Introduction
High-net-worth individuals and business owners in Texas often seek robust strategies to protect assets and optimize tax outcomes, but inexperienced advisors may overlook the unique benefits of trust-owned Limited Liability Companies (LLCs), leading to missed opportunities or compliance risks.
Are you leveraging trust-owned LLCs to safeguard your wealth while navigating Texas’s franchise tax and federal income tax rules effectively in 2025? At Kewal Krishan & Co, our expert tax advisors help Texas clients save an average of $50,000 annually, potentially totaling $775,000 over a decade through strategic asset protection and tax planning. This blog explores the asset-protection benefits and tax treatment of trust-owned Texas LLCs for 2025, grounded in the Texas Business Organizations Code (TBOC) and Internal Revenue Code (IRC), with detailed examples and compliance steps.
With Texas’s favorable trust laws and no state income tax, combining trusts with LLCs offers powerful protection and federal tax efficiency. Start strengthening your financial strategy today with insights from Our Tax Planning Services.
Understanding Trust-Owned Texas LLCs
A trust-owned LLC in Texas combines the liability protection of an LLC under TBOC § 101 with the estate planning and asset-protection benefits of a trust under the Texas Property Code § 112. LLCs shield personal assets from business liabilities, while trusts protect assets from creditors and streamline wealth transfer.
Asset-Protection Benefits
- LLC Protection: Under TBOC § 101.112, creditors of an LLC member can only obtain a charging order against distributions, not LLC assets or management rights, enhancing protection.
- Trust Protection: Texas trusts, especially irrevocable ones, shield assets from creditors if properly structured (Texas Property Code § 112.035). Non-grantor trusts further isolate assets from the grantor’s liabilities.
- Texas Advantage: Texas’s strong anti-creditor laws make it a favorable jurisdiction for asset protection, with no state income tax amplifying federal savings.
Tax Treatment
- Federal Income Tax:
- Grantor Trust: Under IRC §§ 671-679, the grantor reports LLC income on Form 1040, taxed at individual rates (up to 37% for 2025). Assets may be included in the estate, qualifying for step-up basis (IRC § 1014).
- Non-Grantor Trust: A separate taxpayer under IRC § 641, filing Form 1041, with compressed brackets (37% over $15,650). Distributions shift income to beneficiaries (Schedule K-1). The One Big Beautiful Bill Act (OBBBA) allows $40,000 SALT deduction per trust (IRC § 164, 2025-2029).
- Texas Franchise Tax: LLCs pay 0.75% on taxable margin (Texas Tax Code § 171.002), reported on Form 05-163 or Form 05-169. Single-member LLCs owned by grantor trusts may be disregarded, reporting via the grantor’s federal return.
For details, see IRS Publication 541 and Texas Comptroller’s Franchise Tax Guide.
Detailed Example: Asset Protection and Tax Savings
Consider a Texas physician, Dr. Patel, with $5 million in assets, including $2 million in real estate, seeking protection from malpractice lawsuits. He forms an irrevocable non-grantor trust owning a Texas LLC, which holds the real estate, generating $150,000 rental income in 2025.
- Asset Protection: The LLC shields real estate from business liabilities (TBOC § 101.112). The non-grantor trust protects against personal creditors, as assets are not in Dr. Patel’s estate (Texas Property Code § 112.035).
- Federal Tax: Trust files Form 1041, taxing $150,000 at compressed rates: ~$49,350 (37% over $15,650) + 3.8% NIIT ($5,700) = $55,050. If distributed to a beneficiary in a 24% bracket, tax drops to $36,000 + NIIT (~$39,600), saving $15,450.
- SALT Deduction: Trust claims $40,000 SALT deduction, saving ~$14,800 at 37%.
- Texas Franchise Tax: LLC revenue $150,000, margin = 70% ($105,000). If 100% Texas-sourced, tax = 0.75% × $105,000 = $787.50.
Grantor Trust Alternative: Dr. Patel reports $150,000 on Form 1040, taxed at 37% + 3.8% NIIT ($58,500), with personal $40,000 SALT cap. Assets remain estate-included, but step-up applies. Franchise tax unchanged.
Non-grantor trust saves ~$18,950 federally with distribution, plus creditor protection.
