Entities Held in Trusts: Common Uses and Benefits in Trust Administration

In a previous article, we outlined common transactions involving trusts and their underlying entities and emphasized the importance of involving the trustee in such entities’ activities. This article builds on that foundation by explaining how entity structures are used within trusts and why they are prevalent in modern estate plans.

Administrative Simplicity, Cost Efficiency and Privacy

As noted in the previous article, two core responsibilities of a trustee include the maintenance of trust accounts for purposes of custody and safekeeping of trust assets and the preparation of trust accountings. In Delaware, a trust accounting is typically a nonjudicial record of a trust’s investment activity and disbursements. These obligations endure even for trustees of investment-directed trusts. Notably, however, these responsibilities generally apply only to the maintenance of financial accounts held directly by the trustee or transactions occurring at the trust level (for example, trust expenditures or distributions to beneficiaries). 

This distinction affects how trust activity is reported on an accounting prepared by the trustee. When a trust owns a passive interest in an entity, that interest is the sole trust asset reported on accountings. Additionally, a trust accounting will only contain activity that directly involves the trust. Transactional activity occurring within the underlying entity is not reported on a trust-level accounting. For example, if a limited liability company (“LLC”) owned by the trust buys or sells investments, those transactions appear only in the LLC’s records and not on a trust-level accounting. This provides an additional layer of privacy for day-to-day transactions at the LLC level that are not reflected on a trust’s accounting while simultaneously simplifying the management of LLC activities.

If the trustee has less activity to account for and the trustee’s involvement in the entity transactions is minimal, this can reduce the trustee’s administrative expenses. Consequently, the trustee can generally offer clients with such trust structures lower administrative trustee fees.

Some individuals prefer minimal trustee involvement in the day-to-day activity of trust investments. This could be for a variety of reasons, including simplifying day-to-day trust administration or retaining direct control over trust investments. 

An entity trust structure supports this preference because the entity manager can actively manage any entity-level accounts without the trustee’s involvement – for example, the trading in a brokerage account owned by the entity, the entity’s buying and selling of other investments, or, for entities that hold real estate, the payment of monthly expenses from an entity-level bank account, which avoids the need to pull funds from a trust’s financial account.

There are tradeoffs that result from the types of arrangements described above. Certain responsibilities that are typically held by a trustee are shifted to the entity manager. For example, the manager is responsible for maintaining accurate records of the entity’s activity in addition to other responsibilities outlined in the entity’s governing documents. 

These responsibilities often include the preparation of tax documents to provide to the entity’s members for their own tax filing obligations and providing the members with accurate and timely information regarding the entity’s holdings and the value of those holdings. There are also administrative costs associated with maintaining the entity, such as annual state registration fees; however, these costs are often minimal when compared to the potential cost savings gained with an entity trust structure.

Additional Asset Protection

Beyond administrative benefits, entities such as LLCs can also enhance a trust’s creditor protection. Irrevocable trusts can be drafted and implemented for creditor protection of beneficiaries, and certain jurisdictions (such as Delaware) allow for the creation of self-settled asset protection trusts, which offers creditor protection to the settlor’s assets. 

Placing trust assets in an LLC provides an additional layer of creditor and liability protection for the trust for activities occurring within the LLC, limiting the potential liability of members to the property contributed to the LLC by the member. This can safeguard the other trust assets not held in that LLC from claims made against the LLC, which is especially important if the LLC is an operating business or is holding an operating business.

Holding and Transferring Real Estate and Unique Assets

Trusts often hold real estate and other unique assets, such as artwork, jewelry, or collectible cars, through an entity, such as an LLC, rather than directly. Holding real estate directly at the trust level creates a unique set of challenges for a trustee, who becomes responsible for ensuring the property is properly maintained and potentially for having periodic appraisals performed on the property for valuation purposes.

Holding these assets in an LLC alleviates the challenges noted above and makes the process of transferring interests easier, often cheaper, and more private when compared to holding them as direct trust assets. 

If a piece of real estate is held directly by a trust and needs to be transferred out of the trust (for example, as part of a sale or distribution), the trustee will encounter the same requirements an individual owner would encounter to transfer that property. These requirements include preparing a deed to transfer the property, understanding and paying transfer taxes, recording the property deed and updating tax assessors, insurance companies and other necessary parties. 

If that same piece of real estate is held in an LLC owned by a trust, the transfer of that property is simple by comparison. The LLC interest can be divided among future generations of the family and continue to be held in trust for their benefit as prescribed in the trust agreement. Because the ownership of the property is not changing, only the internal LLC records need to be updated to reflect the new members, meaning the family can avoid paying deed and property transfer fees, insurance costs and other administration expenses.

The LLC agreement and trust agreement can also address property management, including how the property can be used, who maintains it and what approvals are required for the sale of the property. The LLC can also open a bank account to address maintenance of the property and to pay any property taxes without the trustee’s involvement, further simplifying maintenance of the property and the trust’s administration.

