If you have real estate or other valuable property that you'd like to pass on to your children or other heirs when you die, you've probably been exploring a number of estate planning options and strategies to find the most efficient, cost-effective method of doing so.
One strategy that can combine limited liability with probate benefits is to use an LLC, or limited liability company, in conjunction with a revocable living trust.
Can a Trust Be a Member of an LLC?
With this strategy, you create an LLC, which will hold title to the property you wish to pass on to your beneficiaries on your death. The interest in this LLC is then held by a revocable trust. Note that you are not creating a trust LLC or an LLC trust—the strategy involves a revocable trust that holds sole ownership interest in an LLC, which in turn holds title to the property.
You may be wondering if it's possible for a trust to be a member of an LLC, or even the sole member of a single-member LLC. The answer is yes.
First, trust law permits trustees—who are acting on behalf of trusts, including revocable trusts—to own any asset, or almost any asset, that an individual can own, and this includes an interest in an LLC, which qualifies as an asset.
Second, LLCs are creatures of state law, and most states permit several different types of entities, including trusts, to hold an ownership interest in an LLC; this also applies with a single-member LLC, where a trust can be the sole member.
What Is a Revocable Trust?
A revocable trust is a living trust that can be terminated at any time by the grantor, that is, the person who created the trust. The grantor may withdraw assets from the trust, and the assets can be managed for the benefit of the grantor.
On the death of the grantor, the assets of the trust may be distributed to the beneficiaries, or the trust might be continued, with the trust assets managed and payments continued to the trust's beneficiaries; the terms of the trust document will dictate the events occurring after the grantor's death.
Advantages of Revocable Trust as Sole Member of an LLC
There are a number of advantages to having a revocable trust be a sole LLC member of an LLC holding the property you wish to pass on at your death.
First, on its own, an LLC affords its owners limited liability.
Let's say, for example, your LLC has title to rental property. A rental property can attract lawsuits for injuries incurred while on the property; with the rental property placed within the LLC, however, liability is limited and only the other LLC assets are exposed. Placing the property within the LLC therefore offers a layer of protection to other assets owned by the revocable trust.
Second, on its own, a revocable trust permits easier distribution of property on the grantor's death—without having to go through the costs associated with probate.
Thus, combining an LLC with a revocable trust provides you with the separate advantages of the limited liability afforded by an LLC, plus the estate planning benefits of avoiding probate offered by the use of a revocable trust. Having a revocable trust be a sole member of an LLC in this way gives you access to a benefit combination that neither entity provides alone.
Disadvantages of Revocable Trust as Sole Member of an LLC
There may also be disadvantages to using this strategy. Cost is one such issue.
It is likely that you will initially form an LLC in order to implement this strategy. LLC formation, while not complicated, does give rise to a number of costs, both initially and the costs associated with annual maintenance, such as renewal fees. There also are a number of costs associated with setting up and maintaining a revocable trust.
If your revocable trust owns properties subject to significant risk, such as the rental property described in the example above—and you want to protect the rest of your revocable trust assets from liability risk while maintaining the probate advantages of a trust for that particular property—combining a revocable trust with an LLC is one option to explore.
Want to talk to an attorney who can give you advice about making a revocable trust a sole member of an LLC? Sign up for our business legal plan to receive unlimited 30-minute attorney phone consultations on new legal matters, tax advice from a tax professional, legal document review, and many other benefits—all for one low price.