A Limited Liability Company (LLC) is designed to protect your assets from lawsuit liabilities. A Living Trust is designed to preserve your assets from unnecessary taxes, probate, and court control of your estate when you die or if you become incapacitated. The LLC is a corporate entity featuring liability protection for its owner(s), much like a “C” or an “S” corporation. However, it is often preferable to a corporation since it is more flexible, easier to operate, and requires fewer formalities.
Why an LLC?
Placing your rental property into an LLC creates a liability barrier which helps protect your personal assets, such as your home, bank accounts, investments, and future income. Once your rental property is transferred to the LLC, the LLC (not you) becomes the owner of the property. Tenant rent checks are then payable to the LLC. Future lease agreements should indicate the LLC as the landlord, and all business involving the LLC property must be conducted in the LLC’s name and through the LLC’s bank account.
How it Works
Although the LLC becomes the title owner of the rental property, you are the underlying owner. The underlying owner, legally called a “Member,” may be you as an individual. It may also be your living trust. In nearly all cases, it is recommended that your living trust be the Owner/Member of the LLC. Upon your death or incapacitation, the person(s) you have appointed as the successor trustee(s) of your living trust will immediately take control and management of the LLC. This eliminates the need for any lengthy court involvement such as probate or conservatorship proceedings. For this reason alone, the use of your living trust as the LLC’s Owner/Member is vastly superior for your heirs, tenants, and any business partners.
In most cases, should you not have a living trust, all real estate, business holdings, bank and financial accounts, owned by you at the time of your death, must go through probate. Probate is a complex court procedure in which a decedent’s creditors are identified and paid. The court will also make a judicial determination as to the decedent’s heirs who eventually receive whatever assets are left over. Probate usually takes several years, and is expensive and complex.
Minimize Taxes
All the significant costs, delays, and inconveniences of going through probate can be completely avoided with proper estate planning, including the use of a living trust. You will, however, retain full control of the trust and use of your assets without restriction while you are alive. And since your living trust uses your social security number as its tax ID number, your income tax returns will be prepared the same as before.
Living trust estate plans can minimize estate (inheritance) taxes, capital gains taxes, and property taxes. In addition, living trusts can provide for a regulated inheritance to young beneficiaries, so that they don’t receive their entire inheritance outright, before they are able to make wise financial decisions.
There are many other benefits and advantages that a living trust estate plan can provide. But none of these are available if you die without having one in place. If you own rental property, the combined use of an LLC with a living trust can ensure your heirs aren’t terribly inconvenienced upon your death or incapacity, and helps to minimize or eliminate taxes and liabilities to the greatest extent possible by protecting and preserving your assets.
Michael K. Elson is a prominent Trusts & Estates attorney located in Encino and Valencia and provides estate, business and asset protection planning, including trusts, LLCs, corporations, probate, and trust administration. Mr. Elson provides estate planning for income property owners and has been writing articles for the AOA magazine for nearly 20 years. He may be reached at www.living-trust-attorney.com or by calling (818) 763-8831 or emailing [email protected]. This article is a broad overview of some estate planning options. Since each person’s circumstances are unique, and there are many intricate exceptions and periodic changes in the law, the mere reading of the material herein does not create an attorney/client relationship between the author and the reader.