Trusts and LLCs
Which are the best vehicles for estate planning: living trusts or limited liability corporations? Phelps LaClair has prepared thousands of estate plans for our clients in the Phoenix Valley. We can say with certainty that there is no “one size fits all” estate plan. Some plans will be based around a living trust; others will feature a limited liability corporation. In some cases, the estate plan will incorporate both. What are the advantages of each, and how do they work together?
Limited Liability Corporation Advantages
A limited liability corporation as a business entity provides personal liability protection from creditors to its members. The members, who are the owners of the limited liability corporation, can be individuals, corporations, partnerships or trusts. They can even be other limited liability corporations. Under most circumstances, the owners of a limited liability corporation cannot be held responsible for the liabilities of the company. If the company has debts or faces bankruptcy, the personal assets of the members cannot be seized to settle the debt. This includes houses, cars and bank accounts. However, creditors can go after the business assets of the limited liability corporation.
Limited liability corporations also have tax advantages. Limited liability corporation members don’t have to file a corporate tax return. They simply report their share of profit or loss from the limited liability corporation on their individual IRS 1040. Any items used in the business such as cell phones, internet, electricity, etc., can be owned by the limited liability corporation. You will not be paying taxes on these business expenses, thus saving as much as 25% of the cost of using them.
When it comes to estate planning, there are also tax advantages to forming a limited liability corporation. The owner of a limited liability corporation can gift shares in the company to beneficiaries while maintaining control over the gifted shares. The beneficiary does not need to pay income tax on the gift. The gift of shares reduces the value of the estate held by the owner, thereby reducing beneficiary estate taxes when the owner dies.
Living Trust Advantages
There are several types of living trusts. The advantage of having an irrevocable trust is similar to having a limited liability corporation. The property and assets that are titled in the trust are protected from liens and lawsuits against the grantor of the trust because these assets no longer belong to the individual, but to the trust. The assets also will not be subject to estate tax after the death of the grantor, nor will the grantor be liable for taxes on profit earned by the irrevocable trust. The trust will pay its own taxes. When the irrevocable trust includes a life insurance policy, the post-death benefits paid to beneficiaries will not be subject to either federal estate or income taxes.
By transferring property into an irrevocable trust, you can reduce the value of your estate. This may qualify you for certain government benefits such as Medicaid, Medicare or Social Security. This strategy may also be beneficial for certain special needs cases.
With a revocable living trust, things are a little different. Property placed into a revocable trust is vulnerable to creditors and legal judgements. Because you can change the terms of the trust at any time, you are still considered the owner of the assets, so your property loses the liability protection afforded to limited liability corporations and irrevocable trusts. The estate will be subject to estate taxes and you will be personally responsible for paying taxes on income earned by the assets in trust. A revocable trust allows the beneficiaries to avoid probate.
Limited Liability Corporations and Trusts Together
It is possible for a revocable trust to own a limited liability corporation, but the liability protection disappears. However, real estate that is titled in the name of a limited liability corporation allows a stipulation that enables beneficiaries to live on the property indefinitely. By holding your limited liability corporation membership interest in trust, your trustee can provide for your beneficiaries long after you die. The trust shelter also avoids probate for the limited liability corporation. In certain situations, it is important not to commingle assets between a revocable trust and limited liability corporation, otherwise, liability protection may be lost. When a grantor keeps assets separate between these vehicles for estate planning, liability protection is maintained for the limited liability corporation.
Give us a Call
Limited liability corporations are valuable vehicles for estate planning, as are living trusts. Sometimes they work well together; other times it is important to keep them separate. They all have advantages that can be very useful with the proper structure within an estate plan. Phelps LaClair is always ready to help with our expertise. As a second generation law firm serving Chandler, Mesa, Phoenix and Scottsdale, we are well equipped to find the best solution for your estate planning needs and goals. Call us for a free no-obligation consultation. It’s time to plan for the future!