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Real Estate Management With Trusts & LLCs

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We often receive interesting questions from our students. We received permission to publish this one as a Blog since it might be of interest to many of you visiting our site.

Comment:

Thank you for your help. I hope learning all this is not “too little too late”.

Q. You said an LLC should be the manager of the rental properties. What exactly does that mean? Does it mean I establish an LLC and put my properties into it or do I establish an LLC and put my property manager (my son) into it?

A. I would do both.   I would form two LLCs .  I would put your property into one LLC  and have the other LLC act as a management company.  Your son can act as an employee of the LLC and help manage it.  He can but does not need to own part of the LLC.  The tenant will contract with the management LLC (Rental Agreement) and the LLC will “do all of the management” of the rental.   You (the property owner) should have a contract with the LLC, just like you would with one of the management companies you can hire for 7% of the rent to manage the rental property.  Your LLC will be the management company.  My LLC Wizard has all the forms you need to form both LLCS.

Q. My Living Revocable Trust says to put property into the Living Revocable Trust. Into which do I put my rentals: the trust or the LLC?

A. You can do either, but I would use both.  I would put the property into an LLC, owned by your trust. The membership interests (stock) in the LLC should be owned by the trust, so it won’t be subject to probate at your death.  The LLC is an asset. The LLC papers at the state should show the trust as the owner AKA member. If you have the LLC taxed as a subchapter s corporation, you should make sure the living trust is a subchapter s qualified trust.  The trust in my Accumulation and Preservation of Wealth materials is a qualified trust.  It has to be written to meet certain IRS Rules or the Subchapter S tax election will be voided.

Q. Warranty deed or quit claim deed:  is one cheaper or better than the other?

A. When you put a property into the LLC make sure you use a warranty deed, not a quit claim deed, because you will lose the title insurance if you transfer to a company using a quit claim deed.  The LLC is a company (limited liability company).  The transfer of the property technically violates the due on sale clause in the mortgage.  As long as the ownership of the LLC is the same as the ownership of the property before it is moved into the LLC, the banks have been unable to call the due on sale clause in the courts.

Comment: Frankly, a lawsuit has me so concerned that I would rather sell my 3 rental houses, than risk one.

A. Carry a big liability policy, use an LLC to manage the property, a different LLC to own the properties, and sleep well at night.  It isn’t all fool proof, and justice always depends on what the judge or jury eats for lunch, but real estate is the only true form of wealth an individual can make money with – statistically.

Q. Does an LLC allow the set up of the other benefits such as HRA, a family limited partnership, a children’s trust, etc? I know these can be done with an s or c corp but I do not think we want those.

A.  An LLC can be a sole proprietorship, a partnership,  an s corp or a c corp, depending upon how you choose to have it taxed.  The legal structure of an LLC is independent of the tax structure. You get to choose.  All the benefits of a c corp are available to the LLC taxed as a c corp.  So you can use an HRA etc.  The limited partnership and children’s trust (2503 trust) are totally independent of the LLC.  They are other legal tools you can use with an LLC or not have an LLC and still use the limited partnership or children’s trust.

Comment: We want to stay very small and uncomplicated.

A.  It is a good idea to stay small and keep it simple.  The lawyers love to get you in over your head with legal structures.  Carry the insurance, have a living trust, and set up the management company LLC.  Own the properties in the living trust for simplicity not asset protection. Asset protection, you would own the properties in a second LLC, but that complicates things.

This post was edited for clarity on 4/28/14.

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About the Author:

Attorney Lee R. Phillips is a nationally recognized attorney who has helped thousands of audiences understand the latest asset protection, business structuring and tax planning techniques. He is a counselor to the United States Supreme Court and holds licenses in law, real estate and insurance. He has a BS in geology, MS in analytical chemistry, and JD in law. Shortly after starting his career as a patent attorney, he started a cancer research project as the national guinea pig, which included five months in isolation intensive care. Over 150 doctors participated directly in his treatment. He understands his audience, because he lost everything due to his illness. You will understand why asset protection became his passion. For thirty years his company, LegaLees Corporation, has specialized in solving asset protection and tax problems for high net worth individuals. Lee is a motivating, engaging, and dynamic speaker who has spoken to over a million people throughout the United States, Canada and the Pacific Rim helping them understand the law and how to use it to their benefit.

Discussion

  1. Pam Ciolkosz  April 8, 2011

    I have become interested in a self directed Roth IRA. I understand the tax advantages of one but what are the asset protection capabilities of a self directed Roth IRA? Is there a seasoning period from the time the IRA is opened and the time withdrawals can be made? How do I go about setting one up? To your knowledge, are the online setups reliable?

    My CPA is of the opinion that an LLC has better tax advantages taxed as a partnership rather than an S corp. Your LLC wizzard course says to have it taxed as an S corp. Will you explain the difference?

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