generation to the next. LLCs are legal business entities, similar to simplified corporations, that have as their main feature the ability to shield owners of the business from legal liability for actions of the business. Consider working with a financial advisor as you make key estate planning and business decisions.
An LLC is created by filing documents including a certificate of formation with the secretary of state for the state where the business will be legally based. It is one of the most common types of business entity, along with sole proprietorship, partnership and corporation.
An LLC is a legal entity with an existence separate from its owners. This means that the owners’ personal assets are protected from creditors in the event the business takes on debt that it fails to pay back. Similarly, should the business be required to pay monetary damages as the result of a lawsuit, the payment has to come from the business assets while the owners’ personal assets are protected.
LLCs offer a simplified management structure compared to regular corporations. They also avoid the double taxation levied on corporate profits by passing dividends directly through to their owners, who pay income taxes at their individual rate.
LLCs can also be useful when passing on business assets to heirs. In many states, a business organized as an LLC can be transferred to the next generation without going through the lengthy process of probate. In addition to business assets, the owners of an LLC can place other types of assets in it, allowing more of their estate to avoid probate.
Trusts are also organized at the state level and are used to hold assets and transfer them to beneficiaries. A trust is not a business entity, as an LLC is, however, and creating one doesn’t require filing any documents with a government agency. Trusts can hold many different types of assets, including cash and bank accounts, real estate and securities, as well as ownership interests in an LLC or other business entity.
The assets in a trust are transferred from the original owners’ control to the trust, where they are overseen by a trustee. The trust also contains instructions describing how the assets are to be distributed to beneficiaries in the event of the owner’s death.
When the owner dies, the assets do not have to go through the probate process and can significantly reduce the estate taxes that would otherwise be levied on the intergenerational transfer of assets. Rather than going through probate, the trustee just distributes the assets as specified in the trust documents.
While trusts are useful for managing estate taxes, they don’t protect the personal assets from liability to any lawsuits, as LLCs do. They also lack the income tax benefits of the LLC.
The choice between LLC and trust depends on individual situations. LLCs are better at protecting business assets from creditors and legal liability. Trusts can handle many types of assets and are better at avoiding probate and reducing estate taxes. In some cases, both an LLC and a trust may be the best way to manage the estate.
LLCs and trusts are two legal vehicles used for managing assets and protecting them from liability and taxation. LLCs are a type of business entity that shields owners from liability for business debts and avoids double taxation while providing for a flexible structure to manage the business. Trusts are used as repositories for assets that will be distributed to beneficiaries after the death of the original owner. Trusts help people avoid the time-consuming probate process while minimizing estate taxes.
Read more related articles here:
Tax Implications for an LLC Owned by a Living Trust
Also, read one of our previous Blogs at:
Should I Create an LLC for Estate Planning?
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