Real estate investing can be a great way to build wealth and is often a go-to strategy to create generational wealth. Now there are hard assets that can be passed on to the next generation and used to generate income in the form of rent or as collateral for loans to fund other wealth building ventures. If you or your parents have a second home or some commercial property, the question of what to do with those assets is an important one. Should your second or investment property go into your trust, or should you put it in something like an LLC?
Baseline Rule: Put it in Trust
To begin, the baseline rule for what to do with any real estate you might have, whether it be your primary residence or an investment property, is to put that property in your trust. You have done the work to acquire some property so you may as well keep the most you can in your estate and not shackle your family with big legal and court fees after you pass on. Put it in trust, avoid probate, maximize your estate value, and keep the money in the family. We discuss this often, so we will leave it there.
Read more:
What About an LLC?
You might be thinking, “What about an LLC or an S-Corp? I heard those give me creditor protection whereas a trust might not and how does this affect taxes?” If so, great, your mind is in the right place. We have already done a deep dive on when to use an LLC vs a trust, but to be brief, there are different considerations on whether you want to use an LLC type structure as opposed to your trust. In this case, if it is truly a second home or just one investment property, you are not building a real estate empire just yet, then titling that property in your trust is going to be your best bet.
If you have real estate, then you are going to have a trust regardless to avoid probate, so use it for its intended purpose – hold assets to avoid probate. Managing the property is just as simple as if it was in your name alone as it does not change what you can do with the property – sell it, refinance, borrow against it. Your property and personal taxes won’t change since it’s just an asset you still own. Additionally, if it is a property you are renting out, its generating income, then the easiest strategy may be to simply hire a property management company and have good liability insurance (something you should have regardless whether it be in your name alone, in the trust or in an LLC). If the property is not generating income, it’s truly a vacation or family home, then there’s no need to add the complexity of an LLC and the yearly minimum cost of keeping the LLC in good standing.
However, if you have multiple properties that are generating income – you are really building a real estate empire, then the strategy should likely pivot to an LLC-type structure.
Read more: Land Trust vs LLC | When to Use One Over the Other
What About Out-of-State Property?
Next, with real estate prices being what they currently are in California, you might be thinking about investing in properties in other states. Let’s say you have a California trust and live in California, but you have another property in Idaho. You can put that Idaho property in your California trust and not have to worry about probate in California or Idaho. Idaho’s probate threshold doesn’t matter since the property is in trust.
Theoretically, you could have a separate Idaho trust to hold your Idaho property and a California trust to hold the California property, but that just creates complexity and headache. Now the family has to administer two trusts, get two EINs from the IRS, two trust accounts, two trust tax returns, and this would only create infighting if the terms of each trust aren’t identical. Our advice in that case – just do one trust.
Additionally, even if you move from California to Idaho, you can simply amend the trust to make it an Idaho trust once you get there but not have to worry about retitling assets since you would keep the same trust name. Even if you did not do that, your California trust will be recognized as valid in Idaho so long as it was valid when executed in California.
Read more: How to Name Your Trust
Everything Goes in Trust
At the end of the day, put everything in your trust – your first home, your second home, your commercial lot, and even that LLC that manages your real estate empire. Put the LLC in trust because the value of that LLC will count towards the probate threshold so take it out of the equation, put it in the trust, and manage everything from there. It’s how the rich folks do it. It’s how us regular folks do it.
BETHEL LAW CORPORATION
ESTATE PLANNING | ELDER LAW | BUSINESS PLANNING
CLICK HERE OR CALL US AT 909-307-6282 TO SCHEDULE A FREE CONSULTATION.
