Many competent New Hampshire estate planning lawyers advise their clients who are members of LLCs to hold their memberships in trusts. As I’ve already briefly mentioned in previous Law in the Marketplace columns, this is usually a bad idea. And using a trust to conduct a business is usually an even worse idea. But since these uses of trusts are widespread in New Hampshire, I want to devote an entire column today to the subject of trusts vs. LLCs. Here’s what you should know about this subject if you are a New Hampshire business owner, an LLC member, a New Hampshire estate planner or a lawyer or accountant advising LLC members and managers:

Trust — definition; purpose

A trust is a contractual arrangement under which one or more persons, called “grantors” or “settlors”:

■ Form a trust by drafting a trust agreement — called, somewhat misleadingly, a trust “instrument”;

■ Contribute assets to the trust for the benefit of named trust beneficiaries;

■ Identify in that contract the person or persons who will manage the trust assets for the beneficiaries’ benefit and the rules governing their management.

In New Hampshire, the laws governing trusts are the New Hampshire Uniform Trust Act (the “UTC”) and numerous New Hampshire trust cases. The purpose of the UTC is to ensure that upon the death of New Hampshire residents, their assets will pass to the persons they intend.

LLC — definition; purpose

An LLC is not a contractual arrangement. Rather, it is a statutory business entity that is not formed under or governed by an “instrument,” but rather, by an LLC statute and New Hampshire LLC case law. In New Hampshire, this statute is the Revised New Hampshire Limited Liability Company Act (the “New Hampshire LLC Act”). LLC founders form their LLCs by filing official documents called certificates of formation with the Division of Corporations of the New Hampshire Secretary of State. The New Hampshire LLC Act contains roughly 300 provisions, most of which are either “mandatory” provisions, which LLCs and their members cannot alter; or “default” provisions, which, in their operating agreements, the members are expressly permitted to alter.

The purpose of the New Hampshire LLC Act is to provide the best possible legal framework for New Hampshire business owners conducting their businesses in New Hampshire.

The N.H. probate problem

When individuals who reside in New Hampshire die, their assets will pass to their heirs under their estate planning documents or, if they have no estate plan, under New Hampshire statutory law, but, with limited exceptions, they will pass legally only to the extent approved by a New Hampshire probate court. However, under New Hampshire probate procedures:

■A court may well withhold approval of asset transfers for many months;

■Probate procedures often require many documentary submissions and hearings;

■Probate legal and accounting fees may amount to many hundreds of dollars; and

■Especially if there are probate arguments among possible heirs, these fees may amount to many thousands of dollars.

The purpose of holding LLC memberships in trusts

However, New Hampshire probate applies only to assets transferred in a deceased person’s own name and not to assets transferred by trust. Thus, New Hampshire estate planners generally advise their clients to avoid probate by conveying all of their valuable assets to their trusts. This often includes not only their homes but also, if they have any, their LLC memberships.

Don’t hold your LLC

membership in a trust

However, for two major reasons, New Hampshire LLC members should not hold their memberships in trusts:

■First, if these LLCs are multi-member LLCs taxable as partnerships — by far the best federal tax regimens for most multi-member LLCs — these LLCs and their members will be subject to the harsh new Internal Revenue Code audit rules that became effective on January 1, 2018 unless they qualify for exemptions from these rules.

■Second, all of these trusts may be subject not only to the New Hampshire LLC Act but also, on many key legal issues, to the UTC. However, as indicated above, the UTC was not designed to govern the holding of LLC memberships or the management of LLCs.

By contrast, the New Hampshire LLC Act was designed specifically for the above purposes, and the drafters of the New Hampshire LLC Act took great pains to ensure that the default rules of that act would address as usefully as possible the roughly 150 legal issues likely to be important these members if they didn’t address them in written operating agreements. (The members of most New Hampshire single-member and multi-member LLCs don’t have written operating agreements.)

It is true that a trust instrument can be drafted to govern reasonably effectively the management of an LLC. But this instrument will never be as effective for this purpose as a well-drafted LLC operating agreement.

Don’t hold your

business in a trust

For essentially the same reasons as those outlined above with regard to the holding of LLC memberships in trusts, it is even more important that New Hampshire businesspeople not own and conduct their businesses as trusts. As noted:

■The UTC was not designed for this purpose;

■The UTC is silent about most or all legal issues likely to be important to New Hampshire business owners; and

■At least a few UTC rules may be positively harmful to these business owners and their businesses.

By contrast, the drafters of the New Hampshire LLC Act did all they could to make the New Hampshire LLC Act as user-friendly as possible to New Hampshire business owners and to address in their best interest all legal issues that might possibly be relevant to them.

John Cunningham is a lawyer licensed to practice law in New Hampshire and Massachusetts. He is of counsel to the law firm of McLane Middleton, P.A. Contact him at 856-7172 or lawjmc@comcast.net. His website is llc199a.com. For access to all of his Law in the Marketplace columns, visit concordmonitor.com.

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