An irrevocable is a device that allows you to place your assets under the care of another person based on terms that you determine in advance. A limited liability company, or LLC, is a vehicle that allows you to own all or part of a company and enjoy limited liability without some of the disadvantages of forming a corporation. Both arrangements are sometimes used to shield assets from creditors.
How an Irrevocable Trust Works
An irrevocable trust, which is created under state law, allows you to place your assets under the control of a trustee for eventual distribution to a beneficiary. Trust assets can include money, real estate, property and intangible assets such as intellectual property rights. If the trust document specifies that the trust is irrevocable rather than revocable, the trust assets no longer belong to you — they belong to the trust. Many people create irrevocable trusts to protect their assets from creditors.
Asset Protection With an Irrevocable Trust
Since an irrevocable trust is an independent legal entity, your personal creditors normally cannot use trust assets to satisfy your debts. Creditors cannot reach these assets even after they are distributed to your beneficiary, unless the debt belongs to your beneficiary. A court can, however, empower creditors to satisfy your debts out of trust assets if you transfer property to the trust for the specific purpose of evading pre-existing creditors — an offense known as “fraudulent transfer.”
How an LLC Works
An LLC is a business entity created under state law by filing articles of organization with the state secretary of state. Although an LLC is similar to a corporation and is designed as a vehicle for operating a business, operating an LLC requires far fewer legal formalities (such as the appointment of a board of directors) than a corporation does. In every state, a single member may form an LLC and then gift or sell property to it. You may gift the same type of property to an LLC that you can gift to an irrevocable trust.
Asset Protection With an LLC
Like a corporation and an irrevocable trust, an LLC is considered an independent legal entity. Once you gift or sell property to an LLC, it becomes the LLC’s property, not yours. As with an irrevocable trust, your personal creditors normally cannot reach LLC assets to satisfy your personal debts (and LLC creditors cannot reach your assets to satisfy LLC debts). Although a court may allow your creditors to reach these assets based on fraudulent transfer, this outcome is somewhat less likely than it is with an irrevocable trust. As the sole owner of an LLC, you have control over LLC assets but are restricted by state law in your ability to use these assets for your personal benefit.
You create an irrevocable trust by drafting and signing a trust document. The trust document names the trustee and one or more beneficiaries and tells the trustee how to manage trust assets. Since the document does not have to be filed with state authorities, no filing fee is required, although your trustee may demand compensation. You create an LLC by filing articles of organization with the state secretary of state and paying a filing fee (typically several hundred dollars). Many states require an LLC to pay an annual fee of several hundred dollars even if it earns no income.
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