As your company expands and you build up significant wealth and liquid capital, you'll need to increasingly protect yourself against creditors, lawsuit plaintiffs, and others who are after your hard-earned money. Trusts and LLCs might seem like similar instruments with which to distance yourself from liability, but they actually fulfill very different purposes.
Let's break down trusts vs. LLCs and explore their key differences so you know which of these two you should use, depending on your situation.
Trusts Explained
A trust isn’t a company; it’s a fiduciary arrangement involving at least three parties. These parties are:
- The grantor or settlor, who decides to set up the trust and who names the other parties in the arrangement
- The trustee, who manages or administers the trust and oversees the distribution of assets if applicable
- The beneficiary(s), which include anyone who benefits from the trust through distributions, asset control and access, etc.
The most common type of trust is an estate planning trust. As an example, a retired high-net-worth individual, like a successful entrepreneur, might set up an estate planning trust with a bundle of liquid capital for their grandchildren. However, the trust is written such that those grandchildren only receive their distributions when they complete college or fulfill some other condition.
Trusts can also be used for things beyond estate planning, however. High-net-worth individuals also frequently use trusts for asset protection. Asset protection trusts are highly durable and resilient, particularly when you work with Dominion to set them up in the right jurisdiction.
What is an LLC?
An LLC is a limited liability company. A limited liability company is a midsize business structure that offers greater membership options for partners compared to sole proprietorships and partnerships but fewer membership options compared to corporations.
LLCs are popular among small business owners, entrepreneurs, medical professionals, and other high-net-worth individuals because they supposedly limit personal liability in the event of a lawsuit. Say that you run a successful business, but a customer decides to sue you because they used your product incorrectly and injured themselves.
If you set up a limited liability company, you may not need to worry about that lawsuit affecting your personal wealth or estate. Instead, if the lawsuit is successful and your business is required to pay damages, those damages will come out of the pockets of your company, not your own pockets.
The truth isn’t as inspiring, unfortunately. In most cases, an LLC is hardly effective – a lawyer will find some instance of you “piercing the corporate veil” by using business assets for personal purposes. For example, picking up your kid in the company car or swiping the company credit card for a snack could eliminate the feeble protections that LLCs afford.
Trusts and LLCs Really Aren’t Similar
As you can see from the above breakdown, trusts and LLCs aren’t very similar when you look at their details. Sure, they both protect your assets and estate, but they do so in drastically different ways and they have different use cases. Furthermore, trusts are much better than LLCs are providing true, reliable asset defense.
Trusts protect your estate by taking ownership out of your hands and assigning different rules or conditions to the assets held within them. LLCs “protect” your wealth by separating your personal liability from that of your company, insulating your assets from some forms of legal attack.
Given these fundamental differences, you should not use trusts and LLCs for the same things. In fact, they should be used for very different needs.
If you are the trustee and the grantor, a court will easily be able to order you to use the assets in your trust to pay bills, court damages, or anything else a judge might decree.
However, with an LLC, the members’ assets are not usually accessible to the company’s creditors because they are separate entities. Also, while the LLC has an unlimited lifespan by default, the trust is typically dissolved when the grantor passes away or after a certain number of years.
Both structures offer varying degrees of privacy, but trusts generally offer more privacy than LLCs. In many jurisdictions, the details of a trust are not a matter of public record.
This is not the case for LLCs, where the operating agreement and other documents are often accessible to the public. However, some states offer anonymous LLC options to shield owner identities.
Big Differences Between Trusts and LLCs
To better illustrate why you shouldn’t use an LLC to shield yourself from liability and lawsuits, let’s drill deeper into the differences between these concepts.
Purpose
The biggest difference between a trust and an LLC is the underlying purpose of either instrument.
A trust is meant to remove ownership of assets from your personal hands and administer or distribute those assets according to certain conditionals or rules outlined in the trust documentation.
An LLC is a company structure that outlines the ownership and running of the company, which can include a small business/startup or a larger company, and which separates corporate liability from personal liability for each of the owners.
