California Keep rental property in Living Trust vs LLC

8 Replies

We have a family home that we are renting out in San Francisco California. It is currently in our parents Living Trust. I asked our Trust Lawyer if we should move the property into an LLC. This is what he said.

" if transferred to an LLC then upon passing the property is no longer transferred from parent to child but from LLC to child. If transferred from LLC to child then the property would be re-assessed at current value and would not qualify for Prop 13 protection. He recommends to purchase more liability insurance."

I never plan on selling the property. When moving from living trust to an LLC is the property re-assessed before putting in the LLC? House was purchased in the 70's id like to keep the 70's sale price.

I believe you would owe the taxes REGARDLESS if you sold the house or kept it if it's in the LLC. Maybe there is a legal way around this, I dunno. But a house in SF purchased in the 70's? I'd say the value of keeping the original tax base creams (like in $1000+ per month) any perceived advantage of the LLC.

If you're renting it out, yes increase your liability insurance. Also make sure the policy has something called "wrongful eviction" coverage. It's common for rental policies.  Given that SF has crazy tenant protections, I'd add that on. If a future tenant has any semblance of a case against you (even if it's not your fault), you can bet the rent board or court would side with the tenant. 

You say "we" so are there multiple heirs? Not sure I'd want one of my siblings being trustee only to wake up one day and discover the house has been refinanced or sold. It happens so don't think for second it won't ever happen to you. The guy who cuts my lawn grew up in a house across the street. There was also a duplex out back. The property was in the parent's trust. After both passed, two brothers ganged up on the third and refinanced out all the equity and then sold the property to a developer who tore it all down. Now the third brother lives in a mobile home park down the street and the three houses that were built on his former home sold for north of $5M. He got nothing out of the deal except the horrible reminder that he got screwed every time he comes here to mow and blow.

If you have none of those concerns, I wouldn't mess with that title at all. As another member stated, you'll lose your prop 13 status and that super low tax bill will show up this coming November with the decimal place moved to the right one column. 

The best asset protection is good insurance. That is a lot cheaper than being reassessed.

Your attorney is not exactly correct. If you hold your membership interest in said LLC via your Trust, then upon your passing, your interest passes according to the Trust agreement. Put another way, your beneficiary will become a member/owner in the LLC. This is why it is important to have a competent CPA on your team who understands estate/trust/gift taxes in addition to business taxes.