Setting up LLC'S. How should wife be involved ?

48 Replies

@Patrick Liska

The answer for Texas is she owns 1/2 whether or not she is a member.   

Originally posted by @Patrick Liska :

@James Miller, @Greg H. lets take divorce out of the picture, lets say they live a good marriage but something happens to him and he passes ( sorry it's morbid, but thinking Estate wise) if she owns half of the llc ( the property) then the basis upon his death would only be raised his half of the assessed value of the property, being she owns half, would they not ? if she is not on the llc and he passes then the basis would be the full assessed value of the property, correct ? or am i thinking wrong on that ?

Texas is a community property state so survivng spouse would get a favorable basis step up on entire LLC interest if interest is CP. If owned one half one half separate property survivor only gets step up in basis on decedent's share.

@Maugno M. Setting up an LLC with or without your wife being a part of it is possible. The question is , what is your goal? Do you want to share the ownership and profits with your wife, or keep them yourself? We don't know enough about your situation to advise you, therefore; I advise that you and your wife discuss it with an attorney and figure out what works for your specific circumstances. Good luck.

@Karen Margrave

The original question had more to do with what would be considered separate property. In Texas, whether or not she is on the deed or a member of the LLC matters little in terms of her interest as we are a community property state

My Bride is not a member of any of my LLC nor would she really want to be. However, I am not sure that I even get close to 1/2 the profits as she is more than happy to take care of that end ! :)

@Maugno M. My husband and I are both managers on LLCs and it’s 50-50% between us in the companies.

Do you want her as a team member or a critic? She owns half anyway just like you do. My wife is completely involved-she is the PM, could not ask for more.

@Greg H. that's not how I read it. Whether or not she's part of the LLC, and how, etc. has everything to do with taxes, liability, etc., therefore; I stand by my advice, that they should discuss their specific circumstances with an attorney, and probably a CPA, doing so has no negative impact.

@Karen Margrave

Your post had to do with "ownership and profits" which is the same if the LLC is community property. I agree that there are other factors to consider

@Greg H. if you read the response from @James Miller to my question ( and correct me if i am wrong James) he essentially agreed with me, if your spouse is not part of the llc your step up basis upon your passing is the full assessed value, but if the spouse is 50% owner then the step up basis is only 50% of the value because your spouse owns 1/2. so to say that @Karen Margrave is wrong is not correct because it depends on how you want to invest and plan for your Estate is it long term or short term. do you want your spouse to be able to claim 1/2 the profits from the LLC ?, do you claim married filing jointly or separately on your tax returns? as a spouse i would think your money is theirs and their money is yours so they would share in the profits, but if you pass do you want them to be able to claim 1/2 the step up basis or the full basis upon inheritance, what is that persons goal. there is more involved then she gets 1/2 of what i own, even in Texas.

Originally posted by @Patrick Liska :

@Greg H. if you read the response from @James Miller to my question ( and correct me if i am wrong James) he essentially agreed with me, if your spouse is not part of the llc your step up basis upon your passing is the full assessed value, but if the spouse is 50% owner then the step up basis is only 50% of the value because your spouse owns 1/2. so to say that @Karen Margrave is wrong is not correct because it depends on how you want to invest and plan for your Estate is it long term or short term. do you want your spouse to be able to claim 1/2 the profits from the LLC ?, do you claim married filing jointly or separately on your tax returns? as a spouse i would think your money is theirs and their money is yours so they would share in the profits, but if you pass do you want them to be able to claim 1/2 the step up basis or the full basis upon inheritance, what is that persons goal. there is more involved then she gets 1/2 of what i own, even in Texas.

