The limited liability company (LLC) is a popular business structure that offers liability protection and avoidance of double taxation. Trusts are popular asset transfer vehicles that allow you to avoid probate and keep assets out of the hands of creditors. By placing LLC membership interests in a trust, business owners can combine the two types of legal entities and enjoy the best of both worlds.

Transferring an LLC to a trust requires a bit of paperwork, and in multimember LLCs, may also require the consent of other members. But a well-planned transfer can help reduce risks, keep your business affairs out of government hands, and fit into your broader estate planning goals.

Benefits of Placing LLC Interests in a Trust

Whether you own a single-member LLC or are a co-owner of a multimember LLC, your LLC ownership interests are considered personal property. Indeed, your business interests are probably one of your most valuable assets. As such, you will want to ensure that you are safeguarding your LLC now and have a plan for what will happen to the business when you are not around or can no longer manage your affairs.

The following are some of the key benefits of placing LLC interests in a trust:

• Probate avoidance. Probate is the legal process of settling an estate when somebody passes away. Overseen by the court (i.e., the government), probate ensures that your debts are paid off and your assets—including business interests—are allocated to the beneficiaries you specify in your will. Assets that are placed in a trust generally avoid probate, which can take weeks or months to complete. During the probate process, there may be nobody managing your business interests, which can result in operational problems.
• Privacy. Not only can probate be lengthy and cause your business to languish—a probated estate is a matter of public record. That means anyone who knows where to look (e.g., creditors, disinherited heirs, and scammers) can learn details about your estate. Trusts, on the other hand, bypass probate, and the assets they contain pass to your beneficiaries more quickly, efficiently, and privately.
• Incapacity planning. You may have a plan for what will happen to your business when you die, such as having a trusted family member take over, or an agreement that allows other LLC members to buy out your ownership stake upon your death. But what happens if an accident or illness renders you incapable of fulfilling your business duties? If your LLC interests are held in a trust, the trust can be structured so that your incapacity immediately triggers the authorization of another person (i.e., the trustee) to take over on your behalf.
• Asset protection. Depending on the type of trust in which you place your LLC membership interests, the trust can make it more difficult for creditors to go after the trust assets.

Types of Trusts You Can Use for an LLC

The three main types of trusts that are commonly used with LLC asset transfers are revocable trusts, irrevocable trusts, and asset protection trusts. Each type has pros and cons for holding LLC assets.

• Revocable trusts (also known as living trusts) are trusts that can be changed or canceled during the lifetime of the grantor (the person who establishes the trust). The grantor can name themselves as the trust beneficiary (the person who receives a benefit from the trust) as well as the trust's trustee (the person who has the right to manage trust assets, including any business interests). Using a revocable trust allows you to avoid probate, control the LLC, and receive income from the trust as the beneficiary during your lifetime. The trust can be set up in such a way that, upon your death or incapacity, a new trustee and a new beneficiary (or beneficiaries) are named. However, as long as you are still alive and maintain control over the trust, the trust assets could be subject to creditors' claims.
• Irrevocable trusts, unlike revocable trusts, cannot be changed or canceled after they are created. The advantage of an irrevocable trust is that creditors cannot go after the assets of the trust's grantor. However, if an LLC is held in an irrevocable trust, the grantor loses access and control over the LLC, as somebody other than the grantor will presumably be named as trustee and beneficiary. This also means that the grantor loses any income from an LLC that is placed in a trust.

Other Considerations for Placing Your LLC in a Trust

Placing your LLC interests in a trust means that the trust—not you as the business owner—is legally an LLC member and a party to the LLC's operating agreement. Although the law permits a trust to own an LLC, the LLC operating agreement may not. Therefore, you will first need to check whether the operating agreement allows for this arrangement.