Dear Mr. Premack: Last month you wrote two separate columns, one about limiting liability for mineral right holders by using an LLC, and another about ways to manage rent houses if the owner becomes disabled. I want to ask a question that combines those ideas. I have owned several rent houses for years. Lately, I am concerned about what happens if I am disabled and I worry about a tenant or guest suing me for some injury on the premises. How might a trust and LLC apply to my situation? – C.J.
In those columns (May 19 and May 27, 2014) I made several suggestions: use a Durable Power of Attorney or a Living Trust to provide a plan in case you become disabled, and consider an LLC if you are concerned about liability. Your situation fits those parameters very well; for your rent houses, you should consider combining a Trust with an LLC.
An LLC (Limited Liability Company) is a legal entity which can operate like a corporation or like a partnership. For management purposes, the LLC can be operated by one person or by a group of managers. Within a family estate plan, the LLC can be owned by a Trust and be managed by the Trustee of that Trust. For liability purposes, the LLC and its assets remain liable for any negligence or any contractual obligations, but the other assets of the trust’s beneficiaries are sheltered from liability.
To take advantage of this idea, you would hire a law firm with experience in estate planning and business formation. The attorneys would help you establish a proper Trust. As the Trust’s Grantor, you would retain authority to amend or to revoke the Trust if your circumstances change. The attorneys would further assist you by creating an LLC through the Texas Secretary of State.
The trust would be the sole “member” of the LLC – that is, the trust would hold ownership of the LLC. The Trustee of the trust would be the sole “manager” of the LLC. Inside the Trust, your attorney would include terms naming you as the initial Trustee. The Trust would include terms regarding alternate Trustees so that management of the rent houses could continue without interruption should you become disabled or should you die.
The Trust would also include provisions setting out how and to whom the trust’s assets provide benefits. Initially, you would continue to receive all of the economic benefits produced by the rent houses. Eventually, when you die, the economic benefits would shift to someone of your selection, similar to what you would state in your Will. This can happen without probate, continuing the Trust/LLC for the next generation.
Title to the rent houses themselves would be transferred into the LLC. Your lawyer should assess the terms of any mortgages you may have against the rent houses to be sure that transferring ownership does not violate any due on sale clause to which you agreed when you borrowed the purchase money. Generally, the mortgage lender will not object to the LLC if 1) they are asked in advance for and grant permission for the transfer, 2) you remain personally liable on the loans, and 3) the terms of the mortgages that allow foreclosure remain effective. Further, all of the leases should be restructured to show the LLC as the landlord.
Once this structure is established, if there is some event at one of the rent houses that creates liability, only the assets of the LLC are at risk. The rent houses themselves, thus, are still at risk. But your own personal bank accounts, investments and unrelated real estate are sheltered. Talk to a law firm whose attorneys have experience in this area, and talk to your CPA about any tax ramifications of shifting your rental properties into a Trust/LLC combination.
Paul Premack is a Certified Elder Law Attorney in San Antonio. His firm has offices in Texas and Washington, and handles estate planning for all ages, probate law and business entity (LLC) formation issues. Submit estate, probate, elder law and LLC questions at www.Premack.com, or go there to view the archive of past legal columns.
Original Publication: San Antonio Express-News, June 9, 2014