Why should I use a trust and not an LLC?

This is an interesting question because it assumes that a trust and an LLC are mutually exclusive options or have the same purpose, whereas the more clarifying question may be “Why should I have a trust and an LLC?”

Because the reality is that LLCs and trusts are different layers of protection that can work together to give you a more comprehensive solution. 

However, I completely understand where the question is coming from because there’s often confusion around what a trust does and what other legal alternatives exist. This is especially true when it comes to asset protection - which is a trigger for a lot of clients, and probably the reason so many attorneys (myself included) discuss trusts as a potential solution.

So let me start by saying, if you are concerned about asset protection in particular then a trust generally should not be viewed as your first option - oftentimes it’s more of a last resort. You first need to be clear on what risk you are trying to protect against. Put differently, what is your specific concern?

Are you afraid someone is going to sue you for an activity directly related to an asset? For example, a tenant slipping and falling at your rental property? 

Or is it more of a malpractice risk related to your line of work?

Or maybe you want to protect yourself from a business deal going wrong.

Or maybe you just want a blanket or general risk protection against various civil lawsuits.

In each of those examples, I would argue that speaking with an experienced insurance agent is your first, most direct, and simple solution to reducing your risk and protecting your assets. To be clear, I’m not an insurance professional, but just speaking as a layperson - do you have adequate business insurance? Malpractice insurance? A good umbrella policy? When’s the last time you checked the coverage for your auto insurance to cover not only the vehicle, but also personal injury limits, and the underinsured risk of the other driver? 

If your insurance layer of your asset protection strategy looks good, you can also look at asset location (who owns the asset and in what form) - for example, is your business or rental property owned by you individually, or are there co-owners, or is it owned by a business entity like and LLC or Corporation?

If done properly, an LLC (limited liability company) should generally be able to limit the liability to only the business assets and shield your personal assets. And this, in my opinion, is a non-negotiable in the context of multiple owners for a business or rental property because you do not want to lose your personal assets because of something your partner did wrong. For example, if you own a rental property with a family member - consider putting it in a LLC immediately.

And then there’s trusts, which (in my opinion) should only be discussed after you’ve mentioned proper insurance coverage and potential business entities.

Trusts can be used in two ways for asset protection purposes. For example, in Massachusetts we are a big fan of realty trusts (also referred to nominee trusts) because they allow us to place a property in the title of the trust and name someone as trustee that isn’t the actual owner of the property. In other words, if you want privacy and understand how keeping things private can deter lawsuits, then a simple realty trust could be seen as an additional layer of protection. 

Taking it one step further, there are also irrevocable trusts, but this is really where there is a major disconnect is in terms of what sounds good in theory and what actually works in practice. If there is only one thing you remember from this article, keep this in mind: if you want to use an irrevocable trust to protect your assets, you’ll generally need to be willing to give up control and/or certain benefits over the asset you are trying to protect.

The most common example of an irrevocable trust that many clients ask me about is a Medicaid asset protection trust or a trust designed to protect against the possibility of going into a nursing home and losing your house. This type of trust in particular has a very strict rule that we refer to as the “any circumstances test” - meaning if there is any circumstance in which the principal or equity in the asset (i.e., your home) could go back to you, then the trust will not work. In other words, if you want to protect your assets from the nursing home then you can’t retain the ability to receive that asset back to you during your lifetime.

This concept of giving up control or certain benefits in order to create another layer of asset protection is something that most clients are not fully aware of at first when it comes to using trusts as an asset protection tool (I blame the internet for misleading people, but at least it led you to this article to clarify things) - so please keep this in mind when speaking with your attorney.

If you’d like to learn more about the interplay between LLC and trusts in your own estate planning, then please feel free to click the link below to schedule your call with me today.

I’m always happy to help!