Pros and Cons of Trusts vs. LLCs

Quick Summary

Here are the key reasons to choose a trust or LLC:

• Use a trust for probate avoidance, estate planning, and privacy.
• Use an LLC for asset protection, liability management, and income-generating real estate.

Difference Between a Trust and an LLC

The main difference between a trust and an LLC is ownership and purpose.

A trust holds assets for beneficiaries and is managed by a trustee. An LLC is a legal business entity owned by members.

A trust primarily exists to manage and distribute assets to beneficiaries. A trust can hold various assets, including real estate, investments, and business interests, and is often used in estate planning.

An LLC exists to operate a business or protect owners from personal liability while managing income-generating activities.

Trusts vs. LLCs for Real Estate

An LLC is better for owning real estate when liability protection from tenants is the priority. A trust is better for estate planning, avoiding probate, and maintaining privacy. Use an LLC for active investments; use a trust to pass property to heirs efficiently and privately. If both are important to you, use both.

LLCs are ideal for real estate that generates liability, such as rental properties or short-term vacation rentals. An LLC separates the real estate from your personal assets.

If someone is injured on the property or sues the LLC, they can’t reach your home, savings, or wages.

An LLC also allows multiple owners to share interests in a property, and rental income can be distributed according to a customized operating agreement.

A trust, on the other hand, is often better for real estate you live in or plan to pass to heirs. Primary residences are not usually held in an LLC because doing so may forfeit homestead protection, create adverse tax consequences, or trigger due-on-sale clauses. Revocable living trusts avoid probate and simplify the transfer of a home to beneficiaries, making them a preferred tool for personal-use properties.

For asset protection, LLCs are more typical. For probate avoidance, a trust is better suited. Some of our clients use both: they own rental property in an LLC, and a trust holds the LLC interest.

Trusts vs. LLCs for Asset Protection

LLCs provide stronger creditor protection than most trusts.

A properly structured Florida LLC shields its assets from personal creditors. If someone sues you personally, they cannot take property held in a multi-member LLC. Instead, their only remedy is a charging order against distributions. They have no access to the property inside the LLC itself.

A revocable trust, by contrast, provides no asset protection. Because you retain full control of the assets, creditors can reach them just as if they were still in your name.

Irrevocable trusts can sometimes protect assets. Transferring assets to an irrevocable trust after a lawsuit is filed or while one is foreseeable can expose the transfer to fraudulent conveyance claims.

Offshore trusts are expensive, but do offer strong protection from civil creditors.

Trusts vs. LLCs for Estate Planning

Trusts are the preferred tool for estate planning. A revocable living trust allows you to control your assets during life and seamlessly transfer them upon death. The assets inside the trust avoid probate and can be managed privately and efficiently by your chosen successor trustee.

An LLC can be part of an estate plan, but it is not a substitute for a trust. LLCs are business entities that require annual maintenance, accounting, and documentation.

When an LLC is owned by a trust, you can benefit from both structures. The LLC holds the property for liability protection, and the trust manages succession and avoids probate.

Key Differences in Tax Treatment

Trusts and LLCs are taxed differently. A revocable trust is disregarded for income tax purposes: income is reported under the grantor’s personal tax return. An irrevocable trust can be taxed as a separate entity, often at higher rates, unless designed as a grantor trust.

A single-member LLC is a pass-through entity by default. Single-member LLCs are taxed like sole proprietorships.

Multi-member LLCs are taxed as partnerships unless an election is made. LLCs have the flexibility to elect S-corp or C-corp taxation.

Privacy Considerations

LLCs provide less privacy. In Florida, LLC managers are disclosed in public records. There are workarounds for some setups when using an LLC formed in another state as manager of the Florida LLC.

On the other hand, a trust offers greater privacy. Trust documents are not recorded publicly, and assets can be held in the name of the trustee.