SHOULD I CREATE A TRUST TO OWN MY REAL ESTATE INTERESTS – OR IS A LIMITED LIABILITY COMPANY BETTER?

For Those with Real Estate Holdings

Earlier this week I wrote a blog on the advisability of placing real estate holdings in a trust. That led me to review the relative strengths of real estate being owned by a trust as opposed to a limited liability company.

A STRAIGHT UP COMPARISON

Trusts are established pursuant to a trust agreement; a limited liability company is established by the execution of a certificate of incorporation. As a general rule, the upfront creation expenses are roughly the same.

A trust agreement is supposed to be filed in each county and state where the trust owns real estate; a corporation’s certificate of incorporation is maintained with the secretary of state where the company is incorporated and each secretary of state where it is doing business (sometimes called a foreign corporation filing). The various secretaries of state will charge you an annual incorporation or company maintenance fee, whereas a trust will not suffer those annual expenses. But the secretaries of state will maintain copies of your important corporate documents, whereas you will be charged with keeping up with your trust agreements – and I have seen many instances where the “trust agreement,” namely the agreement controlling the terms of the trust and the powers of the trustee, have been irretrievably misplaced.

Often, estate planning firms do not feel comfortable creating companies; since we support small businesses and handle real estate transactions, in addition to estate planning, we are comfortable with both.

As an important aside, irrespective of the entity selected, trust or company, it is absolutely necessary to execute deeds conveying the real estate either into the trust or into the company.

Also, for many, the advantage of incorporating in Delaware and Nevada are grossly overstated and can give rise to administrative burdens that can otherwise be avoided.

LIABILITY PROTECTION

Limited liability companies are especially established to protect the members (namely, you) from any liability beyond the assets owned by the company. A good general liability policy can usually assure that these assets will be protected. Trusts probably offer the same liability protection and need to be similarly insured.

TAX ADVANTAGES

The tax revisions of the Trump era provide, in some limited instances, federal income tax advantages for limited liability companies. You should consult with your tax advisor as to whether either a limited liability company or trust offer significant tax advantages. Placing your home in either a limited liability company or a trust may result in a loss of your “homestead tax exemption,” which, depending upon the state, can be significant.

INSURANCE

You should consult with your local insurance agent and assure yourself that the assets owned by either the limited liability company or the trust are properly insured.

SUPER SECRET?

In order to transact business with a trust, the contracting party may be required to review the trust agreement. So, despite what anyone has told you, there may be instances where that trust agreement has to be given to a third party. When real estate transactions are involved, the Texas Title Standards will require just that. On the other hand, only the certificate of incorporation and other documents on file with the secretary of state for the state of incorporation will be required by third parties doing business with your limited liability company.

SUCCESSION PLANNING

Limited liability companies do not dissolve upon the death of a member. So, the business activities of a limited liability company are not interrupted by the death of a member, although the stockholder’s assets, including his or her ownership in the limited liability company, may need to be probated to assure a proper reclassification of owners.

Similarly, unless the trust agreement provides for termination upon the death of its settlor or beneficiary, it survives the death of the trustee or beneficiary. So, theoretically, assets owned by the trust do not need to be re-titled or probated. As I mentioned before, however, most people fail to convey all of their real estate investments (sometimes actually none) into the trust. In almost every instance, all assets not owned by a trust will need to be retitled through a probate proceeding.

IN CONCLUSION

The choice to own real estate in your own name, a trust, or a limited liability company, is an important one that requires some thought and planning.

Our firm does not offer “cookie-cutter” solutions. We tailor to each individual’s special needs. This can be especially important where real estate holdings are involved, and out of state properties are part of your asset portfolio. Whatever you do, do not go with a one size fits all law firm – get a specialized service.

There are lots of options and many nuances to how you should own your real estate. For a more detailed and specific analysis for your properties please contact the law firm for an estate and asset protection plan that fits your needs. We can also assist you with deed transfers to get your properties into the right place.

by Jack M. Wilhelm

Edward Wilhelm and Jack Wilhelm provide tremendously high value legal assistance to a large number of very desirable clients.

THE WILHELM LAW FIRM, 5524 Bee Caves Road, Suite B5, Austin, TX 78746; (512) 236 8400 (phone); (512) 236 8404 (fax); www.wilhelmlaw.net

DISCLAIMER: The information on this site is not intended to and does not offer legal advice, legal recommendations, or legal representation on any matter. You need to consult an attorney in person for legal advice regarding your individual situation.