Trust vs. LLC: How Do They Compare in Terms of Asset Protection?

One of the main points to remember when comparing what a trust and an LLC offer in terms of wealth protection is that they both offer significant advantages when it comes to tax and wealth planning.

Simply comparing the cost of a Cook Island trust, for instance, to a comparable LLC product would not give you a broad enough view to accurately compare which one is best for your needs and circumstances.

Both options have their uses as legal vehicles that provide you with the tools and resources to be able to reduce your tax burden and manage your assets in the most efficient way possible.

Deciding whether a trust or an LLC is the best option is not simply down to cost. You also have a scenario where you can actually place an LLC in a trust. As there are so many options and considerations, all of which could have financial implications, it is imperative that you get professional guidance when sorting out your financial affairs in this way.

In the meantime, here are some pointers to help you distinguish between the two.

A brief explanation of what a trust is

A simplistic view of a trust that many tend to offer by way of explanation is that it is an instrument that delivers the opportunity to transfer wealth in a tax-efficient way.

The first point to make is that a trust should not be viewed as something only the super-wealthy should be interested in. Trusts are used regularly as a way of avoiding probate and planning for tax liabilities in the best way possible.

Trusts can be used to hold more than just cash. You can hold real estate, securities, and even life insurance policies within a trust. That makes it a useful tool that can be used for sound financial planning, regardless of the extent of your wealth.

When you create a trust you need to have a set of priorities and wishes in mind that you want fulfilled through the trust. Once your assets are transferred into the trust they become the property of the trust and its beneficiaries. That is why it is considered such a good tax planning tool as it helps minimize or avoid estate taxes.

LLCs explained

When you are discussing your financial affairs with a wealth management professional the alternative option to a trust that will enter the conversation is an LLC.

In basic terms, an LLC (Limited Liability Company) is a business structure that is designed to offer protection from personal responsibility in relation to debts and liabilities.

One of the main reasons why someone might choose to create an LLC for tax planning purposes is that it creates a scenario where you could avoid the double taxation that impacts corporations. LLCs are not taxed at their corporate level. Instead, the LLC owner is required to pay taxes on business profits via their personal income tax return.

You should be aware that LLCs offer differing levels of asset protection according to which state it is created in. Some states offer more robust asset protection than others when it comes to LLCs.

You will be able to pass on a family business through an LLC vehicle. An LLC can be considered as flexible as a trust in terms of what assets you can protect using this instrument. Almost any type of asset could be placed within the protection of an LLC.

Which option offers better asset protection?

It is not that easy to provide a definitive answer as to whether it is better to choose a trust or an LLC for the best level of asset protection.

The bottom line on that score is that both an LLC and a trust offer valuable and useful options when it comes to being able to legally shield assets from the burden of taxation. Both also offer a high degree of probate protection as well.

If you were looking for one specific distinction when comparing an LLC to a trust with regard to asset protection, it is worth noting that an LLC offers personal liability protection.

That additional shield of protection comes at a price. You can typically expect to pay higher ongoing costs to manage assets in an LLC compared to a trust.

In fairness, the higher cost might be worth considering for some individuals as you tend to enjoy a greater level of ability to manage assets in an LLC.

Privacy considerations

A notable drawback to using an LLC compared to a trust is the subject of privacy.

The details of a trust is never a matter of public record. You enjoy total privacy and information relating to your assets and beneficiaries will not be for public consumption. The details of an LLC will be public information. However, you do have options to hide the identity of members in some states.

Protecting assets from creditors

When a trust or LLC is set up correctly it has the potential ability to ringfence assets and protect them from creditors. You do need professional guidance when choosing the right type of trust in order to achieve a maximum level of creditor protection.

When it comes to asset protection, there is no definitive answer that points to either an LLC or a trust being the better option.

There are trade-off scenarios with either option, such as the lack of privacy afforded by an LLC compared to a trust.

One scenario that is often suggested would be to consider covering all bases and using a combination of the two. If you place an LLC within a trust you could enjoy an additional layer of asset protection and get the best of both worlds.

How the trust or LLC is structured is often critical. That is why you need to talk to a wealth management professional who can create a structure that aligns with your goals in the most tax-efficient and cost-friendly way possible.

You have worked hard to create your wealth. Make sure you do what you can to pass on as much of your wealth as possible by making the most of what a trust and LLC have to offer.