Assigning LLC Into A Trust
Who should own my LLC? Can a trust be the sole member of my company? There are various ways to protect and manage your individual and business assets, including the creative use of legal entities known as trusts in unison with common business entities such as limited liability companies, or LLCs.
Economists estimate that the “Great Wealth Transfer” is already underway and includes a significant amount of closely held business interests.
One such strategy is assigning memberships in an LLC into a trust; the trust would be the sole “member” or owner of the LLC. This approach not only offers asset protection, but can also facilitate smoother transitions of ownership and management in the event of incapacity or death.
How do you assign an LLC membership interest?
Assigning an LLC membership interests into a trust refers to the legal process by which an LLC member transfers their ownership rights in the LLC to a trust. This is done for a variety of reasons, including planning for future asset protections, estate planning, and tax efficiency. The trust becomes the owner of the LLC membership interest and the Trustee of the trust has the ability to manage the LLC according to the terms of the trust.
Why should you consider assigning your LLC membership interest into a trust?
There are multiple legitimate and beneficial reasons to have your trust control your LLC – or all of your multiple LLCs. Here are just a few of our client’s goals that we can achieve through this structure:
- Asset Protection. In transferring LLC membership interests into a trust, trustees can shield assets from creditors by removing their own individual ownership interests in the business. This protection is strongest when using an irrevocable trust.
- Estate Planning. Transferring LLC interests can also simplify the distribution of assets upon the death of the trustee(s). A key benefit of the use of a trust is the avoidance of probate, which can be a lengthy and costly process.
- Tax Benefits. There may be favorable tax implications depending on the structure of the trust. For example, certain trust structures allow income generated by the LLC to be taxed at the trust level rather than at the individual level, which can potentially reduce overall tax liability.
- Management & Control. Trusts can provide clear directives for the management of your LLC, which will ensure your wishes are followed even after you are no longer able to manage them yourself. This type of “dead hand” control is typically not possible within the LLC itself, but is a central feature of a trust arrangement.
Steps to take before assigning your LLC membership interest:
- Consult with Trusted Professionals. It is crucial to engage a skilled attorney and thoughtful tax advisor throughout the transfer process. They provide guidance specifically tailored to your circumstances, ensuring that your estate planning and financial goals align with the transfer and documents used.
- Evaluate the LLC Operating Agreement and Applicable Law. Understanding the rules and procedures regarding the transfer of membership as outlined in your LLC’s operating agreement and your jurisdiction’s LLC rules is paramount.
- Choose the Right Type of Trust. Based on your individual objectives and goals, determine whether a revocable or irrevocable trust best suits your needs; within these two categories, there are many other structures of trusts. Each approach has its own advantages and disadvantages that you should consider. Consult with an estate planning attorney throughout the trust selection process.
- Communicate with Other LLC Members, If Necessary. Transparency is your friend throughout this process. Discuss your intentions with other members to ensure that there are no misunderstandings or potential conflicts down the road.
- Draft Comprehensive Trust and LLC Documents. Ensure that the trust clearly outlines how the LLC membership interests are managed, who the beneficiaries are, and what happens in various scenarios, such as death or incapacity. Additionally, the LLC operating agreement, sometimes called a management agreement or partnership agreement, should be structured to fit in unison with the trust.
Frequently asked questions about assigning LLC membership interests into trusts:
- Can I transfer my LLC membership interest into any type of trust? Generally, LLC membership interests can transfer into various types of trusts, like revocable trusts, irrevocable trusts, or testamentary trusts. However, each state has its own rules on ownership of LLCs and there could be restrictions in statutes, court cases, or other sources of law. The choice of trust will depend on your specific goals, whether they be asset protection, estate planning, or tax considerations.
- Will I lose control of my LLC after transferring it into a trust? Not necessarily. It will largely depend on the type of trust created and the governing rules you put in place. If you create a revocable living trust, you can maintain control over the LLC membership interests while you are alive and competent. Alternatively, if you opt for an irrevocable trust, you could relinquish some control over the assets in exchange for even stronger asset protection.
- What are the tax implications of transferring LLC memberships into a trust? The tax implications vary based on the type of trust and your overall financial situation, not to mention your tax elections. Generally, if your interests transfer into a revocable trust, no immediate tax consequences will trigger, because the IRS treats it as a disregarded entity. If the interests transfer into an irrevocable trust, there might be gift or transfer tax implications, and the trust itself could have a responsibility to pay taxes on any income generated by the LLC. You should consult an experienced tax professional as part of your trust and LLC team.
- What happens to my LLC membership interests when I die? If you own an LLC in your personal name (you are personally listed as the owner/member of the LLC), your membership interest in the LLC will be subject to probate. However, once you assign your membership interests to a trust, the terms of the trust will dictate how the LLC will be managed after your passing – typically without having to go through probate. This can help ensure a smooth transition of ownership and management without proceeding through the court processes, which will allow your beneficiaries to receive their inheritance in a more timely and effective manner and continue to seamlessly manage your businesses.
What if I already have a trust?
Excellent! Your existing trust may be the perfect fit for your LLC and a simple assignment of LLC membership interest may be all that is needed. For others, more comprehensive revisions may be necessary or advisable to properly protect you and your assets.
Looking For the Best Trust Attorneys?
Assigning LLC membership interests into a trust can be a powerful strategy. It is essential to approach the process with considerate thought and professional guidance. Our clients are looking for the best trust attorneys in Oklahoma who understand the intricacies of the trust and LLC transfer process. If you are contemplating transferring your LLC membership interest into an LLC or have any other questions about planning for your business’ future, contact the experienced attorneys at Avenue Legal Group.
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