When to Choose a Revocable Trust vs an LLC
When it comes to estate planning in Huntsville, AL, there are several ways to protect your assets and ensure that whatever you leave behind ends up in the right hands.
Most people are familiar with written wills to guide their family, close relatives, and friends through their estate after they’ve passed on. However, trusts and limited liability companies are also some unique options.
Trusts and limited liabilities companies (LLCs) are also two legal methods to protect assets. However, as your Huntsville attorney will tell you, they have some significantly different features and uses, which means that neither is a one-size-fits-all option.
In this article, we’re going to tell you everything you need to know about irrevocable trusts and LLCs so you can figure out which is best suited for your asset protection needs.
Read on to learn more.
What’s the Difference Between an Irrevocable Trust and an LLC?
When it comes down to the most essential features of trusts and LLCs, both offer a certain level of asset protection.
Trusts are primarily used to avoid estate taxes and probate court while transferring assets to beneficiaries. However, they’re also much more common regarding estate planning, especially for those who have beneficiaries that are meant to receive more specific assets.
LLCs, on the other hand, are legal business entities. They work similarly to corporations and sole proprietorships. Their primary feature is shielding the owners’ personal assets from any legal liabilities for their business actions.
It should be noted that trusts and LLCs are used under varying circumstances — with trusts being a more popular option for passing on personal assets and cash.
Now, let’s dive into the details of each:
What Is an Irrevocable Trust?
An irrevocable trust is just one of the types of trusts you can create. The primary two types of trusts are revocable and irrevocable. As you can guess by the names, one can be amended while the other cannot.
An irrevocable trust is an account you can funnel specific assets into for a named beneficiary. Once the trust is created, its assets are no longer legally yours as they belong to your designated beneficiary. The trust also typically contains instructions on how the assets are distributed.
However, the beneficiary does not formally receive their assets until a specific date and time. For example, most trusts are set up for certain milestones, such as marriages, graduations, childbirth, etc. Or, they go into effect once the trustor (the writer of the trust) passes away.
Until that happens, the trust’s management is the trustee’s responsibility, the person chosen to oversee the account. The trustee, however, doesn’t typically take over unless (or until) the trustor passes away.
What Are the Benefits of Setting Up an Irrevocable Trust?
Several benefits come with setting up an irrevocable trust, which include the following:
Asset protection. By creating an irrevocable trust, you’re moving specific assets out of your estate, making it the legal property of your beneficiary. Once the trust is created, neither creditors nor lawsuits can legally claim them. The same goes for an unexpected health event. For example, should you become mentally incapacitated, the state nor Medicare can touch the assets in an irrevocable trust.
The reduction of estate taxes. Estate taxes materialize as a percentage of your estate’s total value. When you create a trust, the assets funneled into that trust are no longer part of your estate. This reduces your estate’s overall value, which reduces the estate taxes that your family would owe when you pass away.
It allows you to bypass probate court. When you pass away, your last will and testament become a legal matter of the state. In other words, it’s up to the probate court to evaluate and assess your will and the value of your estate, which can be a lengthy and costly process. However, the assets you put into a trust do not go through probate court. Their legal ownership has already been transferred and set to distribute at a specific date and time.
They are difficult to contest. Sometimes, a disgruntled family member comes out of the blue when someone is deceased and tries to get their “fair share” of cash or other assets. While wills can be contested, trusts are harder to do so (unless proven that the trust was written under duress or other extreme circumstances). This means that the assets within a trust can be untouchable.
They allow you to be more specific. For example, suppose you have multiple beneficiaries. In that case, you may want to ensure that they receive different assets or different amounts of cash when the time comes. So you can set up individual irrevocable trusts for each beneficiary to ensure they receive what you intend for them to receive, rather than listing these things out in a will and hoping all goes accordingly.
What is an LLC?
An LLC is a business entity that combines the flexibility of a corporation and a sole proprietorship. The flexibility comes in personal asset protection and more relaxed taxes, so they’re popular among small- to medium-sized business owners.
When you choose an LLC as your business structure, you have limited liability as a company, just as you would with a corporation. This means that your personal assets are shielded from creditors, lawsuits, and other liens against your business should your business incur debts, get sued, dissolve, and so on.
