Do I need an LLC or Trust? This common question is asked frequently by clients owning investment property. They are often times confused with one another.

The answer is simple: You need both. Each type of entity serves a different purpose in life.

The two different entities have different purposes and jobs to fulfill so really, the question you should be asking yourself is “what is my goal.”

Let’s go through and take a closer look at each entity to understand what they do and how they function in the real world. That is the best way to answer the question of “Do I need a LLC or Trust?”

What is an LLC?

An LLC is an acronym that stands for a limited liability company, which is a legal entity. An LLC has a separate tax identification number from the IRS and files separate income taxes each year. An LLC is a type of legal entity that is created to engage in a business venture of some type. An LLC can have multiple members or a singular member. If you want to read more about LLCs, click on this link.

The main attraction of an LLC is that members are limited in their personally liable for judgments, debts, obligations or liabilities of the LLC.  This liability protection is one of the reasons why people decide to set up LLCs to run a business.

For example, John sets up an LLC to operate his dog grooming business. If John causes harm to a client’s dog that results in a lawsuit, John is limited to his membership interest in the liability. So, John has segregated his personal assets from his business liability.

What is a Trust?

A revocable Trust is also a type of legal entity. However, a revocable trust uses the social security number of the person that created it. It does not file separate income taxes.

The main purpose of the trust is to transition wealth from the owner to the beneficiaries in the most cost effective, private method possible while avoiding probate.

A revocable trust does not provide personally liable protection to the owner from judgments, debts, obligations.


Example 1:

As an example, we will use John. John owns a property which he rents out to a tenant. He is also divorced and has 2 children. He wants to protect his family from liabilities, so he creates an LLC only.

During John’s life he will have liability protection through the LLC. However, at John’s death, the LLC member interest owned by John will go through a court process called probate.

Example 2:

As an example, we will use John. John owns a property which he rents out to a tenant. He is also divorced and has 2 minor children. He wants to protect his family from court probate intervention at his death, so he sets up a revocable trust.

During John’s life, he will NOT have liability protection, however, at his death, the property will transfer to his children through his trust without a court intervention or probate process.

Example 3:

If John’s goal is to avoid probate and provide a method for transferring it at his death to a loved one, then a trust will accomplish this goal. If John’s goal is to protect it from lawsuits, then he may want to explore creating an LLC.

For example, John creates an LLC and a revocable trust to hold his investment property. John has effectively protected his assets and provided for a method of transfer at his death and incapacity planning.

During John’s life, he will have liability protection.

At John’s death, his estate will avoid probate and the asset will be transferred smoothly to his children.

This third variation of planning must be done correctly to get the best of both worlds. John will have his cake and eat it too!

If you would like to speak to an attorney, we offer free consultations. Give our office a call, 818-649-9910