 The OP asked the original question regarding his business of flipping houses. As you know, inventory in this business is short term so estate planning is a tiny tiny piece of the puzzle as with short term assets any step up basis would more than likely be evaporated with the extra time needed to liquidate the asset

@Greg H. , the OP mentioned flipping LLC and an LLC for his rentals , so he talked about starting 2 llc's. i agree, the flipping business would be short term and would have no Estate planning but the buy and hold would

Originally posted by @Patrick Liska :

@Greg H., the OP mentioned flipping LLC and an LLC for his rentals , so he talked about starting 2 llc's. i agree, the flipping business would be short term and would have no Estate planning but the buy and hold would

 You are correct.  I have read that post a couple of times and didn’t catch the rental part.  On the rental part, I would do a different structure if I was a long long term keeper of a rental property.  Personally, I have never been a long term owner of rentals as I will always sell when it is advantageous and then replicate the cash flow with a different property. Just my philosophy

@Karen Margrave If I interpreted your response wrong by not catching the rental part, I apologize 

Originally posted by @Patrick Liska :

@Greg H. if you read the response from @James Miller to my question ( and correct me if i am wrong James) he essentially agreed with me, if your spouse is not part of the llc your step up basis upon your passing is the full assessed value, but if the spouse is 50% owner then the step up basis is only 50% of the value because your spouse owns 1/2. so to say that @Karen Margrave is wrong is not correct because it depends on how you want to invest and plan for your Estate is it long term or short term. do you want your spouse to be able to claim 1/2 the profits from the LLC ?, do you claim married filing jointly or separately on your tax returns? as a spouse i would think your money is theirs and their money is yours so they would share in the profits, but if you pass do you want them to be able to claim 1/2 the step up basis or the full basis upon inheritance, what is that persons goal. there is more involved then she gets 1/2 of what i own, even in Texas.

 The percentages aren’t what matters. What matters is whether owed as community property or separate property. Which are legal terms of art in TX. 

@Costin I. I understand this, but just wanted some insight, or different point of views from other's that do RE. It can get complicated, and i want to be ready, now and in the future. Great info i appreciate it, are you saying a total of three LLC'S?

@Costin I. I understand this, but just wanted some insight, or different point of views from other's that do RE. It can get complicated, and i want to be ready, now and in the future. Great info i appreciate it, are you saying a total of three LLC'S?

This post has been removed.

@Maugno M. Yes, it can get complicated and overwhelming. But ultimately, that is the structure you should aim for. 

Now, it depends on your situation, goals, progress speed, etc. when and which one you put in place.

For example, if you don't have any major personal assets to protect, I would wait to get to that point before incurring these expenses and complications. If you do an occasional flip, here and there, every other years, might be overkill to get LLCs for that. If you hire property managers for your rentals, you don't need an PM operations entity. If your rentals are over leveraged to the hilt (the mortgage note itself is a form of litigation deterrent as there is little to collect if forced to sell), with little cash flow, then there is little to protect and I would wait till you get some serious equity. But these risk thresholds can only be determined by you and your tolerance to risk.

But, if you do a lot of flips, you might want to invest in an LLC. And while you can recycle the LLC, if you have multiple rehabs going at the same time and something goes wrong and you get sued, you can get in a pickle with all of them. And after you sell the flip, if later the buyer comes back with a claim, and you are doing other flips, again, you can get in a pickle with all of them. So, I would - then do each flip in a child Series-LLC, after which you left it dormant once flip is sold and just reissue another child Series-LLC for next flip.

If you have many rentals, with substantial equity and cash flow, then maybe you should place them in an asset holding entity. Same idea, depending on your risk tolerance, and the type of rentals and other criteria (a longer discussion here about the asset distribution per entity), it can be in one LLC, or separate LLC - since you are in Texas and have the option spring for the 20-30% more initial cost and establish a Series-LLC as your holding entity. Now, there are two reasons why not combine with the flipping one: this holding entity will just hold assets, will not be involved in any activities. Plus, it will be hard to differentiate between active income and expenses and passive income and expense, probably a nightmare from a bookkeeping, accounting and taxes perspective.

If you do your own property management, then you want a separate LLC for that - same idea, separate active from passive participation. I'm not sure if this can be one of the child Series-LLC, or is better to be a separate LLC (you might want to have it taxed differently this one, for other considerations, like if you draw a salary out of it, or want to establish Solo 401K plans, etc.). On this one, things get a bit more involved, and require a conversation with specialists (AP lawyer and CPA) to take in account your full picture and plans.

