Do Trusts or LLCs Provide You with Better Asset Protection?

by | Jan 26, 2024

Do Trusts or LLCs Provide Better Asset Protection?

You may think of a trust as the only way to protect your assets from creditors after you’re gone. Today, we’ll be talking about another option for asset protection: the use of an LLC. Each has its advantages and disadvantages.

First, what exactly is a trust? And how does it work to protect your assets?

Asset Protection Through Trusts

A trust is a separate legal entity that owns and manages property – like real estate, cash, stocks, bonds, etc. – for the benefit of your desired beneficiaries. A trustee is appointed to manage the trust pursuant to the document’s precise instructions in the trust agreement. Trustees are fiduciaries who are held to a higher standard of care, so they must adhere to the trust’s instructions at the risk of being held personally liable for damages relating therefrom. 

There are many benefits and also many disadvantages, so it’s important to understand them to determine if a trust is the right fit for your needs. To start, trusts can either be revocable or irrevocable. Watch the video below to understand more about how each of these affects asset protection. 

Read Transcript

Hi. Thanks for tuning in for another dose of bite-sized bits of knowledge, where we give you meaningful information in a short amount of time. Today we’re talking about trusts and how they or may not provide asset protection. I have touched on it in other videos, but it is too important to not focus on exclusively in one dedicated video. So let’s talk about it.

Do trust provide asset protection? It’s the million dollar question. The answer is maybe. And I’m not just trying to be cute. The answer is maybe.

Revocable trust that you can revoke, amend, or terminate in Florida provide no asset protection benefits while you’re alive. That’s not to say that they can’t own assets that will provide benefit, like an annuity or other assets, but they themselves, by virtue of them being trust, provide no asset protection. Zero. Donut. None. It’s not even subject to dispute. I won’t talk about anymore where they do provide asset protection. 

Where revocable trusts provide asset protection is after your state is settled – your creditors are resolved one way or another by settling them, getting them stricken, or whatever they’re settled at that time. Then whoever inherits your assets in trust, provided they remain in trust, will have an asset protection benefit.

So it’s your beneficiaries who have the asset protection benefit of a rev trust, not you, not you. And again, it’s only after your estate is settled that they get that benefit. And it’s only if the assets stay in trust. If for some reason, your trust says, “Hey, everybody, one third, one third, one third and terminate,” there’s no more asset protection. It’s not in trust anymore.

So that’s a common approach that I don’t personally philosophically agree with. And I will fight with you on that. And I’ll make you sign something. Right. And I told you because I want to make sure you know that I think that so rev trusts. I think you’re good now. 

Irrevocable trusts. Irrevocable trust, like the name suggests, are more difficult to change. They can be changed. They can be structured flexibly. And we do that, of course. But most of the time when we are presented with a problem with irrevocable trust, it wasn’t something we drafted. So our hands are kind of tied.

Irrevocable trusts can provide asset protection. Yes, they can. But there’s rules. You can’t just make what’s called a self settled asset protection trust. You can’t do it. You’re not allowed to do it in Florida. 

Other states, however, do allow that. Other states allow you to make a trust over here, put all your stuff in it, and then somehow it’s protected from your creditors. It’s remarkable. Florida is not one of those States. You can always go to one of those states. You can always do one of those trusts. But there are risks. I did a whole presentation on those risks, and I don’t want to get into that right now. But it’s an option.

There’s better options. We do better options that have less risk. Irrevocable trust can provide asset protection. It’s not the go-to vehicle for protecting your assets. There are better ways. We do those ways. Talk to us about it. Don’t knee-jerk into things that you find online. Talk to the people who do it every day. We’re happy to help you.

I hope this clarifies this issue for you. Thank you for stopping by and stay tuned for more. Bye.

Asset Protection Through an LLC

Now that you understand the limits of trusts, perhaps you are wondering about the LLC option I mentioned earlier. Let’s go into the basics of an LLC to start.

In Florida, a limited partnership (LLP) or a multi-member limited liability company (LLC) will protect your assets. However, it’s important to understand how they protect your assets.

