LEGAL ADVICE—Living Trust or LLC?

By on September 4, 2014
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It’s often said that a lawsuit is filed in this country about every six seconds! Even if you are sued and are actually right and the other party is wrong, it will still cost a lot of money in legal defense fees, not to speak of countless days of worry and stress. Most people get so tired of the entire process; they just want to settle – right or wrong!

A Living Trust, because it is “revocable”, affords you no protection against lawsuits, creditors or bankruptcy. Since you can revoke, or remove, your assets from a Living Trust, so can a court or third-party predators and creditors. You require planning beyond the Living Trust if you want the peace of mind of asset protection. There are many types of asset protection planning that you can pursue. However, you should understand that any such planning must be done in advance of any liabilities and must be substantiated and intended for purposes other than merely avoiding creditors.

A perfect example, and often one of the most overlooked, is the use of a Limited Liability Company (“LLC”), which is an excellent vehicle for holding and managing family investments in real estate, stocks and bonds and even in some other active businesses.

Let me give you a quick snapshot of how the LLC works. You transfer income property, a business or other investment assets to the LLC, which is a separate legal entity. You then receive two types of ownership interests, commonly referred to as control interests and non-control interests.

You will retain the control interests (which usually represents only 1% to 5% of the total equity ownership). You, as LLC manager, may retain lifetime management and control over the assets, be paid a management fee or salary for running the LLC and decide the amount and timing of distributions of net income (after expenses and your management fee). The non-control or limited interests which you initially receive are excellent items to gift, in part or in whole, over time, to your loved ones. The limited owners have no right to current management or control, and only receive distributions when you, the manager, decide it’s appropriate.

One of the paramount benefits of the LLC is the asset protection feature. All owners are not liable for LLC debts, so you and your loved ones’ personal assets are insulated from any liability originating inside the LLC. If multiple properties or assets are involved, you may want to use a separate company to isolate liability only to a particular individual property. Similarly, liabilities of the owners that occur outside the LLC (divorce, personal creditors, etc.) typically do not flow inside and affect LLC assets.

Another significant benefit of the LLC is establishing proper succession management of family investments. Typically, only one or two family members may be qualified to properly lead and manage the business, but at the same time you do want other beneficiaries to receive a protected economic interest. You can establish who will be the owner in charge of decisions relating to investing, buying, selling, refinancing, etc., while your other loved ones can be protected through the ownership of limited interests, which will entitle them to certain distributions of profits whenever the appointed manager deems distributions to be appropriate.

And finally, an LLC allows you to keep your assets in the family. If several family members inherit a piece of property directly, any one of them (even with a small interest) might force a partition and unintended sale of the property. With an LLC, if one family member needs money or wants to sever ties with the company, a pre-established method to selling his or her interest to other family members is established. Rather than forcing LLC assets to be sold or selling his or her interest to some third party who could then be involved in the family’s affairs, this process is available for everyone’s protection.

Many people think liability insurance is all they need, but if you own rental property, a tenant could sue you over toxic mold issues, a criminal act on the property, or a wrongful eviction. All of these are usually excluded from coverage by most property liability policies.

Explore your options, know all the benefits that a properly formed LLC can offer and discuss them with a qualified estate attorney. Remember, it’s always best to plan ahead and be safe than sorry!