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The Best of Both Worlds:  Using LLCs and Trusts Together to Own Your Real Estate

If you’re over the age of 55 you probably know about Living Trusts (and should have one). And if you’re a real estate investor or business person you probably know about LLCs.  But do you know the advantages of having your Living Trust own your LLC(s)?  Well you will, after reading this article.

Owning investment properties can be highly rewarding, but it also comes with risks. So, let’s explore how smart real estate investors can protect themselves and their properties with this powerful strategy.

Real Estate Investing Risks and Rewards

Before we dive into the advantages of using an LLC and a Living Trust, let’s take a closer look at the risks associated with owning real estate. If you know anything about me, you know I strongly believe that Real Estate is “The Bomb” when it comes to growing your wealth and providing for your family for generations to come.  But, with liability exposure and unforeseen incidents, and even lawsuits, landlords and property owners face various challenges. Slip and fall accidents, environmental issues, and crimes occurring on your property can lead to legal judgments against the property owner.  (Notice how I said, “property owner”… that’s a clue…)

As you can see, asset protection should be a critical aspect of every real estate investor’s strategy. Obviously it’s important to have a good insurance policy in place, and it’s important to read those policies closely, especially the limitations and exclusions.  But to safeguard ourselves, we also need to explore alternative ways of holding property.  By incorporating an LLC and a Trust into your holding structure, you can create a robust defensive shield against lawsuits and other financial liabilities.

How you Hold Title to Property can Increase your Asset Protection

Real Estate 101:  If you own a rental property or properties – and this can include renting out rooms in your own home – you definitely do NOT want to have ownership, or TITLE, in your own name.  Fortunately, there are several ways to hold investment properties other than in your own name. These include corporations, limited partnerships, LLCs, and trusts. While each option has its merits, today, we’ll focus on LLCs and trusts as these two are considered the most preferred entities for real estate investors.  And even better when used together.

LLCs offer a myriad of advantages for real estate investors. For one thing, LLCs avoid the “double taxation” of corporations, or “C-Corps.”  Just so you know, currently the double taxation for a C-Corp is 27% for Federal, plus 9% for California, plus you are taxed on whatever you pay yourself for personal use.

Most importantly, LLCs and Corporations offer asset protection for all members.  In other words, if the LLC is sued, the individual members’ personal assets are typically protected from liability.  The number one rule in asset protection is to separate the property from your social security number.  Business entities, which have their own tax ID, do this, while sole proprietorships do not.  If somebody sued your LLC, the only way for them to get money out of you personally would be to file a charging order and then proving there was negligence, illegal activity, malpractice or something like that.  That’s called “piercing the corporate veil”, and it rarely succeeds.

Additionally, forming an LLC is relatively inexpensive and nowadays a straightforward task with companies such as Legal Zoom, making it an attractive option for investors.

Forming a single LLC for all your Real Estate Investments

Having a single LLC for all your investment properties is convenient and as you might expect costs the least.  If you are a resident of California – meaning you live here more than half the time and your bank accounts are here – then any legal entity will cost you $800, even if you don’t use it.  If you’ve hung around real estate investors, I bet you’ve heard talk of Nevada or Wyoming or Delaware or Texas LLCs, which do have certain advantages, such as more privacy and protection for members and officers than California LLCs.   But did you know that the California Franchise Tax Board will charge you $800 per year even if you formed your business entity formed in a different state? (That would be called a ”Foreign Corporation” by the way.)

The “One LLC per Property” Ownership Strategy

So, when thinking of that cost, you might not want to follow the advice of top real estate “gurus” based in other states who advise investors to have one LLC for every property.  Own four properties, and that $3200 per year is just for LLC expense.  But on the other hand, you might decide that this expense is worth it after reading this article.  So why would we want to have multiple LLCs, preferably one for each property?  The short answer is, you isolate your liabilities.  So what does that mean?  Let’s say you own four rental properties in one LLC and a tenant’s kid falls into a hole and get’s seriously hurt.  If they prove you were negligent they could be paid damages from that single LLC, which means you might have to sell several of your properties to pay off the judgment.  If the judgment is massive, you could lose all four properties and pay a huge amount to the plaintiff.  But if the LLC that was sued had only that one property in it, the plaintiff would only be able to collect one fourth as much.   The other three properties would be safe.  So you can see that this strategy can add an extra layer of protection to your real estate portfolio.  Another positive is, many banks and lenders view this strategy favorably when considering loans and security interests. Oh, and an important note, while you’re paying $800 per LLC if you reside in California, this expense can be at least partially tax deductible.  So in the end, you can see why it’s important to have a good CPA on your team, because they could help get the GAIN of Asset Protection without the PAIN of high taxes.