Here is a diagram I put together to help for similar questions:

@Maugno M. All questions you are asking now were supposed to be asked before the marriage. The outcome of your asset protection depends on your wife right now. You need a postnup agreement. Can you make her sign that, noone here can tell. Till then everything you make shares between you two, including the profit from your flip. Moreover, when you buy and sell seceral times, it would be hard to trace the original pre marriage money. It does not matter how many times you repeat in this thread that you want to protect youself, there are only 2 solutions for this: get postnup or get divorse now.

Nice chart! Can you make one for the OP? I think married people are pretty easy, Treat them as one entity. If she is involved in the business put her on the LLC, if not, don't.

Originally posted by @Kate J. :
@Maugno Mora All questions you are asking now were supposed to be asked before the marriage. The outcome of your asset protection depends on your wife right now. You need a postnup agreement. Can you make her sign that, noone here can tell. Till then everything you make shares between you two, including the profit from your flip. Moreover, when you buy and sell seceral times, it would be hard to trace the original pre marriage money. It does not matter how many times you repeat in this thread that you want to protect youself, there are only 2 solutions for this: get postnup or get divorse now.

 I think a divorce would be a bit harsh; marriage is a special kind of legal partnership. A post-nuptial agreement is an option; perhaps you should discuss with a family lawyer your options.

Originally posted by @James Miller :
Originally posted by @Kate J.:
@Maugno Mora All questions you are asking now were supposed to be asked before the marriage. The outcome of your asset protection depends on your wife right now. You need a postnup agreement. Can you make her sign that, noone here can tell. Till then everything you make shares between you two, including the profit from your flip. Moreover, when you buy and sell seceral times, it would be hard to trace the original pre marriage money. It does not matter how many times you repeat in this thread that you want to protect youself, there are only 2 solutions for this: get postnup or get divorse now.

 I think a divorce would be a bit harsh; marriage is a special kind of legal partnership. A post-nuptial agreement is an option; perhaps you should discuss with a family lawyer your options.

It's harsh, but what if they can't come to an agreement? It's quite possible. When I was young and somewhat stupid, Ive sensed that the divorse is coming and I've asked my husband to write a postnup. It was horrible... He demanded his full 3 year salary from me or no postnup. It was all during the time that we were in a good relationship. I ended up paying him what he wanted to secure the rest of my asset with postnup. I would rather not marry, than marry and loose my money. Besides, marriage is just a paper. This paper is supposed to simplify life and not make it complicated.

Originally posted by @Kate J. :
Originally posted by @James Miller:
Originally posted by @Kate J.:
@Maugno Mora All questions you are asking now were supposed to be asked before the marriage. The outcome of your asset protection depends on your wife right now. You need a postnup agreement. Can you make her sign that, noone here can tell. Till then everything you make shares between you two, including the profit from your flip. Moreover, when you buy and sell seceral times, it would be hard to trace the original pre marriage money. It does not matter how many times you repeat in this thread that you want to protect youself, there are only 2 solutions for this: get postnup or get divorse now.

 I think a divorce would be a bit harsh; marriage is a special kind of legal partnership. A post-nuptial agreement is an option; perhaps you should discuss with a family lawyer your options.

It's harsh, but what if they can't come to an agreement? It's quite possible. When I was young and somewhat stupid, Ive sensed that the divorse is coming and I've asked my husband to write a postnup. It was horrible... He demanded his full 3 year salary from me or no postnup. It was all during the time that we were in a good relationship. I ended up paying him what he wanted to secure the rest of my asset with postnup. I would rather not marry, than marry and loose my money. Besides, marriage is just a paper. This paper is supposed to simplify life and not make it complicated.

If they can't come to an agreement, then there are possible other options. The big thing I would think is to simply get spouse to confirm that the real estate remains separate even if contributed to an LLC, and to take care of any rights of reimbursement now. Half the rents produced by the separate property are the spouse's right now anyways, so there's negotiation room.

Thank you all for all the feedback.  i appreciate it, i ended up setting it up as just two separate entities, wife and I members. Confirming it all today, names check out, etc. 

I think you all a looking at this the wrong way.. The reason you put it in an LLC is to project you from personal attacks from others. Putting up an LLC places a shield between you and the company. Technically if the LLC screws up, you and your personal assets are protected. LLC are for asset protection/insulation.

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