Should You Put Your Real Estate in an LLC or a Trust?

Posted By: Pam Maass ICOR Blog & News,

Real estate investing can be an excellent strategy to build and pass on wealth to future generations. Your properties can generate rental income and serve as valuable assets for collateral in various wealth-building ventures. If you or your parents own a second home or commercial property, deciding how to handle these assets is crucial. Should you place your investment property into a trust, or consider something like an LLC? Let's break it down.


The Baseline Rule: Putting it in Trust

First and foremost, the fundamental guideline for managing any real estate you own, whether it's your primary residence or an investment property, is to put it in a trust. This approach helps you avoid probate, maximize the value of your estate, and ensure that your hard-earned money stays within the family. It's a practical choice that prevents your loved ones from dealing with hefty legal and court fees after you're gone.


Considering an LLC

You might be wondering about the option of using an LLC or an S-Corp. You might have heard that these entities offer creditor protection and might have questions about their impact on taxes. Well, if you're dealing with just a second home or one investment property and you're not on the path to building a massive real estate empire, sticking with a trust is usually your best bet.


Even if you have real estate, you're probably going to have a trust anyway to avoid probate, so why not use it for its intended purpose – holding assets to sidestep probate? Managing the property remains straightforward, much like when it's in your name alone. You can still sell it, refinance, or use it as collateral for loans. Your property and personal taxes won't undergo any major changes since it's still an asset you own. And if you're renting it out, consider hiring a property management company and investing in good liability insurance (a wise move, regardless of whether it's in your name, trust, or LLC). If the property is not generating income and is more of a vacation or family home, there's no need to complicate things with an LLC and the associated yearly costs.


Expanding Your Real Estate Empire

However, if you're dealing with multiple income-generating properties and building a real estate empire, it might be time to consider an LLC-type structure. You can then assign your ownership interest in the LLC to the trust to avoid probate upon your passing.


Handling Out-of-State Property

Now, what about out-of-state property? Let's say you have a trust in Colorado but also own property in Wyoming. You can place that Wyoming property into your Colorado trust, and that way, you won't have to worry about probate in either Colorado or Wyoming.

Putting Everything in Trust

In the grand scheme of things, it's a good practice to put everything into your trust – whether it's your primary home, second home, commercial property, or even the LLC that manages your real estate empire. Placing the LLC in the trust is a smart move, as the value of the LLC counts towards the probate threshold. Take it out of the equation, put it in the trust, and manage everything from there. It's not just how the rich folks do it; it's a strategy that works for us regular folks too.


Remember that every investor's situation is unique, so it's essential to work closely with estate planning professionals who can tailor a plan to your specific needs and goals. Your family's legacy is worth the effort. At Law Mother, Estate Planning is our focus. We are proud to be sponsors of ICOR and offer ICOR members a complimentary 15 minute call. 

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