When it comes to protecting your investments, you have more than a few tools at your disposal. Both LLCs and trusts can help you make the most out of a rental property. That said, choosing which of these means to take advantage of can be a challenge, especially if you’re not entirely clear on the differences between the two. So before answering “Should a rental property be in an LLC or trust?” we’ll break the two structures down.
What Is an LLC?
LLCs are limited liability companies. You have the option to create an LLC at your leisure一either on your own, with a partner, or with a larger group of people. While you don’t need to classify larger groups as your board of directors, you can still collaborate with them to ensure your LLC is as efficient as possible.
LLCs serve your investment portfolio by protecting your personal assets. These institutions effectively create a barrier between the funds you use on a day-to-day basis and those that you’ve specifically designated for use with a specific rental property. You can even create several distinct LLCs for all of your rental properties, thereby ensuring that any legal issues that impact one have no sway over the others.
As mentioned, LLCs create a barrier between your business and your personal interests. You can direct financial concerns, lawsuits, and other rental property responsibilities to said institution when you have an LLC to rely on. If you don’t have an LLC or an equivalent in place, then you put your own finances on the line when contending with a shifting market or tenant-related concerns.
LLCs also come with their own suite of tax benefits. LLCs owned and operated by a single person can direct their related income to that individual’s personal funds. Because that institution’s revenue counts as personal income, the taxes that you have to pay on said earnings will be less than they would be otherwise.
The rules dictating how an LLC may come into being and how it can successfully operate will vary from state to state. If you’ve not built an LLC from the ground up before, you may want to reach out to a professional for guidance.
Do be prepared, too, for the start-up costs affiliated with most LLCs. While your expenses may benefit from creating this institution in the long run, you’ll need to brace your budget for the legal costs and title taxes that may come your way. Similarly, if you’ve created an LLC with a partner or a group of people, you’ll need to distribute your earnings accordingly. In turn, your budget may undergo significant transformations over the first two years of your LLCs’ operations.
What Is a Trust?
A trust is not an institution in the same way that an LLC is. Instead, a trust is a legally binding agreement placing its holder (the trustee) in charge of a particular property on behalf of a beneficiary. In creating a trust, you become the beneficiary, whereas someone like a property manager becomes the trustee.
There are two types of trusts that investors tend to use for rental properties. If you want to cut out the middleman, it’s in your best interest to invest in a revocable trust. Revocable trusts allow the same person to be both the beneficiary and the trustee.
While this trust comes with fewer legal protections while the beneficiary is alive, it works as an estate planning tool, ensuring that future benefactors can contend with the needs of those properties after the initial holder is gone.
Irrevocable trusts, comparatively, see the financial control of specific rental properties released to another party. Irrevocable trusts prevent the holder from being a trustee and beneficiary, effectively separating that party from the arrangement. Instead, the irrevocable trust becomes a thing that only the trustee can control.
When you put the funds related to your real estate properties into either of the trusts mentioned earlier, they become exempt from certain forms of taxation. You can effectively reduce your perceived income, ensuring that your year-end taxes are a little more affordable.
If you have a family you want to protect after you’re gone, trusts also ensure that your rental properties retain their overall financial value. Both revocable and irrevocable trusts let you award funds to certain parties, even if you choose to separate yourself from those funds for the sake of ease.
Trusts have inherently fewer legal protections than LLCs do. When you place your rental properties within a trust, you effectively create a liferaft for the future instead of a barrier for the present. That doesn’t mean that trusts are ineffective but rather that they represent the long game over one’s immediate benefits.
LLC Versus Trust: Which Serves Your Interests?
LLCs and trusts both come into play during conversations about rental investments, but their purposes tend to differ. So should your rental property be in an LLC or trust?
Trusts, as mentioned, benefit you and your loved ones in the long term, ensuring that the value of your rental properties has substantial financial staying power. LLCs, comparatively, allow you to protect yourself on the legal front while separating your personal assets from those of your investments.
The Verdict: Should Your Rental Property Be in an LLC or Trust?
Answering “should your rental property be in an LLC or trust?” correctly is a matter of personal opinion. Both of these institutions have the opportunity to save you money in the long run while protecting you from the fluctuations of the rental market. If you want to learn more about each institution’s benefits and the process of creating either for your properties, you can reach out to a financial expert in your area.