Many of our estate planning clients in Peoria and Scottsdale have questions about how best to protect it – should you place it in a trust or a form an LLC? Both of these options have advantages but making the right choice depends on your goals for asset protection, estate planning, and tax considerations.
Why Consider an LLC for Rental Property?
Arizona estate planning clients with properties in Peoria and Scottsdale might decide that an llc is the right option because of the benefits forming a Limited Liability Company offers:
- Liability Protection – When properly structured and documented, an LLC is a way to limit liability such that only the LLC property is at risk, not your personal assets. For example, if someone is injured while visiting the property that your Peoria or Scottsdale tenant is renting from you, the visitor may try to sue you – the homeowner – for the accident that occurred. When your LLC owns only the rental property, having the LLC helps insure that only the property owned by the LLC is subject to risk, not your personal assets.
- Separate Business Entity – Having a separate business entity for your Scottsdale or Peoria rental properties allows you to keep your rental income and expenses separate from your personal finances. This can have some tax advantages.
- Tax Advantages – Speaking of tax advantages, LLCs are very flexible in terms of how they are taxed (e.g., partnership, sole proprietorship, S-Corp, etc.) which can be useful in saving money.
On the other hand, LLCs do have some disadvantages such as:
- The formalities required to be maintained so that you can take full advantage of the limited liability protection can be cumbersome.
- It may be more difficult to get a mortgage on property owned by an LLC rather than as a person.
Why Consider a Trust for your Rental Property?
A revocable living trust is a fantastic estate planning tool for our Scottsdale and Peoria clients because they ensure a smooth transition of assets without the need for probate when the trust is correctly set-up and funded. This provides a lot of benefits for your rental property such as:
- Avoiding Probate – A trust allows your heirs to inherit the real estate without the probate court process.
- Privacy – LLCs are public entities whereas trusts are private agreements between yourself and your Trustee.
- Continuity – If you become incapacitated, your trust contains provisions to enable your trusted successor to make decisions about and assist with the management of your rental property whereas an LLC does not contain these provisions, especially if you set it up yourself.
But, an LLC does have some disadvantages, for example:
- A trust does not provide the limited liability protection that an LLC does.
- If you are sued for something related to the rental property, your personal assets can be at risk.
Can you do both an LLC and a Trust?
Yes! Our Scottsdale and Peoria clients do this often. In this structure, your LLC can own the rental property and your trust can then in turn own the LLC. This provides liability protection and allows you to take advantage of a revocable living trust.
Which option is best?
If you are primarily worried about asset protection, an LLC might be best. But, you’re most focused on avoiding probate, a revocable living trust is a great option. For the best of both, work with a professional to create a revocable living trust that owns your LLC.
At Windrose Law Center PLC, we help Scottsdale and Peoria rental property owners navigate the complexities of estate planning and asset protection. If you would like personalized guidance, schedule a consultation today to discuss your unique situation. Schedule a consultation today and we will be happy to discuss these options with you.