Asset protection may be accomplished using both trusts and limited liability companies (LLCs), legal entities. Although both are produced at the state level, they are distinct in both their characteristics and their applications. When passing down assets within a family from one generation to the next, the primary motivation for establishing trusts is to avoid paying taxes. The primary benefit of limited liability companies (LLCs), legal business organizations that are somewhat analogous to streamlined corporations, is the capacity to insulate owners of a company from personal legal responsibility for the company's conduct.

LLC Features

It is possible to establish a limited liability company (LLC) by submitting the necessary paperwork, which should include a certificate of formation, to the secretary of state in the state in which the company will be legally headquartered. Along with sole proprietorships, partnerships, and corporations, it is one of the most typical organizational structures for commercial enterprises.

A limited liability company (LLC) is a kind of legal entity that has an existence distinct from that of its owners. If the company takes on a debt it cannot repay, the owners' individual assets are shielded from the reach of the creditors to who the company owes money. In a similar vein, if the company is obliged to pay monetary damages as a consequence of a lawsuit, the payment must come from the assets of the company, while the owners' personal assets are shielded from the judgment.

Compared to traditional companies, LLCs come with more straightforward management structures. They achieve this by distributing dividends directly to their owners, who pay income taxes according to their individual rates. This allows them to sidestep the double taxation imposed on corporate earnings.

LLCs may also be helpful when it comes to transferring the assets of a corporation to heirs. A family-owned company structured as an LLC may be handed down from generation to generation in several states without going through the drawn-out process of probate. The owners of an LLC can deposit various kinds of assets in it in addition to company assets, which enables a greater portion of their estate to bypass the probate process.

Trust Features

Trusts, which may also be established at the state level, store assets and facilitate their distribution to beneficiaries. On the other hand, a trust is not considered a commercial entity in the same way that an LLC is, and the formation of a trust does not need the filing of any paperwork with a government body. Trusts can hold various assets, such as cash and bank accounts, real estate and stocks, and ownership interests in an LLC or other business organization. Cash and bank accounts are examples of liquid assets.

When assets are placed in a trust, control passes from the original owners to the trustees, who are responsible for managing the assets. If the trust owner passes away, the trust document will also include instructions detailing how the assets will be dispersed among the beneficiaries.

The assets do not have to go through the probate procedure when the owner passes away, which may greatly lower the estate taxes that would otherwise be paid on the transfer of assets between generations if probate was required. Instead of going through the probate process, the trustee will simply divide the assets per the terms of the trust instruments.

Considerations to Make Before Selecting Either One or Both

Trusts help handle inheritance taxes, but they do not shield the beneficiaries' assets from legal claims like limited liability companies (LLCs) do. They do not qualify for the income tax advantages available to LLCs.

Depending on the circumstances, an LLC or a trust may be preferable. LLCs are superior to corporations in shielding corporate assets from the claims of creditors and legal action. Trusts can manage various assets and are superior to other methods for avoiding the probate process and lowering estate taxes. A limited liability company (LLC) and a trust may be optimal for managing an estate under certain circumstances.

Bottom Line

Trusts and limited liability companies (LLCs) are two legal entities that may be used to manage assets and shield them from taxes and responsibility. LLCs are a sort of corporate organization that protects owners from personal responsibility for business debts, eliminates double taxation, and provides a flexible framework for managing a company while at the same time allowing for more operational freedom.

Trusts are financial vehicles intended to store assets until the original owner passes away, at which point the assets are transferred to the beneficiaries. Trusts assist individuals in lowering estate taxes and avoiding the drawn-out process of probate. A thorough estate plan would often include the use of limited liability companies (LLCs) and trusts, both of which can be altered or disbanded at any moment by the owner or owners.