Finally, owning real property through an LLC allows for creative ownership options. For example, multiple branches of a family, each with their own trust, may pool their assets to acquire a vacation property through an LLC that one family branch could not afford on its own. Each family branch trust could own an equal percentage interest in the LLC. The LLC agreement could delineate the usage of the property among the families and allow for cost sharing of expenses between the trusts.

Family Business Governance and Succession

Placing a family-owned private business in a trust is beneficial for multiple reasons. Proper planning for the transition of ownership and management of a family business through a trust-held entity, such as an LLC, can reduce or eliminate family conflict. It can also limit operational delays, unnecessary costs and public scrutiny during transition phases.

When the family business is held in an irrevocable trust that is not includable in the business founder’s estate, the transition to the next generation of ownership can avoid the probate process, which is not only lengthy and potentially costly, but also public record. 

The trust agreement can provide a pre-determined plan for passing ownership of the business to the next generation after the founder passes away. This can prevent ownership disputes among the potential heirs and can ensure that leadership and management of the company can continue without unnecessary costs or delay. Alternatively, if there are no family members willing or able to take over control of the business, the trust agreement can prescribe the transition of management of the company to other key employees.

The trust agreement and LLC agreement can also provide a framework for future governance of the business. The trust agreement can be drafted as an investment directed trust, where certain family members can hold investment responsibility as an Investment Direction Adviser. The family member or members in this role can be given the power to direct the trustee to vote on the trust’s membership shares at company meetings or to remove and replace managers of the company. The trust agreement can also provide guidance or instructions for the Investment Direction Adviser in making certain decisions regarding the members’ authority under the LLC agreement.

These agreements can also be drafted to affect future ownership of the company, ensuring the business remains under the control of the family unless the family agrees otherwise. The trust agreement may eliminate the trustee’s and Investment Direction Adviser’s ability to transfer any shares of the business altogether or require the consent of another party prior to any transfer. The LLC agreement may also limit the ability of members to transfer their interest, often limiting permitted transfers to other family members, or otherwise requiring consent from the manager or other members before effective transfers of the LLC interests can be made. 

These limits can also support valuation discounts when interests are gifted or sold. The reasoning is simple: if a member in an entity has limited authority or control over that entity or is severely limited in its ability to transfer its membership interest, then that interest would be less valuable to a buyer on an open market and that decreased value may be taken into account when it is gifted or is sold.

Estate Planning for Non-U.S. Individuals

Individuals who are not domiciled in the U.S. but hold U.S.-based assets may be able to use a trust entity structure for significant transfer tax savings.

Under 26 U.S.C. § 2103-§ 2104 and 26 CFR §20.2104-1, a non-U.S. domiciliary may be subject to U.S. estate tax on certain U.S. situs property when they die, including U.S. real estate or stock in U.S. companies, even if that stock is held in a non-U.S. account.

Unlike a U.S. domiciliary, who has a $15 million lifetime federal gift and estate tax exemption as of 2026, the lifetime federal estate tax exemption for a non-U.S. domiciliary is only $60,000 and is not adjusted for inflation (a non-U.S. domiciliary also has zero federal gift tax exemption).

The non-U.S. taxpayer may benefit from an estate tax treaty between that individual’s country of domicile and the U.S., but in the absence of such a treaty, that non-U.S. taxpayer will likely incur substantial transfer taxes when transferring U.S. situs assets.

One potential solution often used by non-U.S. domiciliaries of countries that do not have an estate tax treaty with the U.S. involves establishing a foreign revocable trust and acquiring those tangible assets through a foreign entity, such as a Canadian limited partnership, owned by the revocable trust. 

Notably, that foreign revocable trust can be administered by a U.S.-based trustee. When U.S. real estate or U.S. stock is held through the foreign partnership, that non-U.S. domiciliary (or their revocable trust) is considered to own non-U.S. situs property. Because non-U.S. situs property is not subject to U.S. estate tax for non-U.S. domiciliaries, the entity can function as an “estate tax blocker” when the non-U.S. domiciliary dies. The revocable trust is includable in the individual’s estate, but, if structured and administered correctly, the non-U.S. settlor will not owe any U.S. federal estate tax on the property held within the entity.

Cross-border tax planning can be extremely complicated. Engaging an experienced attorney early in the planning process and hiring an experienced trustee to administer trusts created as part of that cross-border planning is key to ensuring the transactions do not incur additional unforeseen, or otherwise avoidable taxes.

Conclusion

Entity structures can significantly strengthen a trust-based estate plan, whether for families managing a business, holding unique assets or addressing crossborder tax concerns. When properly structured and administered, limited liability companies and limited partnerships offer efficiency, control, enhanced asset protection and potential cost and tax savings. Keeping in mind the best practices discussed in our earlier article, these structures are powerful estate planning techniques that can provide substantial benefits to an individual’s estate plan and to trusts they establish for future generations.