Short answer. Jake forms the LLC first, because it is faster, and the trust second. The more useful point is that this is not an either/or: many setups end up with an LLC inside the trust and a second LLC outside it. The one inside gives the trust something banks will lend to and a way to pay a manager. The one outside exists because trusts reach the top federal tax bracket at a startlingly low income level, so you want somewhere else for income to land.
Why an LLC inside the trust
Two reasons, and the first is the one people have not heard.
It is a credit chassis. Banks lend to operating businesses. Lending against a trust is awkward for them, and while it happens, having a business entity inside the trust makes the conversation ordinary rather than an exception. The LLC can build its own credit history.
It separates control from ownership. Assets sit inside the protected structure, and you can still manage them as manager of the LLC, and be compensated for doing so. You get the protection of the trust without the paralysis of not being able to touch anything.
Why a second LLC outside the trust
This is where the tax code does something people find hard to believe until they see the table. Trusts and estates run on a compressed rate schedule: the same top marginal rate that an individual reaches in the hundreds of thousands arrives for a trust in the mid five figures.
Jake's on-camera figures are close but not exact, so here is the mechanism stated precisely. The top federal rate for trusts and estates is 37 percent, and it applies to undistributed taxable income above a threshold that is adjusted for inflation every year and has recently sat around fifteen to sixteen thousand dollars. The current-year figure is in the IRS instructions for Form 1041, and it is worth looking up rather than remembering, because it moves.
How income actually gets out of the top bracket
The recording describes this as passing the trust's taxes to the LLC. The underlying mechanism has a name, and knowing it makes the strategy legible.
A trust that distributes income generally gets an income distribution deduction, and the income is then reported by whoever received it, at their own rates. That is IRC sections 661 and 662 for complex trusts, and sections 651 and 652 for simple ones. The concept that carries the character of that income out to the recipient is distributable net income, or DNI.
So the practical shape is: income that stays inside the trust is taxed on the compressed schedule, and income distributed out is taxed to the recipient on theirs. An entity outside the trust gives you a recipient. Assets left inside compound without that annual drag, which is the reason for splitting rather than putting everything in one place.
| Inside the trust | Outside the trust | |
|---|---|---|
| Protection from personal creditors | Strongest | Charging order only |
| Rate schedule on retained income | Compressed: top rate arrives fast | Your own brackets |
| Passes outside probate | Yes | Only if the interest is assigned to the trust |
| Easy to borrow against | Easier with an LLC inside it | Yes |
| Natural role | Long-hold assets, compounding | Income, expenses, anything being sold |
How much goes in each
Jake declines to give a number on camera, and that is the correct answer rather than an evasion. The factors he names are time horizon and how close the assets are to being needed: the longer the horizon, the more the case for letting assets sit inside the trust and compound without the annual tax drag. Anything you expect to sell or spend from is easier to hold outside.
That is a framework, not an allocation. The split depends on your actual income, your state, and what the trust is for, which is a conversation with an estate attorney rather than a rule of thumb.
The warning worth repeating
In passing, Jake rules out "some common law crazy wild thing that is illegal." That deserves more than a passing mention, because those arrangements are actively marketed to exactly the audience reading this.
Pure trusts, constitutional trusts, common law business trusts and similar packages are promoted on the claim that they place income beyond the reach of federal tax. The IRS maintains a page on abusive trust arrangements describing these structures and how they are treated. A legitimate trust changes who is taxed and when. It does not make income disappear, and any pitch built on the second claim is a problem you are buying, not a structure.
Why the LLC goes first
Sequencing is practical rather than doctrinal. An LLC can be formed in days. A trust is drafted, and drafting takes as long as it takes to decide what the trust is actually for. Starting the LLC first means the entity exists and can open accounts while the trust is still being written, and the LLC interest can be assigned into the trust once it is signed.
There is also no single thing called "a trust." Living trusts, asset protection trusts, spendthrift provisions, dynasty trusts and insurance trusts all do different jobs, and families with substantial balance sheets typically end up with several working together rather than one. That is the reason the drafting cannot be rushed and the reason a template does not work.
DAG's writeup on choosing between an LLC and a trust for digital assets takes the comparison further, and its crypto trust structures hub covers the operational questions that come next: whether a trustee can hold a hardware wallet, trustee liability, and which states are used for crypto trusts.
Common questions
Can a trust own an LLC?
Yes, and that is the standard arrangement. The trust holds the membership interest; the LLC holds the assets and does the operating.
Why not put everything in the trust?
Because income retained inside a trust is taxed on the compressed schedule described above. Everything in one place is simpler and, above a modest income level, more expensive.
Do I need both from day one?
No. The LLC is the piece that solves the immediate problem of holding assets in something other than your personal name. The trust answers what happens next, and it is worth doing properly rather than quickly.
Does moving my LLC into a trust trigger tax?
Assigning a membership interest to a revocable living trust is generally not a taxable event, because a revocable trust is treated as you for tax purposes. Irrevocable trusts are a different analysis and a gift tax question can arise. That one goes to a tax professional before it happens, not after.
- Crypto estate planning: the full guide on jakeclaver.com
- Setting up the LLC
- Creating an LLC and living trust: what information is required
This page summarizes recorded commentary and general information. It is not investment, tax, or legal advice, and it is not a recommendation to form any entity or trust. Trust drafting is state-specific and the wrong structure is expensive to unwind. Speak to a qualified estate attorney and tax professional before acting.