Stautz Law

Tag: Trust

  • LLCs as Trust Substitutes!?

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    Hi folks, it’s Andy Stautz at Stautz Law. I am here today with the avant-garde of estate planning. I’m kidding. This talk is just kind of a thought experiment. It’s not informational. It’s definitely not legal advice. It’s just kind of a “what if?”  

    So you might have seen my talk a couple weeks ago about planning around LLCs. If you’re a small business owner or you’re self-employed, you’ve got an LLC, I talk about how you can. Put those in trust. Make them payable on death. You know, handle them in probate and just kind of how to deal with that.  

    Today. I want to float the idea that an LLC is a lot like a trust, and if you were really crazy I think you could use an LLC to do pretty much everything that a trust does.  

    Is an LLC the same as a Trust?

    Because think about it. OK, what’s a trust? A trust lets you separate legal and equitable title to property. And you give the trustee a set of instructions on how to administer the property for the benefit of the beneficiary, the beneficiaries.  

    OK, What’s an LLC? Well, an LLC is an entity that controls some property according to instructions that are in an operating agreement for the benefit of the beneficial owners. Who could be whoever.  

    Those are pretty analogous concepts. I mean, both are ways to hold property with instructions.  

    Reasons for Different Treatment in the Law

    Now trusts are specially favored in the law because, you know, we’ve got an elaborate trust code on how to create them, how to administer them, how to deal with situations where they’re not administered properly. How to change them if they’re not doing what you want to do, right? Lots of protections in the trust code. And. That kind of comes from. That comes from history, obviously. UM. But it’s not… Like… in an average smooth trust administration, do you need it? But the trust code is kind of a way of hedging around the fact that trusts are highly favored in the law, right? I’ve talked before about how trust is a legal fiction, right? There’s no reason the government needs to let you use a trust at all, much less use a trust to avoid probate, for instance.  

    Well, you know what? How is an LLC different? Couldn’t you in theory make an LLC have an operating agreement with succession terms in the operating agreement. Make the interest in the LLC transferable on death. And then at death, you know, you avoid probate because it’s immediately payable to your successor interests. Your successor operator knows what to do and follows the operating agreement, and then you use the corporate code, you know, running a business for the benefit of the shareholders, basically like you use the, the, the corporate fiduciary code. As a like enforcement mechanism, if you need it.  

    How is it different?  

    I don’t think so… That’s just a funny idea… I don’t seriously recommend that anyone try it, and if you came to my office asking for it. I’d probably say no. But it’s an interesting thought experiment.  

    It’s like, OK, what are we doing here? We are giving instructions. What do we want? We want the instructions to be followed. We want there to be an enforcement mechanism if it’s not, and we want to do it as privately as possible.  

    Practical Reasons NOT to Use an LLC as a Trust Substitute

    So the only advantage to using an LLC and having like this totally separate set of rules would be if you thought there was some advantage in… If there were like simplicity gains or cost effectiveness gains, right? Because people write their own LLC operating agreements all the time, most people would not dream of writing their own trust.  

    But then it’s like, OK, by the time you’ve got an LLC operating agreement sophisticated enough to be a trust substitute, it’s like, OK, you need professional advice anyway. And so that’s where you come back to: If you walk to my office and you want to plan using that instead of a trust, I probably won’t.  

    But it’s a fun idea. And I think I might be the only person kind of floating it, but it’s one way of thinking. It’s a lot and I hope it’s entertaining. And if you are an attorney and you do this, I would love to hear about it. And if you are a client or someone’s setting up your estate plan, and you either have done this or you’ve seen someone who does this, or you’re interested in trying it. I would love to hear. Because it sounds fun.  

    OK, that’s all. A goofy one for today, but reach out if you want to talk about it. This is not advice, this is a theoretical discussion. OK? That’s all for today. Bye now.

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  • Talking About . . . Trust Terminology

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    Hi, welcome back. It’s Andy Stautz at Stautz Law and we’re here for another quick informational chat, this time about trust terminology, aka the lingo.

    Oftentimes, clients are intimidated by all the the new terms, the new words they run into when they’re talking to their estate planner, or starting to read about estate planning and and think about their options. So especially in the in the trust world, which is just a part, but an important part of of what I do for my clients, it’s worth knowing some of the terms so you can think about how how you want your plan to work and you can go into your planning meeting confident that you know what’s going on.

    So just going back to basics, umm, a trust is a legal relationship. . . . between three people. There is a settlor, or a grantor, (2 names for the same thing), and that’s the person Who gives the property. And then there is the trustee. The trustee is the person who holds the property. And then there is the beneficiary. The beneficiary is the person who enjoys the property.

    [T]he clever idea of a trust is to separate the ownership, which is in the trustee’s hands, and the use and enjoyment, which is in the beneficiaries’ hands. So your basic three players are the settlor or the grantor, sometimes you know, it’s even called a trustor, but that’s very rare. The trustee just called a trustee. No alternate terms there. And then the beneficiary.

    And umm, the confusing part sometimes. Is that a grantor can also be a trustee? And also a beneficiary. Kind of in some circumstances.

    And so that leads us to our next topic, which is OK. About all the different names for trusts. You know — what’s the difference between a revocable and an irrevocable trust? A grantor or non grantor trust? What about an asset protection trust?

    And the thing there to understand is those are just descriptive titles. Those are just different ways of explaining the type of trust you’re talking about. Because the basic concept of separating legal and equitable ownership. Can be used in so many different ways. So if you’re saying a trust is. Revocable or irrevocable, that just means that the grantor can decide to take it. And unwind it, versus irrevocable. Irrevocable can’t be. . . The trust can’t be undone once it’s been made.

    Same thing with. You know, a grantor trust for tax purposes is one where the grantor retains, you know, is still the beneficiary in some way. Umm. Versus a non grantor trust.

    Same thing with a self settled trust. As you might imagine, the self settled means the settlor, the grantor. has put the property in trust for himself or herself, so self settled.

    And so for many of these concepts, you . . . They can be. . . They’re just descriptive terms and and sometimes. You know, it’s kind of insider knowledge, OK? A Medicaid asset protection trust. Do we call it a MAPT or . . . . ? You get to sophisticated, you know, SLATs and GRATs, and you know all these increasingly esoteric acronyms.

    They’re all just different ways to describe the type of trust that’s being used. Just a convenient technical short hand.

    But the basic terms to remember settlor or grantor, trustee, beneficiary. And that basic relationship works for all trusts, no matter how complicated, because that’s what makes the trust the trust.

    Hope you’ve enjoyed this overview. If you’re ready to talk trusts with me, I would love it. You can book an initial planning meeting online. You can give me a call. And I look forward to working with you with personalized advice for for your situation and come up with the best plan that’s that’s going to work for you. Until then, bye now!

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    Book your initial planning meeting with Stautz Law and we’ll discuss your individual needs. No obligation.

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