Additionally, LLCs are taxed via pass-through tax. This means that rather than being taxed at a corporate rate, your profits and losses pass through your business entity to your personal income tax — and you’re taxed that way. Of course, it also means you’re solely responsible for contributing to Social Security and Medicare on your own. Still, you’ll be saving a lot more during tax season than paying corporate tax rates.
LLCs can have one member (in which case it would be formed as a single-member LLC) or multiple members. There are also family LLCs in which cases shares can be distributed among children without giving them any voting power. The shares only become active at a specified time.
Professional LLCs for professional services require legal certifications, such as offices for medical practitioners, attorneys, etc.
Lastly, LLCs are advantageous when passing down business assets to heirs. In many states, including Alabama, a business formed as an LLC can be transferred over to your children or other heirs without going through the probate court process. In addition, the LLC owner can also legally place different types of assets in their LLC, which allows them to reduce estate taxes and the time spent in probate court.
What Are the Benefits of Setting Up an LLC?
There are several benefits of setting up an LLC, including:
Personal asset protection. As mentioned above, the LLC is separate from the owner. Therefore, personal assets such as your home, car, personal bank account, or anything else you own that’s not business-related are shielded from anyone trying to claim them while going after your business.
Pass-through taxation. All business profits and losses under an LLC pass directly through from the business to the owner’s personal tax returns. These profits are then taxed at the owner’s individual tax rates versus taxed at the corporate rate or with double-taxation.
Ease of use. LLCs are the simplest of all the business entities in both formation and operation. Unlike corporations, LLCs don’t require directors, officers, board members, shareholders, and other administrative burdens. Only the members within the LLC are the acting managers contributing to the physical business.
They’re flexible. LLCs provide business owners with a tremendous amount of flexibility, starting with the number of members they can have, which is virtually limitless. The managers can choose to participate in the daily operations or designate someone to act as an on-premise manager. They can also decide how they want to be taxed, like a sole proprietorship (pass-through taxation) or as a corporation.
They provide you with credibility. When you form an LLC, you gain credibility as you now have a legal entity. This demonstrates to your customer base that you are a legitimate business, which helps to build your reputation and garner trust.
You can transfer personal assets into an LLC. Then, whether you plan to pass on your business to heirs, you can still use your entity to protect personal assets. However, this works best for property, cash, vehicles, and machinery. Of course, you’ll need to be careful when doing this, as it puts your personal assets at risk should something happen to your business.
Key Considerations Before Deciding Which Is Best for You
Choosing between an LLC and a trust comes down to your individual situation. LLCs perform better when protecting assets from legal liabilities and creditors. On the other hand, trusts are usually better for protecting your assets from creditors while also allowing you to avoid private court and reducing your estate taxes. In some instances, setting up both a trust and an LLC is beneficial in managing your overall estate.
Here are some things you’ll need to consider when deciding:
Privacy. Trusts remain 100% private, while LLCs are a public record.
Asset protection. As stated above, trusts and LLCs offer different levels of protection for your assets. For example, trusts protect your assets from creditors, individuals, and other liens, while LLCs protect your assets from mainly business liabilities.
Control. When you put assets into an irrevocable trust, you’re giving up all ownership rights to those assets. However, when you place assets into an LLC, you maintain control over them.
The costs. Trusts are notably much more cost-effective to create and maintain. They typically require a filing fee, the hourly fee your Huntsville attorney charges, and whatever you choose to pay your trustee for maintaining the account. LLCs are ongoing entities requiring an initial filing fee, renewal fees, annual reporting fees, and taxes.
Probate. Irrevocable trusts will automatically bypass the probate court process as the assets they contain are owned by the beneficiary. For an LLC to skip probate court, specific provisions must be written into the operating agreement that outlines your business rules. For example, you could stipulate that your portion of the business income will go directly to your children after you pass.
Figuring out whether a trust or an LLC is suitable for your estate can be tricky. That’s where your Alabama business lawyer comes in handy. Contact us today to set up a consultation with Sarah S. Shepard or another experienced Huntsville corporate attorney. We can help you plan your estate and ensure that your most precious assets remain protected.