My grandfather practiced dentistry for 50 years in Jamaica and never set up a trust.
Today the question that comes up first is whether a rental belongs in an LLC or a trust.
But it is the wrong shape of question. An LLC and a trust do different jobs. Some households need one. Some need both. Some need neither. Which is which depends on your state and your assets and your family.
This guide is not going to tell you which to choose. It shows what each tool is for and where they differ so your estate attorney can decide with you and you can ask better questions. It is education, not legal or tax advice. Your attorney decides the legal side and your CPA decides the tax side.
What is an LLC for a rental property?
An LLC is a business entity you form under state law. The property is titled in the LLC's name and you own an interest in the LLC.
Its main job is to keep the property's risks apart from the rest of what you own. If a tenant is hurt or a contractor sues the claim is aimed at the LLC first. How well that works depends on your state's law and on how you run the LLC. Mixing personal money with the LLC's money is the classic way to weaken it. Insurance still matters.
An LLC also brings paperwork. It needs an operating agreement and its own bank account and in many states an annual filing and a fee.
For federal income tax the IRS treats a one-owner LLC as part of its owner by default unless it elects otherwise. An LLC with more than one owner is treated as a partnership by default (IRS: Limited Liability Company and Treas. Reg. §301.7701-3). Whether that fits your return is for your CPA.
What is a trust for a rental property?
A trust is an arrangement where one person called the trustee holds and manages property for the benefit of others called beneficiaries. You write the rules in a document.
Its main job is control and succession. It says who manages the property if you cannot and who receives it when you are gone and when. A trust can also be written to hold the property for children until a certain age.
A trust does its work only when the property is actually placed in it. The deed has to be retitled. A trust document sitting in a drawer with the deed still in your own name does very little.
A trust that you can change during your life usually does not by itself separate the property from your personal liability. Ask your attorney how that works in your state.
For income tax a trust you control during your life is generally ignored and its income is reported as yours. Other kinds of trusts file their own returns (Treas. Reg. §1.671-1 and IRS Form 1041). Which kind fits is for your attorney and your CPA.
Seven jobs a rental owner needs done
This is the part to print. Read each job. Then read what usually speaks to it. The last line of every item is the same on purpose.
- Keeping the property's risks apart from your other assets. Usually an LLC's job. A trust alone usually is not built for this. Ask your attorney.
- Deciding who manages the property if you cannot. Usually a trust's job through a successor trustee. An LLC's operating agreement can name a manager too. Ask your attorney.
- Deciding who receives the property and when. Usually a trust or a will. An LLC interest can pass the same way. Ask your attorney.
- Keeping the process after a death simpler for the family. In many states a trust can help the property pass without a court process. The rules differ by state. Ask your attorney.
- Paperwork and yearly cost. An LLC often has state filings and fees. A trust often has fewer yearly filings but more work up front to retitle assets. Ask your attorney.
- How the property shows up on your tax return. It depends on the type of LLC and the type of trust. Your CPA confirms it before you sign anything. If you qualify; your CPA decides.
- Telling the insurance company and the title company. Both tools change who the owner is. Both can raise questions with your policy and your title. Ask your attorney and your insurance professional.
Why do some households use both?
The two tools can sit together. A common pattern is a trust that owns the LLC. The LLC holds the rental. The LLC does the risk job and the trust does the control and succession job.
Another household might hold the rental in their own names and rely on insurance and a will. Another might choose a trust and no LLC. None of these is a recommendation. They are examples of why the answer is a conversation and not a rule.
Why does this get decided before the purchase?
Because the title is easiest to get right the first time. Moving a property into an LLC or a trust later can mean more steps and new questions for your attorney and your CPA and your insurer.
My grandfather owned his building in Halfway Tree and did nearly everything right. Fifty years built. Three years gone.
An LLC would not have solved that and neither would a trust alone. The structure was the step he skipped. The tool is the attorney's choice. Making the choice at all is yours.
Questions to bring to your estate attorney
- What is each of us trying to protect and from what?
- Given our state and our assets would you use an LLC or a trust or both for this property and why?
- If we use a trust who is the trustee and who is the successor trustee?
- What has to be retitled and by when so the structure actually works?
- How do we keep the LLC separate in practice so the protection holds?
- What do we tell our insurance and title companies and when?
Questions to bring to your CPA
- How would the structure our attorney suggests change how this rental is reported on our return?
- Do we need any new tax filings if the property sits in an LLC or a trust?
- Does the structure change how we track hours or records if we run a short-term rental?
Our guide to estate planning for a rental property turns the wider ownership questions into a one-page worksheet. Our checklist for your CPA meeting lists what to gather for the tax side. Our guide to home equity for a rental covers the planning questions to finish before any purchase.
If you are an estate attorney or a CPA and a client asks you this question our page for professionals who work with our clients explains how the program sits next to your work. If you are a household and want to see where you stand first take the Full Blueprint Check. It never recommends buying and deciding not to buy is a good outcome.
How The Full Blueprint fits in
The Full Blueprint is one-on-one coaching that walks a household through these decisions in order: the goal and the professionals and the structure and the property and the records. Structure is Step 5 of 10 and it comes before the purchase on purpose. We introduce you to CPAs and estate attorneys and cost segregation specialists. You choose who you work with. Your attorney makes the legal calls and your CPA makes the tax calls. The Full Blueprint is a coaching program of Twenty-Five Media Group LLC. It is separate from any lender and never arranges financing.
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