I am buying 2 out of 3 units in a new condo conversion building. The goal will be to renovate and sell both units. I have done this to 2 other properties, but only as my own residence and a second mortgage.

The goal going forward will be for this to be my income. Not a weekly income, but as a result of selling the finished product and the profit being income as well as equity to buy the next property.

My accountant has advised me not to establish an LLC, but to create a Grantor's Trust for each property that I buy. My attorney has said the opposite and to establish an LLC for the sole purpose that in the event I sell a place and it falls to the ground, the LLC will be responsible and not me personally and my assets.

So I thought I'd run this buy some of the legal folks here. Give me your opinions. Thanks so much.

 

I don't know too much about Grantor's Trust, but you lawyer has a very valid point about doing a LLC. Much better to have your business go bankrupt than you personally in case something awful were to occur.

 

I'd put the property in an LLC. Get the LLC its own EIN (taxpayer number) and its own operating/bank account. Treat it like the business it is. If there's a problem, any liability should be contained to the LLC.

There are different ways to set up an LLC. For a bit more protection, you may not do a single member LLC. Wyoming has the best LLC statutes, IMO, and we set up a fair number of them for clients. Talk to your lawyer.

There are different types of grantor trusts, but the kind your accountant is probably talking about would serve no purpose that I can think of in this situation.

Edit: I don't know the laws of your state and can offer absolutely no legal advice other than to talk to your own lawyer.

 

what exactly is a Grantor's Trust? is it a sort of tax shelter for the assets?

 

A grantor is the person who sets up the trust. Usually when someone says "grantor trust" they're talking about a basic revocable trust where the grantor puts his assets or property into the name of the trust he has set up. Normally the grantor is taxed on the income because of certain rights and controls the grantor keeps over the trust--such as being able to revoke it. Generally, there is no asset protection with these and they are definitely not a "tax shelter."

Beyond that, there are different kinds of grantor trusts depending on what the goal is.

 

Neither is a tax shelter as I understand. Just 2 different ways of managing property and money.

I'm presented with 2 options:
1. Put the property in trust and acquire umbrella policies to protect myself.

2. LLC which contains any liability to the LLC and not to me personally.

My lawyer says LLC is the way to go. Looks like the only downside is the added expense of filing taxes at the end of the year. In addition to the yearly fees to the state.

So many things to consider....

 

Ideally you would put the rental property in the LLC and still have the large policies. Don't give up the coverage just because of the entity.

As I said, I don't know the statute for your state, but you should have your choice of laws. Meaning you could put the property in a Nevada, Delaware, or Wyoming LLC and then qualify it to do business in your state. Fees vary wildly between the states as do remedies if you're sued. These are all considerations you should be able to talk over with your lawyer.

 

so the Trust assumes liability for the properties? what is the advantage (if any) of a Trust over a LLC?

i am asking because i currently have one rental property and would be acquiring more in the future.

 

The trust provides some anonimity to you. Any liability or claims fall on the trust, not you personally. Assuming you have an umbrella insurance policy which covers both the property and your own assets.

They are both ways of doing the same thing. The LLC provides more protection as I understand in that if you sold the property that you renovated (which is what I will be doing) and it collapsed, the LLC takes the hit as opposed to you personally.

I have chosen to establish the LLC mostly for business and tax purposes. Where it will be a business for me, I can put my truck, tools, plow, cell phone, etc under the LLC and have them all written off the company expenses. However the LLC will cost more to establish, and file taxes at the end of the year.

I have two friends (brothers) who own several rental properties. They were in trust for years and years and they just converted them to an LLC. It all depends on what your attorney recommends and suggests as a better option for you.

 

i may be foolish, but I have all of my properties in my own name.... i have a $1M liability policy on every policy just in case someone thinks my sidewalk would be a good place to fake an injury.

Do you plan to do crappy work that you would need to worry about them "falling to the ground"? I would suggest you maybe buy a 1 year warranty (~$380) for each house as it is sold. That would protect the new owner from almost anything that breaks.

Maybe the rules are different from state to state, but in PA as long as you disclosed any problems ("sellers disclosure sheet") and the buyer signed it, you should be ok.

I have heard of people not telling the future buyer about sewer problems, mold, etc..... i could see a possible law suit there....

I have thought about an LLC but I would have to sell all of my properties to the LLC which at the minimum would be 2% for the transfer tax, re-recording deeds, new mortgages, etc..... so I just pay for the $1M of insurance instead.

O ya..... the $1M insurance is about $25 more per year than $250k which is sort of standard.... so $25 per house....