What are the pros and cons of putting rental property into a trust?
So, not a discussion of your personal residence, not a discussion of your vacation residence that you’re keeping for your own personal and family use, but rental property. Something that you are letting others pay you to stay in. So, please stick around for a discussion of that.
I’m Sarah Siedentoff. I’m an estate planning and probate attorney in Atlanta, Georgia, and author of the book, “Peace of Mind Through Estate Planning.” What are the pros and cons of putting rental property in our trust? You’re going to want to find out because you don’t want to be making any mistakes with what is supposed to be a money-making property.
So the first thing that we’re going to discuss is a con of putting rental property into a trust. And that is no liability protection. Trusts are not designed to give liability protection, particularly in Georgia, a very creditor-friendly state. And so we’re not getting liability protection with the trust.
On the other hand, as a pro, we are avoiding probate. Probate takes time, costs money, and is generally a headache and a hassle. So if you pass away, you’re avoiding that hassle for your family. The asset can be transferred under whatever the provisions are in the trust without worrying about that.
Another pro is going to be the backup trustee. So if something happens to you, whether that is that you’ve actually passed away, or whether you are incapacitated for some reason, we have a backup trustee who is stepping in, and sometimes it might be a child, a friend, it could even be a professional who’s stepping in to manage the assets in the trust. So you know that there is a continuous management plan and nothing is falling through the cracks.
Another pro of putting your property into the trust is that you can give very specific instructions for what should happen. If something happens to me and I can no longer manage the property, maybe I’m no longer able to go out and mow the grass and do all the things that have made this lucrative for me. I can say that the backup trustee should be selling the property and possibly investing in something different or doing whatever it is with that money. So I can be very, very specific about what the trust should do with the property.
Con, no liability protection. Yes, you heard me say it before. It is the biggest con of putting your rental property into a trust. So there is a fix for this. LLCs are intended to give liability protection, so, limited liability company, anything in that LLC, if used properly, is sort of a bubble. And if there’s any liability attached to that asset, somebody trips and falls at the rental property and sues you. If everything is done correctly, all of that liability stays inside the LLC bubble and worst-case scenario, we are losing that rental property, but we’re not losing your primary house or your other assets. So we love LLCs for liability protection, and guess what can own an LLC? A trust.
So, often the combo of trust, owning LLC, which owns rental property is a great way to go and fixes those cons of a trust owning the property outright. I do this a lot. It’s typically very, very effective, works great for people. And so I do strongly encourage you to think about liability protection in regard to any rental property. Insurance, insurance, but LLCs as well. And trusts for probate avoidance, but not for liability avoidance. So, thank you. And please subscribe if you’re interested in more content.