Primarily, these entities insulate and isolate your assets from each other and yourself, as the owner.  The result is encapsulating the liability exposure to the entity itself rather than allowing it to spread to you and your other assets, especially unrelated assets. It’s another tool in your asset protection toolbox.

There are several different types of business entities, with each having its own unique advantages and disadvantages. Business entities are designed in large part to limit the exposure to liability that owners, investors, and/or shareholders may face. They all do a good job of protecting the owners from creditors of the business, or “inside creditors”. However, they are very different with respect to how they protect owners’ interests in the entities from their personal creditors, or “outside creditors.”

You are considerably more vulnerable when your assets are pooled together. However, if you separate them legally, or insulate and isolate them from each other and yourself, it provides layers of protection that will go a long way. Conversely, you are less protected from your personal creditors with a corporation electing to be treated as a small business corporation (S-corp) than you think. 

The same applies with respect to an s-corporation and a single-member limited liability company (LLC), which provides a little protection. General partnerships and sole proprietorships offer the least protection; mainly, none. 

In other words, you are exposing yourself to unnecessary liability, and you are at risk of having your business being taken away from you if you are not incorporated correctly. We will defer to another day how to properly maintain compliance of your entity to ensure you’re receiving maximum protection under the law. 

The bottom line here is that multi-member LLCs and limited partnerships offer the maximum amount of protection of domestic entities. You can always employ irrevocable trusts and offshore entities and trusts if you want to take your asset protection planning to a deeper level. The expense and hassle of doing so may not be worth it, though, so it largely depends on the facts of your circumstances.

Limited Partnerships

Limited partnerships are excellent vehicles for business, tax, estate planning and asset protection planning. Like multi-member limited liability companies, or LLCs, they protect from business creditors, or “inside creditors”, and personal creditors, or “outside creditors.” 

These partnerships, therefore, provide an excellent opportunity to insulate and isolate assets from each other and yourself, as the owner. How they work to do so and how they operate in general is beyond the scope of this post, but you can find more information here.

Do I Need Multiple LLCs to Isolate My Assets?

The short answer is yes, you may need multiple LLCs. This is because of several reasons.

First, you may have several different types of investments or assets. Remember, assets are property. The term “Property” includes everything you can possibly own. You or your assets have the potential to harm someone or something in some way, either actively or passively. Consequently, if that happens, you’re probably on the hook unless you planned ahead. When you have multiple assets, you want to insulate and isolate from each other as well as you, the owner. The best way to do this is to properly retitle them into the names of one or more LLCs. 

Second, you want to make sure that your business interests are properly nested within subsidiary companies to ensure that this legal separation is maximized. Why?

  1. The reason why you want to insulate and isolate assets by utilizing LLCs is to limit your liability to “outside” creditors, or creditors of you personally. However, most people only focus their attention on limited liability relating to business creditors (#2 below). This is why they incorporate their business in the first place. Forming a business entity, such as a corporation, does limit your personal liability with respect to “inside creditors,” but leaves you extremely vulnerable in other ways.
  2. You want to ensure that your business interests are properly insulated/isolated or “legally separated,” as well. This means that you may want to separate assets that you thought were a “unit”. If everything is in a different company, then each asset’s liability exposure to itself and your other assets is substantially reduced. Physicians’s practices are a great example of this strategy.

Get Asset Protection Planning Help

Fortunately, you can protect yourself, your family, your business and your assets. Asset protection planning involves taking advantage of debtor friendly laws, especially in Florida, in order to minimize your exposure to personal liability. I’m talking about maximizing your use of assets that are deemed “off limits” to creditors. It also includes covering all your bases such that you insulate and isolate your properties from each other and yourself. 

An effective plan also requires using the combination of several business entities and trusts. I’m pleased to share with you that asset protection is not necessary for everyone. But if you’re serious about protecting your assets, you need an asset protection plan. Asset protection is relevant to estate planning because they overlap significantly. An effective plan will have your estate plan built-in so your business and estate transitions smoothly to subsequent generations.

Reach out to our office today to speak with an experienced Florida business planning attorney.

Originally published 12/6/2013. Updated 1/26/2024.

Barry E. Haimo, Esq.
Haimo Law
Strategic Planning With Purpose®