Seeking insight from anyone who has converted their home(s) into an LLC for short- or long-term rentals versus simply extending an umbrella insurance policy. Our primary goal is liability protection; potential tax benefits are a secondary consideration. Would appreciate hearing about your experience or recommendations. Homes are in Suffolk County, LI, NY. Thanks!
For liability issues, a multi-partnership LLC is good. (Not so much for a solo/individual LLC). If you have many properties, consider having several LLCs.
An alternative plan: I've been using trusts (inter-vivos, revocable land-holding trust) for decades. when you pair that with a good umbrella policy, you can keep the target off your back (don't name the trust in your own name, duh).
You will sleep well knowing the umbrella will mostly cover any lawsuits. Put each property in it's own, separate trust. Trusts are basically transparent for IRS purposes, so everything will flow through to you (trustee and/or beneficiaries).
Once you have the trust template, it's just cut and paste--your only costs are recording fees.
Plus, no due-on-sale worries if you are using the trust for estate planning purposes, which we all are, of course.
My 'avoid liability issues rule': don't do stupid stuff! Follow the l/t and other laws to the letter. Treat everyone courteously and fairly.
Putting your rentals into an LLC vs just keeping them in your personal name with umbrella coverage comes down to weighing liability protection, costs, financing, and taxes.
With an LLC, you can create a legal separation between you and the property, so if a tenant or guest sues, in theory they're going after the LLC's assets, not your personal ones.
It can also make it cleaner if you're bringing in partners or selling later. That said, in New York, LLC setup and annual fees add to your costs, you'll likely need to transfer the deed (which could trigger transfer taxes or mortgage issues), and financing under an LLC is usually more expensive with higher down payments.
Umbrella insurance is cheaper and easy to add, but it’s still tied to you personally. If the claim exceeds your coverage limits, your personal assets could still be at risk. Also, insurance companies can deny claims for certain situations, so it’s not bulletproof.
Many people in your shoes run the rentals in an LLC for liability purposes but keep their primary home out of it, and they make sure their LLC has its own bank account, lease agreements, and insurance. The trade-off is more paperwork and cost versus simplicity with umbrella coverage.