Does a Trust Provide Limited Liability Protection?

Trusts are commonly used in estate planning to protect assets, avoid probate, and ensure a smooth transfer of wealth to beneficiaries. However, many people mistakenly believe that placing assets in a trust provides the same kind of limited liability protection as a business entity like an LLC or corporation. This post will clarify the legal protections a trust does—and does not—provide.

What Is Limited Liability Protection?

Limited liability protection is a legal safeguard that shields an individual’s personal assets from business-related debts and lawsuits. This protection is typically provided by business entities such as:

• Limited Liability Companies (LLCs)
• Corporations (S-Corps and C-Corps)
• Limited Partnerships (LPs)

If a lawsuit is filed against an LLC, for example, the owner’s personal assets are usually not at risk—only the assets held by the LLC.

Does a Trust Offer Limited Liability Protection?

In general, trusts do not provide limited liability protection in the way that LLCs and corporations do. However, they can offer other forms of asset protection, depending on the type of trust used.

Revocable Living Trusts

A revocable living trust is a common estate planning tool, but it does not provide liability protection. Since the trust creator (grantor) retains full control over the assets in the trust, creditors can still go after those assets to satisfy debts or legal claims.

Irrevocable Trusts

An irrevocable trust, on the other hand, may provide some level of asset protection. Once assets are transferred into an irrevocable trust, they are legally separate from the grantor’s personal assets, meaning creditors may not be able to reach them—provided the trust was properly structured and not created to defraud creditors.

Key factors influencing asset protection with an irrevocable trust:

• The grantor cannot alter or revoke the trust.
• The trust must be established before legal claims arise.
• Certain state laws may impact creditor access to trust assets.

When Should You Use a Trust vs. an LLC for Asset Protection?

If your goal is estate planning, a trust is an excellent tool for managing assets, avoiding probate, and ensuring a smooth transition of wealth.

If your goal is limited liability protection, forming an LLC or corporation is usually the better option. LLCs and corporations are specifically designed to shield personal assets from business-related liabilities.

For maximum protection, a combination of both structures can be beneficial. For example, an LLC can own real estate or business assets, while a properly structured irrevocable trust can hold the LLC interests, offering both estate planning benefits and some level of asset protection.

Key Takeaways

• A revocable living trust does not provide liability protection.
• An irrevocable trust may offer asset protection but not the same level as an LLC.
• For liability protection, an LLC or corporation is typically a better choice.
• A well-designed estate plan may use both trusts and business entities for comprehensive protection.

How Edwards Law Can Help

Understanding how to protect your assets requires careful planning and legal expertise. At Edwards Law, we help individuals and business owners craft estate plans that safeguard their wealth and limit liability exposure. Whether you need a trust, an LLC, or both, our team is here to guide you.

Contact us today for a consultation and ensure your estate and business are properly protected!