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A Trust vs. LLC, Which One Will Serve You the Best?

Question Presented
What are the primary differences between the rights of a beneficiary receiving interest in a trust versus the rights of a beneficiary receiving interest in a Limited Liability Company (LLC)?

The rights of a beneficiary receiving interest in a trust differ from the rights of a beneficiary receiving interest in an LLC in a few keyways. In a trust, the beneficiary generally has an equitable interest in the property held in trust, and the trustee is the legal title holder, guided by beneficiary designation. In contrast, an LLC beneficiary may hold a property interest in the LLC itself, along with the privilege of participating in management, encompassing both LLC member rights and responsibilities. Additionally, the fiduciary duties owed by a trustee to a beneficiary differ from the fiduciary duties owed by an LLC member to the company and other members. Also please note that for beneficiary designations, it is important to retain a lawyer specialized in designating beneficiaries.

A trust in its entirety is a fiduciary relationship with all the fiduciary duties. The benefit of an LLC is that it can use a typical financial statement used every day, a manager can have more control than is generally available in a trust and an LLC can have an arbitration agreement, which is unenforceable for a trust. Additionally, a trust uses the court ordered accounting format compared to an LLC’s typical financial statement.

First, distinguishing characteristics emerge between the rights of a beneficiary in a trust and those of a beneficiary in an LLC concerning their interest in the property. Within a trust arrangement, the beneficiary's equitable interest in the trust's holdings is notable, with the trustee serving as the legal title holder. This fiduciary setup is underscored by the concept of beneficiary rights and the legal framework of beneficiary designation. Steinhart v. County of Los Angeles, 47 Cal.4th 1298 (Cal. 2010). Conversely, the LLC beneficiary enjoys a distinct position, potentially possessing a direct property interest in the LLC itself. This multifaceted arrangement incorporates both the core LLC member rights and the corresponding responsibilities linked to active participation in the LLC's management. Evans v. Galardi, 16 Cal.3d 300 (Cal. 1976); Northwest Energetic Services, Llc. v. California Franchise Tax Board, 159 Cal.App.4th 841 (Cal. Ct. App. 2008).

Second, the fiduciary obligations attached to a trustee vary from those imposed on an LLC member. In a trust context, the trustee bears a duty of loyalty and care toward the beneficiary, encompassing acting in the beneficiary's best interests, avoiding conflicts of interest, and refraining from gross negligence or recklessness. These obligations mirror the broader framework of beneficiary rights and responsibilities. Babbitt v. Superior Court of L. A. Cnty., 246 Cal.App.4th 1135 (Cal. Ct. App. 2016). Conversely, the fiduciary duties of an LLC member are tailored to the company's dynamics and fellow members. These responsibilities, encompassing loyalty and care, extend to accounting for benefits derived from the LLC, abstaining from adverse dealings, and refraining from competitive activities, as stipulated by the legal framework of LLC member rights and responsibilities. Cal. Corp. Code § 17704.09

Finally, divergences are evident in terms of a beneficiary's entitlement to information or an accounting. A trust beneficiary typically retains the right to request an accounting and access information from the trustee concerning trust assets and transactions, safeguarding the beneficiary's beneficiary rights. Estate of Giraldin, 55 Cal.4th 1058 (Cal. 2012). In contrast, an LLC beneficiary's scope for insight lies in the right to inspect and duplicate partnership books, serving as an avenue for ensuring transparency and accountability within the framework of trust beneficiary rights and responsibilities. Evans v. Galardi, 16 Cal.3d 300 (Cal. 1976).

Below is a chart of the comparisons between an LLC and a Trust:
DUTY The highest fiduciary duty is required for a Trust. A contract designates more limited fiduciary duties.
CONTROL A Trustee has control over a Trust. A Manager has control of a LLC, while members have some rights to vote by being owners.
REMEDY Arbitration is not allowed in a Trust, as the Probate Court does not allow arbitration for it. Mediation and Arbitration is possible in an LLC, as LLC’s typically have arbitration provisions.
TERM Ages of distribution are set within a Trust. LLCs have a perpetual term.
DISTRIBUTION Distribution is set by the Trust requirements regarding distribution. An LLC’s Manager has discretion as prescribed to him in the operating agreement.
LIABILITY Liability is unlimited on a trustee. An operating agreement sets limits for liability.
FINANCIAL REPORTING Financial reporting is done using a Court ordered form. Standard financial statements can be used in an LLC.
FORCED BUY-OUT A forced buy-out is not an available option for a Trust. With a court order a forced buy-out is possible for an LLC.
BUY-SELL A buy-sell is not an available option for a Trust. A buy-sell is an option designated in the operating agreement.
SELL SHARE Like a buy-sell, selling shares are not an available option in a Trust. Like buy-sell, selling shares is available as designated in the operating agreement.
PROBATE AVOIDANCE A Trust can avoid Probate. An LLC can avoid Probate by using the power of appointment.

In conclusion, comprehending the nuances between beneficiary rights, trust beneficiary rights, LLC member rights, and LLC member rights and responsibilities is essential in elucidating the distinct positions and privileges of beneficiaries within trusts and LLCs. This is why it is important to consult with a trust expert like C. Tucker Cheadle who understands the differences between LLCs and trusts, has 30 years of experience of administering trusts and LLCs, and has drafted over 70 trusts and LLC operating agreements.

C. Tucker Cheadle Law works throughout California, specifically in Orange, Los Angeles, San Bernardino, San Diego, Marin, Santa Clara, Santa Maria, Stanislas, Redding, and Napa counties. Contact us today at 949.553.1066 to discuss whether a Trust or an LLC is the right choice for your particular situation.

This article is designed only to provide a general background and is not legal advice. If you need legal advice please contact C. Tucker Cheadle at 949.553.1066 and after providing all the important facts and information, a legal opinion can be made. A review of any materials on this web page, any preliminary comments or an introductory meeting does not constitute legal, income tax or accounting advice upon which reliance can be placed. The attorney client relationship can only be created by a written retainer agreement following a check of potential and actual conflicts of interest with other clients.
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Trust vs. LLC

C. Tucker Cheadle Law works throughout California, specifically in Orange, Los Angeles, San Bernardino, San Diego, Marin, Santa Clara, Santa Maria, Stanislas, Redding, and Napa counties. Contact us today to discuss both Trusts and LLC's with you and which is best for your particular situation.