When to form an LLC and/or Family Trust

Question

Greetings. There's been a ton of discussion around when to form a LLC. I would love to solicit your advice as I'm guessing many of you have gone through the same thought process. A bit of background info:

1) My wife and I after 30 years of working have a healthy stock portfolio. Enough that we want to make sure that this asset class is protected from any potential liability that may come out of our REI

2) We currently have a primary residence (in CA) and five rental properties (1 CA, 3 Minn, 1 MO). We plan on aggressively purchasing more in the next 3 years by allocating by liquidating some of our stock portfolio to REI

3) We have an old trust, and thinking about creating a new one so we can include our new properties

So the questions are:

1) When is a good time to think about putting our properties in a LLC as a way to shield our other assets. I know we need to very strictly keep all rev/expenses in the LLC (e.g. separate bank accounts, etc) and then also quick deed title to the LLC. The loans are still in our names, so not sure how much exposure that gives us. Also should we create a separate LLC for each state that we own property? Should the LLC be in the same state as the property?

2) As for our family trust. Is it ok to create a single revocable trust or should we be looking at creating two trusts? A revocable for our non property assets and an irrevocable for our REI? I read that an irrevocable trust doesn't allow liability to crawl out of the trust to other assets.

I realize these are definitely advanced questions that a lawyer/CPA should be answering, but they all seem to have different opinions. I'm interested in what you all have done as practical real life suggestions/advice.

Thanks!

Carnet Williams · Answer

@Katie Lepore thanks so much for the feedback. I really enjoyed your article and it provides some food for thought indeed. You mentioned an umbrella policy.. would we need one for each property? My wife and I have a general umbrella policy (that I need to followup on to see if it covers slip and falls and other incidents that can happen on a property).

Katie L. · Answer

@Carnet Williams

Yes, very advanced questions that will be very different for every person. You should absolutely seek out an attorney to get personalized advice. The forums are great for idea generating but don't take the place of personalized advice.

There are several considerations that can go into the analysis of whether you need an LLC or whether a large insurance policy will suffice. Will depend on several factors like the type of property, type of tenants, your risk tolerance, other assets you own, your estate planning, laws where the property is located, etc.

Any lawsuits would be limited to the assets of the LLC and not your personal assets (assuming you run the LLC appropriately and the corporate veil is not pierced). But, an LLC will not limit you from liability in total. You can still lose your investment in the LLC. If you're going the umbrella insurance route, make sure it will cover you for several things including just the routine slip and fall (like mold or earthquake). You'll also want to ensure you have a good property manager to look after the upkeep of the property if you are not there to notice anything deteriorating or which may need attention.

This article goes into a lot of the considerations about whether to form an LLC or not: https://www.mmpph.com/wp-content/uploads/2019/04/May-2019-newsletter.pdf

Creating an LLC in California would cost you a minimum tax of $800 every year. You would have ongoing filing requirements with the State and would need to keep business records and documentation.

You also want to look at whether a pass-through entity helps your bottom line and your taxes. There is a new 20% pass through deduction you may qualify for that could help you, but not everyone qualifies. You should still be able to get this even if the properties are not in an LLC, if you qualify.

As for the irrevocable trust, there are a lot of things you need to consider before going that route. Trusts are subject to the highest income tax brackets very quickly so if you're planning on having rental income flow through the trust, you'll want to keep this in mind or structure in the correct way to reach your goals. You also want to make sure you don't have a self-settled trust if you're looking for liability protection. There's a lot of things to consider here.

These are all things you will want to discuss with your attorney and CPA. If you need references for either of them in San Diego, let me know.

*This post does not create an attorney-client or CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

When to form an LLC and/or Family Trust

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