LLC's and Irrevocable Trusts

[Leigh Ann Smith]

An attorney told us that an LLC would be best protected if an irrevocable trust is a 10% owner of the LLC. We've decided not to retain the services of this attorney. I'm not asking for legal advice here, just your understanding of how we might want to set this up.

So, let's say we set up XYZ, llc with 45% owned by husband, 45% owned by wife, and 10% owned by irrevocable trust (with the couple's children as beneficiaries). Can they then nest ABC, llc (husband is the single owner) underneath that?  So, would there be a benefit if XYZ, llc were the owner of ABC, llc?  ABC, llc might lease property from the husband & wife, it might have a promissory note payable to the husband & wife, etc.  ABC, llc doesn't own anything; rather, it leases everything from the husband & wife.

Then, if ABC llc is sued, could they go after the husband as the single member, or could they not, because XYZ llc owns it?

And, if the husband and wife want to sell or dispose of ABC, llc, they could do that since they own the majority of XYZ, llc, correct?

[Joel Beckman]

Regarding whether or not a claimant can go after the husband as a single member, the fact that XYZ owns ABC has only some bearing on claimant's ability to go after the husband, but is not dispositive. In most circumstances, Husband should be protected under the LLC laws regardless of who owns the LLC (it's the point of LLC protection). However, claimant could go after the husband directly if they can "piercing the corporate veil". This would only occur if the husband is engaging in business practices that by their nature are designed for the very purpose of escaping personal liability. While examples are numerous, they include co mingling personal funds with corporate funds, the use of the corporate form to promote fraud, the use of the corporate form as an alter ego (i.e. under capitalized, lacks business formalities, etc.), amongst others.