Many farm clients falsely believe that because they have a trust they do not need to establish a limited liability company (“LLC”). This is simply not true. The purpose for using an LLC is very different than using a trust. In practice, a family farm should have both.
The purpose of a trust is to allow the creator (often called the grantor) to specify exactly how they want their property to be distributed at the creator’s death. A trust avoids probate because it never dies so if property is transferred to the trust, at the creator’s death, the assets are distributed according to the creator’s wishes. A trust also protects against disability issues. If a creator becomes disabled, the trust provisions apply and a successor trustee is named. Without a trust, a court would need to establish a guardianship/ conservatorship. A judge would closely supervise all actions taken.
An LLC has a very different purpose. It is a business structure. It provides creditor protection and provides a vehicle to transfer the ownership at a later time to the son /daughter who will take over the family farm operations. The trust will own the LLC. Without an LLC, the trust would own the farm property.
Having both an LLC and a trust are important steps in protecting the farm. Each structure serves a very different but essential role in the farm operation.
You can read about this and other issues of importance to the family farmer in our 2014 Family Farm newsletter.