What's an LLC?
LLC stands for limited liability company. LLCs provide owners with limited liability so that the owners cannot be held responsible for the liabilities of the company. The owners of an LLC are called members. From a tax perspective, an single-member LLC is treated like a sole proprietorship and a multi-member LLC is treated like a partnership. LLCs pay no taxes, and all profits are taxed to the member.
What's a Living Trust?
Trust documents are primarily used to shield assets from probate proceedings upon death. Probate proceedings can be costly, and the details are public record. A living trust is a trust that is able to be changed by the creator (called a grantor). Grantors of living trusts can revoke the trust and change beneficiaries and trustees. Most grantors place all of their assets into their living trust for the benefit of themselves and their family.
How Do They Work Together?
When grantors place all of their assets into a trust they can also place the membership interest in an LLC into the trust. Living trusts are like LLCs in that they are not taxed. When a business owner creates an LLC and puts his membership interest into a living trust no new taxes are created. The owner has now created limited liability for his business and has avoided the public scrutiny and costs of probate at his passing. An LLC and living trust combination are essential components of an asset-protection and estate plan.