Protecting Your Legacy: Holding Rental Property in an LLC

August 2, 2017

Managing wealth is a two-fold endeavor, pairing two important goals: building and protecting. As advisors, we often find that while our clients’ initial questions and interests focus on the growth of their investments, a vital part of our ongoing work concerns the safeguarding of those assets.

As part of our regular planning meetings, we include a review of personal assets such as private real estate. Our goal is to ensure these assets are managed in a way that supports our clients’ long-term financial goals. When we identify an area of need, we may recommend immediate action be taken with a respected attorney or tax professional.

One area that often presents an opportunity to create better protection is with rental property. In a number of cases, we have concluded that a different ownership structure would more properly protect our clients from serious losses that could result from liability claims. One ownership structure that can be useful for clients who own rental real estate is a limited liability corporation (LLC), and here’s why:

Using an LLC for rental real estate

Unlike an umbrella insurance policy, an LLC structure can protect personal assets in the event that insurance is insufficient to cover a monetary judgement (from a lawsuit). Most umbrella policies kick in after your homeowners insurance limit has been reached, and then they only pay the prescribed monetary claims up to a specified amount. But an LLC provides more protection and more privacy.

The benefits of creating an LLC include:

  • Providing protection against personal asset seizure should creditors come after your assets
  • Safeguarding your privacy

Scenarios where you might consider placing assets in an LLC include:

  • You own property that you rent out as a vacation home or as a long-term rental
  • You own multiple rental properties, solely or with partners, primarily for their income-producing potential
  • You own property jointly with others and would like to formally delineate how assets, profits, and losses are allocated

If you own multiple rental properties, it might make sense to set up more than one LLC.

Further items for consideration

LLC formation can be time and paperwork intensive, requiring the creation of documentation including articles of incorporation and an operating agreement. LLCs must also pay taxes and often an annual fee based on their income. In some cases, LLC members must report profits and losses on their personal tax returns.

Once an LLC is created, in order for it to provide the planned protection, the ownership of the property must be properly transferred into the LLC. This can also become complicated if the property has an underlying mortgage, as that will need to be coordinated with the lender. And LLCs should maintain separate bank accounts to avoid comingling funds with your personal accounts so you don’t provide an opening for a creditor to successfully seize your personal assets through a court order invalidating the LLC.

Because LLC formation can be complicated, and the protection is not absolute, we recommend that our clients speak with a tax advisor as well as an attorney to make sure the potential implications, and the protection benefits, are fully understood.

Whether forming an LLC makes sense for you depends on your personal financial situation. As with any estate planning technique, we’ve found that every individual or family presents a new set of circumstances and opportunities. That’s part of what makes our job so interesting and rewarding.

Do you have questions or want to know more about asset protection strategies and estate planning? Please call your Litman Gregory Wealth Advisor or contact us here.


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