Adding TRUSTS to the Equation

OK, so let’s talk about TRUSTS.  As you know, I draft Estate Plans with my law firm, Simone Legal, and I simply love Love LOVE Trusts!  Trusts, particularly Revocable “Living” Trusts, are essential for estate planning and asset distribution after one’s passing.  If you own real estate and care even the least bit about your heirs, you need a living trust; otherwise your loved ones would be forced to file a probate case, which means having to hire an attorney and spending 12-24 months in court… and the judge, not you, decides who gets what.  If you’re interested in trusts, watch my YouTube video or read my Blog which shows no less than TEN Benefits of having a living trust.  There we delve deeper into the world of trusts and estate planning, revocable and irrevocable trusts.  From avoiding probate to minimizing estate taxes, the right trust can make a significant impact on you and your family’s financial future.

Now honestly, a Trust alone does not provide much in the way of liability protection, but it becomes an integral part of a powerful asset protection strategy when paired with an LLC.  Simply by designating your trust as the sole member of the LLC, you add an extra layer of protection for your property.  Anybody looking to sue you and get money out of you personally would now have to not only “pierce the corporate veil” of the LLC but then deal with the trust.  And it might be harder, if not impossible, to locate the LLC in the first place, because your name would not be associated with it. In other words, the property is owned by the LLC, which is owned by the Trust, and you are the Trustee of the Trust. That’s a heck of a lot better than you owning the property in your own name!

How your Trust can “Own” your LLC(s)

For those who own a business and wish to integrate it into their estate planning, it’s essential to know how to transfer your business interests to a trust  Forming an LLC requires careful consideration and adherence to specific legal requirements.  The process varies depending on the business type. For limited partnerships and LLCs, where business interests are only partly yours, you can transfer your portion to a trust with an “Assignment of Interest” document.  Similar steps apply to general partnerships, where an “Assignment of Business Interest” document can facilitate the transfer. With corporations, a straightforward “Assignment of Stock” document is usually required for stock transfers. However, for sole proprietorships, while you can’t transfer business interests, you can transfer the assets that make up your business to a trust. This process involves documenting the assets, the owner, and the designated trustee.

Tax Implications

Now let’s discuss the tax implications of holding real estate in an LLC and a trust.  While these structures offer significant benefits for asset protection and estate planning, for many of you, the tax implications will be less than you might expect.  Most LLCs, and especially single-member LLCs, are called ”pass-thru entities” because they are taxed directly to you, which does eliminate the double taxation of a C-Corp.  Now S-Corps do have several tax advantages, but if you are a buy-and-hold investor you do not want or need an S-Corp as the benefits of the S-Corp apply to ordinary income, and rental income is a different kind of income.  In other words, S-Corps are for rehabbers or flippers, those who buy and sell within a one year period.  But fear not buy-and-hold investors, you have a huge palette of tax deductions.  Next-level tax planning might be to accelerate enough depreciation to offset cashflow now and push the rest into the future with Carry-Forwards.

In short…

To summarize, owning rental property can be incredibly rewarding, but it’s essential to protect yourself from potential risks.  By utilizing both an LLC and a Living Trust, you can secure your investments and achieve optimal financial well-being.  By holding each investment property in a single-member LLC, with the living trust as the sole member of the LLC, we can achieve an added layer of protection from the LLC and benefit from the estate planning advantages of a trust. This combination allows rental property owners to mitigate liability risks while also ensuring a smoother transfer of assets to beneficiaries in the event of their passing.

Remember, seeking professional advice is always wise when navigating legal and financial matters.  This is an area where having a tax professional who is well-versed in real estate and Real Estate Investing is an absolute must.  And of course, you already know that Rock Real Estate has a nationwide team of Realtors to find your perfect rental properties wherever you wish to invest, and you should also know that Simone Legal is here to create your Trust and help advise you about your LLC(s).

by  Stuart R Simone Esq

Realtor® | Broker Associate | Mortgage Loan Originator
DRE# 02084380
NMLS# 2246767
SBN# 269830
Stu@RockRealEstate.org
818-717-7605
facebook.com/StuSimoneRealEstate
https://stuart-simone.relofunding.com
https://stuartsimone.exprealty.com

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