LLC Versus Trust for a Rental Property

The real estate market is one of the most lucrative industries one can invest in and if done properly, the savvy investor can tap into and maximize its full potential. To the novice investor, venturing into the property scene is as daunting as it is overwhelming. Like any industry, there are risks involved and if not managed properly and effectively, the individual may miss out on many benefits of the investment as well as fall victim to some of its downsides. The key to overcoming this hurdle is to equip yourself with knowledge and master the ropes of managing a rental property business.

It is advisable that new property owners not only do their homework on their own, but also schedule lengthy conversations with real estate lawyers, estate agents, property managers, and any other such professionals or individuals who are highly skilled and knowledgeable about the industry. Interactions with such people often prove to be invaluable as it not only gives you a better overview of what you are getting into, including and especially as it concerns legal matters, but it affords you the opportunity to make sound decisions when deciding how best to minimize liabilities and risks, and maximize profits on the property. 

The two popular options to protect your rental property and optimize your money are using either an LLC or Trust.

LLC’s Demystified

So, what then is an LLC? According to Will Kenton, an LLC, which is short for a Limited Liability Company, is a company structure that protects owners from any liability that might occur on the rental property without affecting the owner’s personal assets. Kevin Johnston argues that the main benefit of an LLC is the liability protection it offers owners so that in the event of losses or debts, owners will not have their personal assets compromised. In essence, if you are a real estate owner, you want to get the most out of your investment while being safe from any potential issues that come with it that can potentially affect your personal life. The role of the LLC is to separate business assets from personal ones.

If the property is registered under an LLC the owner should not use the assets or the proceeds of the property for personal gain. If the property in the LLC runs into a legal or financial mishap such as a debt liability, the personal assets of the owner(s) of the LLC will not be seized to pay off the debts. This is an important selling point of the merits of an LLC as an attractive option for a property owner.

Like anything in life, every benefit comes with a drawback. The problem of using an LLC is in its name. It offers ‘limited’ liability. For instance, in the event of any criminal behavior or neglect of some basic duties, the veil of protection of the LLC will be pierced and the owners will then not be protected by the LLC, and they might have to dig into their personal assets to resolve the problem caused. Also, there are higher taxes linked to LLCs and the fact that it can be dissolved in the event of the death of an owner adds to its limitations. So, how then does an LLC compare to a Trust?

What is a Trust?

simlar to an LLC, a Trust is also highly regarded as a viable option for managing a rental property. According to David Carnes, a trust is a relationship in which a trustee is given authority by a trustor to oversee property assets for the benefit of the beneficiary. This arrangement ensures that the trustor’s assets are legally and financially protected by avoiding real estate taxes and probate. When a Trust is established, the property and its value no longer form part of the trustee’s personal estate. Brian Farkas states that a rental property placed in a Trust is protected from creditors, lawsuits and misfortune.

Unlike the LLC, a Trust offers a degree of privacy since everything will be done in the name of the Trust, drawing less attention to the owners of the rental property. It is worth noting that Trusts have been key players in the real estate game for several years, longer than LLCs. Not only has this made them a tried and tested way to manage your rental property but also proven their effectiveness.

One of the reasons why people tend to shy away from Trusts is the high costs involved in creating them as well as maintaining them, posing the question as to whether the costs involved are really worth it.

Conclusion
It goes without saying that property owners have their work cut out for them when trying to make a sound decision on the rental of their property. The decision to either leave their property in the hands of an LLC or those of a Trust is not an easy one, and is not a one size fits all situation. Ultimately, the option of what option to choose is dependent on the specific needs of the individual. This is where you as the owner need to weigh the pros and cons of both options vis-a-vis your specific situation and decide on the right option for your specific property.

However, whether you choose the LLC or Trust route, you need to understand that none of the protection they offer is completely foolproof. Renting out property is risky and there is always going to be a liability somewhere whether foreseen or unforeseen. The point is for the property owner to, at best, minimize the potential problems so as to save themselves a great deal of time, money and peace of mind.