As Brokers & Property Managers one of the least asked questions that we receive is how should we take title to our rental property? This should be one to the most often sought after questions and answers. While this is typically deemed outside of our scope as real estate agents… we do have some unique insights and what we believe is valuable information. Once you have this new found information… you should ask your tax advisor what makes the most sense for you in your unique financial arena.
Let’s start with the most typical… Oftentimes when a new investor purchases a rental property, they have no idea how to take title. They ask their title company or their escrow officer for some guidance and yet this is surface level knowledge and information. This often leads them into holding title as Husband & Wife as Community Property (with or without right of survivorship), or tenants in common. While these are valid ways to hold title, they provide you with little to no asset protection. If this is you… the good news is that you can take the next step and transfer ownership of that rental property into a trust (also being referred to herein as an estate plan). In this case, you would most likely be the trustee, and then you would deed the property from you or you and spouse, into the trust, and viola… your home is now vested in the trust.
BENEFITS OF A TRUST
There are many benefits to holding your home in a trust. Some are:
A trust allows you and your beneficiaries to avoid probate which is costly and time consuming. This can cost your heirs anywhere from 4% - 10% of the total estate, and oftentimes takes 6-12 months to work through. Additionally, your beneficiaries have to cover all of the ongoing and recurring expenses and liabilities of the property/s while you work through the process.
A trust provides asset protection. In many cases the trust can not be liened, and provides a shield from litigation and creditors.
A Trust is Flexible - these are often referred to as “Living Trusts”, so you have immediate access to any of the items that may be vested in the trust. Examples are checking accounts, savings accounts, the property documents, the will, or other health care documents if/when needed.
There could be instructions and benefits for adult children to care for their aging parents and follow their desires/wishes.
There are tax advantages to the successors and beneficiaries.
There is added privacy, as the documents contain the personal information for the assets. There are no delays… Other than waiting on the decedent's death certificate from the county recorder, the beneficiaries can take immediate action and control of the property/s within the trust.
The only Con on setting up a trust is from a financial perspective. If you are one of the 82% of Californians that don't already have a trust, you will have an upfront investment to create that trust which is anywhere from $800 - $5,000 and we see that $2,500 is about the average or the norm. Keep in mind that this will save your beneficiaries countless time and thousands of dollars when it’s most important. A trust may not be the best place to have your asset secured. It’s better than holding it as a married couple or an individual and yet it’s not always the best. Another great option is to hold title in an “LLC” or a Limited Liability Corporation. Now there are pros and cons to this as well. Most savvy investors will still say the pros outweigh the cons, and yet we don’t know your unique financial situation.
BENEFITS OF AN LLC
There are many benefits to holding your investment property in an LLC. Some are:
An LLC allows you and your beneficiaries to “POSSIBLY” avoid probate which is costly and time consuming. The difference here between the trust and the LLC is completely dependent upon who the members of the board on the LLC, and what their interests are structured and how these interests are to be transferred.
An LLC also provides asset protection. Much like the trust, an LLC provides restrictions from liens, possible litigation, and creditor protection.
An LLC can also be Flexible - this will depend on the members or managers. If this is self managed, which in the case of real estate, it would be… then decisions can be made immediately and without delay.
There are tax advantages to the managers, successors and beneficiaries.
There could be added privacy. Could be… Yes, because in California, the members of an llc need to be identified on a statement of information. This form included the names and addresses of managing members. The good news is that not everyone knows where to get this information. The bad news is that it’s available.
DISADVANTAGES OF AN LLC
There are a few disadvantages to holding your rental properties in an LLC, and these would include:
Higher setup fees - The cost to set this up with the state is around $870, plus attorney fees to take care of the documentation.
There are filings that need to be done with the secretary of state every year.
There are additional tax returns that need to be filed so there will be additional fees from your tax advisor/accountant.
There may be additional insurance costs associated with having 1/multiple LLC’s. And maybe even the prerequisite to carry an umbrella policy.
Lastly… there is the idea that you would have both. You set up both your LLC/s and your trust. Once the LLC is complete, you can then transfer that into the trust which creates an additional barrier of asset protection.
CONCLUSION
At the very least… you should now have a better understanding of the advantages and disadvantages of holding title as an individual, a trust and an LLC. The Next Steps are for you to reach out to your tax advisor and set up a strategic session on how to best proceed with your investment asset/s. Still don’t know where to turn… the good news is we’ve got you. Check out our friends at Wilkerson & Wilkerson Law, in Orange. We are confident that they will take great care of you and all your trust needs! If you found this information helpful, please share this with someone you know, like and care about… and please reach out to us with any questions as we would love to be a trusted advisor and referral resource for you on your financial journey. Talk to you soon!
