Is an LLC Owned by a Trust a Disregarded Entity?

Using a trust to own an LLC can offer benefits like asset protection and estate planning advantages. However, tax treatment depends on factors such as the type of trust involved. A key consideration is whether the LLC qualifies as a disregarded entity for tax purposes, which determines how income and expenses are reported to the IRS.

Single-Member Ownership

For an LLC to be treated as a disregarded entity, it must have a single owner. When a trust owns the LLC, the IRS generally considers the trust—not its beneficiaries—as the owner. If a single trust holds 100% of the LLC, it may be classified as a disregarded entity.

The trust’s structure plays a role in this classification. If multiple individuals, such as co-trustees, have independent authority over the LLC, the IRS may not recognize it as a single-member entity. A disregarded entity is treated as an extension of its owner for tax purposes, whereas a multi-member LLC is classified as a partnership, requiring a separate tax return.

If a trust owns multiple LLCs, each is evaluated separately. A wholly owned LLC may still be disregarded, even if the trust has interests in other businesses. However, if ownership is divided among multiple entities or individuals, the LLC could lose its disregarded status.

Tax Reporting Obligations

The tax obligations of an LLC owned by a trust depend on whether the LLC is classified as a disregarded entity or a separate taxable entity. If disregarded, its income, deductions, and credits flow directly to the trust’s tax return.

A grantor trust reports the LLC’s activity on the grantor’s Form 1040 using Schedule C, E, or F, depending on the business type. The LLC’s earnings are taxed at the individual level, and the owner may owe self-employment taxes if the business generates active income. If the trust is not a grantor trust, income is reported on Form 1041, with the trust responsible for tax payments unless distributions are made to beneficiaries.

Even though a disregarded LLC does not file a separate federal tax return, state-level filing obligations may still apply. Some states require single-member LLCs to submit informational reports or pay franchise taxes. California imposes an $800 annual minimum tax on LLCs, regardless of federal classification. Texas requires a franchise tax report, and Tennessee imposes an excise tax based on revenue thresholds.

If the LLC is not disregarded, it must file its own tax return, typically using Form 1065 for partnerships or Form 1120 for corporations, depending on its election. This requires separate accounting records, estimated tax payments, and additional reporting. The trust, if it remains a member, would receive a Schedule K-1 detailing its share of the LLC’s income, deductions, and credits, which it must report on its own tax return.

Types of Trusts with LLCs

The tax treatment of an LLC owned by a trust depends on the type of trust involved. Different trusts have varying levels of control and tax obligations, which influence whether the LLC is considered a disregarded entity.

Grantor Trust

A grantor trust is one in which the grantor retains certain powers over the trust’s assets. Under IRS rules (26 U.S. Code 671-678), income from a grantor trust is taxed directly to the grantor. If a grantor trust owns 100% of an LLC, the LLC qualifies as a disregarded entity.

For example, if a grantor trust owns an LLC that generates $100,000 in net income, the grantor reports this income on their personal tax return (Form 1040). If the LLC’s income comes from self-employment activities, the grantor may also owe self-employment tax, which is 15.3% on net earnings up to $168,600 in 2024. This structure simplifies tax reporting but does not provide liability protection beyond what the LLC itself offers.

Revocable Trust

A revocable trust, or living trust, allows the grantor to modify or revoke it at any time. Because the grantor maintains control, the IRS treats the trust as an extension of the grantor for tax purposes. If a revocable trust owns an LLC, the LLC is disregarded, and all income, deductions, and credits pass through to the grantor’s personal tax return.

Using a revocable trust to own an LLC can simplify estate planning. When the grantor dies, the trust’s assets, including the LLC, transfer to beneficiaries without probate. However, at the grantor’s death, the trust becomes irrevocable, which may change the LLC’s tax treatment. If the LLC remains a single-member entity under the new trust structure, it may still be disregarded. If multiple beneficiaries gain ownership, it could be reclassified as a partnership, requiring a separate tax return (Form 1065).

Irrevocable Trust

An irrevocable trust cannot be modified or revoked once established, except under limited circumstances. Unlike grantor and revocable trusts, an irrevocable trust is a separate legal entity for tax purposes, with its own tax identification number and tax return (Form 1041). If an irrevocable trust owns an LLC, the LLC is generally not disregarded unless the trust qualifies as a single-member owner.

Irrevocable trusts are often used for asset protection and estate tax planning. Because the trust, not the grantor, owns the LLC, the assets are typically shielded from creditors and excluded from the grantor’s taxable estate. However, trusts face higher tax rates than individuals. In 2024, an irrevocable trust reaches the highest federal income tax bracket of 37% at just $15,200 of taxable income, compared to $609,350 for a single filer.

If the trust distributes income, beneficiaries report it on their personal tax returns, potentially reducing the overall tax burden. If income is retained in the trust, it is taxed at the trust’s higher rates, making distribution planning an important consideration.