Should you form an LLC or create a living trust in California? This is one of the most common questions we hear from business owners and property investors. The answer: LLC vs living trust isn't an either/or question—these serve completely different purposes, and many Californians need BOTH for comprehensive protection.
LLC vs Living Trust: Key Differences
| Feature | LLC | Living Trust |
|---|---|---|
| Primary Purpose | Liability protection | Probate avoidance |
| What It Protects | Your personal assets from business/property lawsuits | Your family from court delays and fees |
| Who Owns Assets? | The LLC entity | You (as trustee) |
| Avoids Probate? | ✗ No | ✓ Yes |
| Creditor Protection? | ✓ Yes (business creditors) | ✗ No (revocable trusts) |
| Annual Fees (CA) | $800 minimum franchise tax | None |
| Setup Cost | $70 filing + attorney fees | $400-$500 |
What is an LLC?
A Limited Liability Company (LLC) is a business entity that separates your personal assets from business or investment property liabilities. If someone sues your LLC (tenant injury, business dispute, etc.), only assets inside the LLC are at risk—not your home, savings, or other personal assets.
LLC Benefits:
- Liability shield — Personal assets protected from business/property lawsuits
- Professional credibility — "LLC" designation for business operations
- Tax flexibility — Choose taxation as sole proprietor, partnership, or corporation
- Separation — Clear divide between business and personal finances
LLC Limitations:
- Does NOT avoid probate — LLC interests pass through probate like other assets
- $800/year minimum tax — California franchise tax regardless of income
- Not ideal for primary residence — Loses homestead exemption, may trigger due-on-sale
- No estate planning benefits — Doesn't help with incapacity or succession planning
What is a Living Trust?
A living trust is an estate planning document that allows your assets to transfer to your beneficiaries without going through probate court. You remain in full control during your lifetime, and when you pass, your successor trustee distributes assets privately—bypassing the 12-24 month California probate process.
Living Trust Benefits:
- Avoids probate — Saves your family 12-24 months and 4-8% in fees
- Privacy — Trust administration is private; probate is public record
- Incapacity planning — Successor trustee manages assets if you're incapacitated
- No annual fees — One-time setup cost, nothing ongoing
- Maintains control — You're the trustee; full access to your assets
Living Trust Limitations:
- No liability protection — Revocable trusts don't shield from lawsuits
- No creditor protection — Assets still reachable by your creditors
- Must be funded — Only assets transferred to the trust avoid probate
When You Need an LLC
Good for LLCs:
- Rental property owners
- Business owners
- Real estate investors
- High-liability professions
- Multiple properties
Not Ideal for LLCs:
- Primary residence only
- Estate planning needs
- Avoiding probate
- Simple family protection
When You Need a Living Trust
Good for Living Trusts:
- California homeowners
- Anyone wanting to avoid probate
- Privacy concerns
- Incapacity planning
- Families with minor children
A Trust Won't Help With:
- Lawsuit protection
- Creditor protection
- Business liability
- Tenant lawsuits
When You Need BOTH an LLC AND a Living Trust
Many California business owners and real estate investors benefit from both structures working together. This isn't about choosing one or the other—it's about layering protections for complete coverage.
1. LLC owns the rental property or business → Provides liability protection
2. Living Trust holds your LLC membership interests → Avoids probate
Result: Your personal assets are protected from lawsuits AND your family avoids probate when you pass.
How the Dual Structure Works:
Think of it as layers of protection. The LLC creates a legal barrier between your rental property (and its risks) and your personal assets. If a tenant sues, only the LLC's assets are exposed—not your home, savings, or other investments. Meanwhile, your living trust holds your LLC membership interest, so when you pass away, your family inherits the LLC without going through probate court.
This structure also simplifies management. Your successor trustee can immediately step in to manage the LLC if you're incapacitated or pass away, without waiting 12-24 months for probate court approval.
Ideal Candidates for Both:
- Real estate investors with one or more rental properties
- Business owners with families they want to protect
- Multi-property landlords who want separate LLCs for each property
- High net worth individuals with diverse asset types
- Professionals in high-liability fields (doctors, contractors, etc.)
