Can a Transfer be made directly into an LLC or LP owned by the Trust (without first going through the Trust)

A transfer to an LLC owned by a trust is functionally equivalent to a transfer first to the trust and then to the LLC because the trust is the ultimate beneficial owner of the LLC. Here’s why:

1. Beneficial Ownership is Key

• When a trust owns an LLC, any assets transferred directly to the LLC are effectively under the control of the trust through its ownership of the LLC.
• The LLC acts as a holding entity, and the trust’s ownership ensures that the assets are aligned with the trust's terms, purposes, and beneficiaries.

2. Chain of Title

• A transfer to the LLC skips the intermediate step of transferring to the trust but achieves the same result because the trust holds legal or equitable ownership of the LLC.
• The LLC is essentially a subsidiary of the trust, making it redundant to first transfer to the trust and then to the LLC.

3. Simplified Transaction

• Directly transferring to the LLC reduces transactional steps and costs. However, the documentation should clearly establish the trust as the owner of the LLC to support the intended legal structure.

Relevant Tax Code Provisions

1. Grantor Trust Rules:

   • If the trust is a grantor trust (where the grantor retains certain powers or benefits), the IRS treats the trust and its assets, including the LLC it owns, as owned by the grantor for income tax purposes.
   • IRC §671–§679:
     • Under these sections, a grantor trust is treated as a disregarded entity for federal tax purposes, meaning transfers to an LLC owned by the trust are treated as though the grantor owns the LLC directly.

2. Single-Member LLC Tax Treatment:

   • If the LLC is a single-member LLC (SMLLC) wholly owned by the trust, it is typically treated as a disregarded entity for federal tax purposes.
   • Treas. Reg. §301.7701-3(b)(1)(ii):
     • This regulation confirms that an SMLLC is ignored for tax purposes unless it elects otherwise, meaning that a transfer to the LLC is considered equivalent to a transfer to its owner (in this case, the trust).

3. Step Transaction Doctrine:

   • Under the step transaction doctrine, the IRS views a series of formally separate but related transactions as a single transaction if they achieve the same result.
   • A transfer first to the trust and then to the LLC would likely be viewed as a single transaction for tax purposes.
   • Relevant case law includes Gregory v. Helvering, 293 U.S. 465 (1935), where the courts disregarded intermediate steps that lacked substantive economic effect.

4. IRC §643(f) (Aggregation Rule for Trusts and Entities):

   • Clarifies that related entities, such as a trust and an LLC wholly owned by it, are often aggregated when analyzing the substance of a transaction.

5. No Recognition of Gain or Loss on Transfers:

   • IRC §1001 and IRC §1015:
     • When transferring property to an LLC owned by the trust, the transferor generally does not recognize gain or loss because the beneficial ownership remains effectively unchanged.
     • The transferred asset’s basis is preserved in the LLC due to the continuity of ownership by the trust.

6. Entity Classification and Beneficial Ownership:

   • Treas. Reg. §1.671-2(e):
     • Confirms that a trust’s ownership of an entity (such as an LLC) does not alter the tax treatment of transactions involving the entity when the trust is disregarded.

Summary of How These Apply

• Tax Neutrality: The direct transfer to an LLC owned by a trust avoids creating a taxable event, provided that the LLC is a disregarded entity and the trust remains the ultimate beneficial owner.
• Documentation to Ensure Compliance: Clearly identify the trust as the owner of the LLC in the operating agreement, and ensure that the transfer aligns with the trust’s grantor or non-grantor tax status.
• IRS Consistency: Maintain consistent reporting to the IRS, treating the trust and LLC as integrated entities per the regulations.

Lodmell & Lodmell, PC is one of the nations leading Asset Protection Law Firms and the creators of The Bridge Trust®.  L&L serves clients nationwide and may be reached at [e-mail] or 602-230-2014.