An LLC’s protection is only related to corporate liability. It does nothing to protect you from lawsuits against you as a person, for example. And, as outlined earlier, an LLC isn’t at all effective at safeguarding assets in the face of a real legal threat.
Instrument Setup
There are also some important differences between trusts and LLCs in terms of setup. With a trust, you must work with trust attorneys; they are the only individuals who are licensed to draft trust paperwork and authorize a new trust. Even if you know the ins and outs of trust law for whatever reason, you can’t set up a legal trust without an attorney.
That’s not true for an LLC! In most US states, you can set up an LLC in a matter of days or weeks by filling out the right paperwork and filing your company documents with your local Secretary of State office. Once your paperwork is approved, your LLC is official.
This is partially because a trust has to be drafted with very precise legal language and terminology. After all, it’s meant to serve specific estate-related purposes or protect you from legal and financial attacks. An LLC must also be written carefully, but its primary job isn’t to protect you from threats.
Level of Control and Ownership
LLCs and trusts also differ heavily in terms of the ownership and level of control you can expect. By definition, a trust removes ownership of key assets from your control unless you are both the grantor and the trustee of a trust instrument.
That can be ideal in certain situations, usually related to estate planning purposes. But note that if your overall goal is to protect your estate and assets, you'll never want to be the trustee for a trust under any circumstances! If you are the trustee and the grantor, a court will easily be able to order you to use the assets in your trust to pay bills, court damages, or anything else they have in mind.
LLCs are focused on who owns what in a given company. For example, if you form an LLC with three other business partners, you and those business partners will need to determine things like:
- Who owns what percentage of the company
- Who’s in charge of which decisions in the company
- And so on
The ownership structure is completely different between LLCs and trusts. Once more, this demonstrates that they really aren’t the same things or comparable in any meaningful way.
Do You Need a Trust or an LLC?
Imagine that you're a high-net-worth individual, and you want to protect your estate and your wealth for years to come. Is it enough to set up an LLC?
No, not at all. While an LLC might theoretically protect you from certain types of lawsuits, it does not protect you from personal lawsuits (those filed against you as an individual, not your company), nor does it protect you from creditors that might aggressively come after your estate or wealth.
In addition, it doesn’t protect your personal assets from corporate aggressors if you’ve ever mingled business and personal assets – and you almost certainly have!
Say that you get divorced, and your spouse wants half of your estate. That you set up an LLC won't matter one bit! Or, say that an ex-business partner wants to sue you specifically, not your company, because they say you stole their business idea.
It doesn't matter if it's a false accusation; if the court finds you guilty, you'll have to pay money out of your pocket.
LLC is not designed to protect against these things. Instead, an asset protection trust – drawn up and administered by Dominion, ideally – can protect you against these things and more.
With an offshore asset protection trust, ownership of the key assets you want to protect is no longer in your hands. Even better, a court or creditor can’t order you to take those assets and use them to pay bills for damages. You legally do not have the ability to do that!
Of course, that all depends on whether or not your trust is set up properly. If your trust has paper-thin protections and a lot of loopholes, you can't be surprised when a court punches through that security in a matter of weeks (or days).
Working with Dominion will stop that from happening. That’s because our financial and legal experts know all there is to setting up asset protection trusts. Furthermore, we know which jurisdictions are most worth your time and money, including which banks you should partner with to ensure the long-term, successful administration of your trust and the assets within.
Get in Touch with Dominion’s Experts Today
As you can see, an LLC isn’t the ideal solution for long-term wealth protection. An LLC won’t universally protect you from all kinds of legal and financial hazards. For that, you need a properly set up asset protection trust from Dominion.
Our experts can immediately get started creating a durable offshore asset protection trust to protect your assets from lawsuits, creditors, ex-business partners, disgruntled patients, and anyone else who may be after your money. With our help, you can even put your LLC into a trust for further protection. Contact us today to get started.