- Anyone with both business assets AND personal estate planning needs
LLC vs Trust for California Rental Properties
Rental property owners face a unique decision: should rental properties go in an LLC, a living trust, or both? Here's the California-specific analysis:
Why LLCs Work for Rentals:
- Liability shield — Tenant injuries, property damage claims, and lawsuits stay within the LLC
- Insurance gap coverage — If a judgment exceeds your insurance limits, only LLC assets are at risk
- Credibility with tenants — Professional appearance for lease agreements
- Multiple property separation — Each property in its own LLC isolates risk
Why Living Trusts Are Still Needed:
- LLCs don't avoid probate — Your LLC membership interest must go through probate
- Succession planning — Trust specifies who inherits and manages the LLC
- Incapacity coverage — Successor trustee can manage LLC if you're incapacitated
- No $800 annual tax on the trust — Living trusts have no ongoing California fees
Tax Implications: LLC vs Living Trust in California
Understanding the tax differences helps you make an informed decision:
LLC Tax Treatment:
- $800 minimum franchise tax — Due annually regardless of income or profit
- Pass-through taxation — LLC income flows to your personal return (unless you elect corporate taxation)
- Self-employment tax — May apply depending on LLC structure and your involvement
- Deductible expenses — Business expenses reduce taxable income
Living Trust Tax Treatment:
- No annual fees — One-time setup cost only
- Tax-neutral — A revocable trust is ignored for income tax purposes; you report income on your personal return
- No separate tax return — Uses your Social Security number during your lifetime
- Step-up in basis — Beneficiaries may receive favorable capital gains treatment
Asset Protection Comparison
Asset protection is a key reason people consider LLCs, but it's important to understand exactly what each structure protects:
| Protection Type | LLC | Living Trust |
|---|---|---|
| Lawsuits from business/rental activities | ✓ Strong protection | ✗ No protection |
| Personal creditors reaching business assets | ✓ Charging order protection | ✗ No protection |
| Your creditors reaching trust assets | N/A | ✗ No protection (revocable) |
| Probate avoidance | ✗ No protection | ✓ Full protection |
| Privacy after death | ✗ Probate is public | ✓ Trust is private |
LLC vs Living Trust for Real Estate in California
For Your Primary Residence:
Use a Living Trust — An LLC is generally NOT recommended for your primary home because:
- You lose the California homestead exemption
- May trigger due-on-sale clause in your mortgage
- Doesn't qualify for capital gains exclusion ($250K/$500K)
- You're paying $800/year for minimal benefit
For Rental Properties:
Consider BOTH — Structure like this:
- Form an LLC to hold the rental property
- Create a living trust to hold your LLC membership interests
- Result: Liability protection + probate avoidance
Cost Comparison: LLC vs Living Trust in California
| Cost | California LLC | Living Trust |
|---|---|---|
| Formation/Setup | $70 (Secretary of State filing) | $400-$500 (our service) |
| Annual Fee | $800 minimum franchise tax | $0 |
| 5-Year Cost | $4,070+ ($70 + $800 x 5) | $400-$500 (one-time) |
| Attorney Setup | $500-$2,000 additional | Included in our price |
Frequently Asked Questions
Q: Should I put my house in an LLC or a trust?
A: For your primary residence, a living trust is almost always better. LLCs can trigger due-on-sale clauses, you lose the homestead exemption, may lose the capital gains exclusion, and LLCs don't avoid probate anyway. A living trust maintains all tax benefits while avoiding probate.
Q: Can I have both an LLC and a living trust?
A: Yes, and many California business owners and real estate investors should have both. The LLC protects against liability; the living trust holds your LLC membership interests and avoids probate. This dual structure provides comprehensive protection.
Q: Does an LLC avoid probate in California?
A: No. LLC membership interests must go through probate like any other asset. To avoid probate on your LLC interests, you need to transfer them to a living trust.
Q: Should I put rental property in an LLC or trust?
A: Consider both. The LLC owns the property (liability protection from tenant lawsuits). The living trust holds the LLC membership interests (probate avoidance). This gives you both protections.
Q: What's the California LLC franchise tax?
A: $800 minimum annually, regardless of income or profit. This makes LLCs expensive if you don't actually need liability protection. Living trusts have zero annual fees.
Q: Will transferring property to an LLC trigger property tax reassessment?
A: Potentially yes. Transferring California real estate can trigger Prop 13 reassessment if not done properly. However, transfers to LLCs where you maintain proportional ownership may qualify for exclusion. Consult with a California attorney before transferring real estate.
Q: Can I manage my own LLC or do I need a lawyer?
A: You can manage your own LLC, but proper setup requires an operating agreement, EIN, separate bank accounts, and annual compliance. Many people hire an attorney for initial setup. Living trusts also benefit from attorney review to ensure California-specific compliance.
Q: Which is better for asset protection: LLC or trust?
A: For liability protection, an LLC is better—it shields personal assets from business lawsuits. A revocable living trust provides NO asset protection from creditors during your lifetime. However, a living trust protects your family from probate, which an LLC cannot do. They serve different purposes.
Ready to Protect Your Family from Probate?
A living trust costs just $400-$500 with no annual fees. Unlike an LLC, it avoids probate and protects your family immediately.
Create Your Living Trust — $400Attorney-reviewed | California Bar #208356 | 24-48 hour delivery
