I currently have two rental properties (both are held in my personal name), and my husband and I are hoping to expand our number of rentals in order to generate more cash flow to supplement our retirement portfolio. We have recently began to think about the liability of holding these properties in our personal name, and are interested in creating an LLC to limit our personal liability in the future should we be sued by a tenant. We have also looked into setting up land trusts (we are in IN) to hold the property, with an LLC as the beneficiary, to increase the privacy of our holdings. The main question I have is: how do we do this? Do we look for an attorney specializing in real estate or estate planning? Can this be accomplished without an attorney to save money?
Do not go it alone; there's too much at stake! You will need tax AND business asset protection advice and assistance.
Do you plan to be the only owner? Or you AND your husband? What about kids or grandkids as part owners, to begin wealth transfer to next generations? Depending on how you will finance the rental properties, if at all, then even if you choose to form an LLC, you might choose to be TAXED as a partnership for some special tax breaks. There are many other advantages and disadvantages that are inappropriate to hash out on a public forum.
If it's important enough to protect your personal liability, then it's important enough to hire professionals to advise and assist you.
I will be happy to assist. In any case, good luck.
veRONIca jarnagin, atty, pc
SInce you acquired the properties in your own name, I am not sure that transferring to an entity will provide you with much privacy (as the prior deed is public record), but an entity would give you some protection from personal liability (assuming you follow the entity rules and maintain adequate insurance). While Indiana may recognize land trusts, the use is not as widespread as in adjoining Illinois. I would suggest an LLC, with a corporate manager if you want an additional layer of protection. While you can set up entities yourself directly with the Secretary of State, I would recommend consulting with a business or real estate attorney (and typically estate planning attorneys are familiar with selecting and organizing entities too).
I would suggest using a real estate attorney with some business formation expertise since it sounds like you will be buying and selling property as part of your business. I am not sure doing it yourself will save money in the long run, since using an expert is usually much more efficient, and will help you avoid mistakes which could cost you even more.
Congratulations. You are planning ahead.
LLC’s are excellent legal tools to hold and manage investment properties. They also isolate the risk generated by these properties. The question on how many properties you should put in one LLC depends on their current value and the overall equity. I recommend a benchmark of 300k/one property in each LLC. Imagine 1 LLC owns 4 investment properties. The equity you have in properties A and B is 350k each, and in C and D, the equity is 125k. In case there is a liability issue (a trespasser who gets hurt, a tenant, whoever) in property C, although the equity you have in it is 125k, the directly exposed net worth would be 1m.
As mentioned above, an LLC isolates the risk generated by risky assets, but it does not protect your personal assets. A plaintiff (a tenant, trespasser, whoever) may always try to pierce the corporate veil by holding you personally responsible by theories as negligence or gross negligence.
Therefore, I recommend you to put the sole proprietorship of the LLC 's that control your properties in an entity that is specifically designed for asset protection purposes, such as an asset management limited partnership that is filed in a state with strong charging order rules and a legislative history as AZ.
The Asset Management Limited partnership that controls the LLC's can hold directly your liquid assets (bank and brokerage accounts). This way, you are protecting your investment properties and isolating the liabilities they may cause, and at the same time, protecting your liquid assets. If the total net worth you seek to protect is over the 400/500k benchmark, my advice is to include to your planning a legal tool that provides you an exit strategy that allows you, if necessary, to take (the ownership of ) your assets out of reach of US courts without compromising ownership or control. This set up is completely tax neutral and does not raise red flags with the IRS.
I advise you to schedule a consultation with an attorney that has proven expertise in the area of asset protection planning. An experienced insurance broker (an extensive umbrella policy is important part of your asset protection planning) and a CPA should also make part of your team.
I'm only a proponent of the use of an LLC if its done in a jurisdiction that affords privacy. There is one particular jurisdiction which costs $75 to file, and you don't have the annual filing fees again AND your private information is not on public records. No, its not Indiana, but its ok if you have an LLC from else where. If you don't make use of the states that have privacy, I would recommend instead the use of an irrevocable trust, as there is usually no public filing. Indiana has yet to adopt a "land trust" as in Illinois and Florida, but an irrevocable trust can work in a very similar way.
I agree with the other attorney's answer that equity value should be determined, but while he may be able to afford $400 - 500K in one entity, you may believe $100K is enough of a risk. It should be determined by what you believe you can risk. I frankly wouldn't risk the $400 - 500K and make mine small, manageable LLCs or trusts with no more than $100K each.
And yes, the trustee of the trust can be that private LLC.
I practice in Indiana. Please let me know if I can assist you.
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