California Investment Properties 101: Holding Investment Properties in LLCs or Trusts
California Investment Properties
DM Law advocates for investment property owners to hold their properties in entities like LLCs rather than individually. Benefits of using an entity include:
Creditor Protection: Shield personal assets from creditors.
Tax Advantages: Enjoy certain tax benefits.
Asset Protection: Add a layer of protection for your investments.
Succession Planning: Simplify ownership transfers.
Smart investors protect themselves and their properties. Real estate investments, though generally smart, come with risks such as tenant lawsuits for slip and falls, uninhabitable premises, and robberies. Holding properties in an LLC or trust helps mitigate these risks and safeguard your investments.
California LLC Pros & Cons
Pros:
LLCs do not require a general partner who is exposed to liability. Instead, all LLC owners — called members — have complete limited liability protection.
LLCs are also superior to C corporations because LLCs avoid the double taxation of corporations yet retain complete limited liability for all members.
Cons:
Lack of privacy, the California Secretary of State website states who the members are of the LLC. This would be public information.
Can be expensive filing all the necessary forms with the California Secretary of State and paying for an attorney to draft the Operating Agreement.
California Trust Pros & Cons
First, when discussing Trusts, DM Law would suggest a revocable trust, which is a popular estate planning tool that can serve useful property management functions during a client’s lifetime but is primarily used as a convenient and efficient means to distribute a client’s assets on the client’s death.
Pros:
A property owner can avoid probate upon death. Distribution of property held in a Living Trust is faster, more accessible to beneficiaries, and less costly than probate.
Privacy of who the property owner is - a lot of high profile individuals will hold their properties in a Trust.
Cons:
A Trust is not a separate legal entity permitted to hold title to real property - so if the owner is ever in a lawsuit, they are not individually shielded, like they would be in an LLC.
Transfer of title to a trust may affect liability insurance, title insurance, real property tax assessments, and due-on-sale clauses. In certain instances, transfer of title to a trust may terminate a title insurance policy.
What About Both?
At DM Law, we like to come up with innovative ideas for our clients, so what about combining the benefits of an LLC and a Trust?
Utilizing both a Trust and an LLC offers the best combination of liability protection and favorable estate planning.
To achieve this, the property owner would hold the investment property in a single-member LLC, with the Living Trust as the sole member.
The Trust would owns the company and holds all the interests of the LLC.
This structure provides added protection from the LLC and the estate planning benefits of a Trust. this structure also protects the identity of the property owner.
Questions?
PLEASE DO NOT HESITATE TO REACH OUT TO DM LAW IF YOU HAVE ANY QUESTIONS OR NEED HELP WITH YOUR INVESTMENT PROPERTIES!