Alternative Scenario
For a $500,000 LLC generating $50,000 income: Non-grantor tax ~$15,650 (or $12,000 if distributed at 24%); grantor tax ~$19,250. Franchise tax $262.50 (70% margin). Non-grantor saves ~$3,600-$7,250.
Step-by-Step Guide for Taxpayer Compliance
To establish and maintain a trust-owned Texas LLC for 2025, follow these steps:
- Form LLC: File Certificate of Formation with Texas Secretary of State (TBOC § 3.010); designate trust as member.
- Create Trust: Draft irrevocable non-grantor or grantor trust with attorney, avoiding powers triggering estate inclusion (IRC §§ 671-679, Texas Property Code § 112).
- Transfer Assets: Convey assets to LLC, then assign LLC interest to trust; obtain appraisals for basis (IRC § 1014).
- Determine Tax Status: Confirm grantor (personal Form 1040) or non-grantor (Form 1041) status.
- Calculate Franchise Tax: Apply 70% margin rule or COGS/compensation method; file Form 05-163/05-169 by May 15, 2026.
- Report Federal Income: Grantor reports on Form 1040; non-grantor files Form 1041, issuing K-1s for distributions.
- Claim SALT Deduction: Non-grantor trusts claim $40,000 SALT on Form 1041 (IRC § 164).
- Retain Records: Keep LLC agreements, trust documents, and financials for four years (Texas Tax Code § 171.211, IRC § 6001).
For multi-jurisdictional assets, explore Our Cross-Border Tax Services.
Common Pitfalls to Avoid
- Unintended Grantor Status: Retaining powers (e.g., revocation) includes assets in estate (IRC § 2036).
- Charging Order Misunderstanding: Assuming LLC fully protects without trust layering (TBOC § 101.112).
- Franchise Tax Errors: Miscalculating margin or apportionment inflates tax (Texas Tax Code § 171.106).
- SALT Overreach: Exceeding reasonable trusts risks IRS aggregation under anti-abuse rules.
Why Work with a Tax Expert?
Trust-owned LLCs in Texas require precise integration of TBOC, IRC, and OBBBA provisions, where errors can expose assets or inflate taxes. Generic advisors may misclassify trusts or overlook franchise tax nuances, costing thousands. Kewal Krishan & Co specializes in Texas-specific asset protection and tax strategies, ensuring robust structures and compliance. Our expertise mitigates risks, as shown in Our Tax Litigation Services.
Conclusion
Trust-owned Texas LLCs in 2025 combine strong asset protection under TBOC and Texas Property Code with federal tax efficiency via non-grantor trusts, leveraging OBBBA’s $40,000 SALT deduction. Texas’s no-income-tax environment enhances federal savings, but accurate franchise tax reporting is critical. Strategic structuring and diligent compliance are essential—implement this approach now to safeguard and optimize your wealth.
Call to Action
Schedule a consultation with Anshul Goyal, CPA EA FCA, a licensed U.S. CPA and Enrolled Agent, admitted to practice before the IRS, specializing in tax litigation and cross-border tax for U.S. businesses and Indians in the U.S. Contact us at Kewal Krishan & Co to structure your trust-owned LLC.
About Our CPA
Anshul Goyal, CPA EA FCA, is a licensed U.S. CPA and Enrolled Agent, representing clients in IRS tax litigation and assisting with cross-border tax compliance for U.S. businesses and Indians in the U.S. His expertise ensures tailored strategies that maximize savings and ensure compliance.
Disclaimer
This blog provides general information for educational purposes only and does not constitute tax, legal, or financial advice. Tax laws change frequently, and individual circumstances vary. Consult a qualified tax professional before making decisions. The author and firm disclaim liability for actions taken based on this content.
FAQs
1. How does a trust-owned LLC protect assets?
LLC limits creditor access to charging orders; trusts shield from personal claims (TBOC § 101.112, Texas Property Code § 112.035).
2. What’s the tax treatment for grantor trusts?
Grantor reports income on Form 1040 at individual rates (IRC §§ 671-679).
3. How does non-grantor trust save taxes?
Shifts income to lower brackets or beneficiaries; claims $40,000 SALT (IRC § 641).
4. What’s Texas franchise tax for LLCs?
0.75% on taxable margin, typically 70% of revenue (Texas Tax Code § 171.002).
5. When is franchise tax due?
May 15, 2026, with extension option (Form 05-164).