Unit owners should know difference between master policy and HO-6
2) Should we form a real estate limited liability company (LLC) to hold the property? And if so, who should be the members: my wife and myself as the members, or create the LLC with the trusts as the members?
I know that with a real estate LLC we would need to have a tax ID, business credit card, business checking account, and to run the LLC as a business separate from our personal finances.
3) Are there tax considerations we should worry about if we put the condo in the name of the revocable living trusts or LLC? (For example, would that set the basis for the property value and prevent our children from getting the benefit of a new basis upon our death? We are in our early 40s with a couple of kids). --Bret
DEAR BRET: You have asked some very serious questions that require a thorough evaluation of your financial situation. I can provide only some basic suggestions, but you really need to discuss your situation with your own financial and legal counselors.
1) Generally it's a good idea to put rental real estate into a LLC for liability purposes. Membership interests can then be titled in the name of the trustees of your revocable trust. If for estate planning or financing or other reasons it is desirable to title the property in the name of the trust, then a large liability policy would be the way to go. Other assets in the trust (and possibly those outside the trust titled in the names of the grantors, but this is a matter of state law, and I do not believe entirely settled) could be subject to a judgment against trustees.
2) Whether you and your wife individually -- or the trustees of the trust -- should be members of the LLC holding the rental property would depend on more facts than you have provided. There are issues with successor trustees and other issues that could come into play if the trustees are listed as the members, and I can't think of any great advantage to doing it that way.
3) Generally, the trust or the LLC would have the same basis in the property as the grantors at the time of the transfer. A step up in basis in the property would happen upon the death of the trust grantor or LLC member, so that the trust property or membership interest in the hands of the beneficiary would have a stepped-up basis. (This presumes we are talking about a revocable living trust; it could be different with an irrevocable trust.)
But please talk with your own financial and legal advisers. I cannot and do not provide specific legal or financial advice.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to email@example.com.
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