How should we structure an LLC and trust for our Tennessee rental property?
Dolan Williams
LawyerSure thing! Let me take your questions one by one: 1. No, you don’t have to create them before closing. You can close in your name, then transfer the property later into an LLC or trust. However, transferring into an LLC could trigger the due-on-sale clause if the lender chooses to enforce it, while transfers into a revocable trust generally don't. Your lender will know for sure. 2. To your second question, yes, the deed can be transferred post-closing. You’ll just need to execute a new deed from yourself to the LLC or trust later, and file it with the county recorder. Make sure your title company and lender don’t object. 3. For the LLC, form it in TN since that’s where the property is as this avoids foreign registration and extra fees. For the trust, you don't have to set it up in any particular state because these aren't state-specific. You can create it wherever you live and it's good wherever. Unlilke an LLC, there are no filing requirements at all.
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We’re under contract to buy a house for short term rental use and trying to close by the end of the month. We want to have the house owned by either a trust or an llc to protect us personally from liability and to also avoid as much taxes as possible, and also to make transfer to our kids easy if we die. But we aren’t sure which entity is the best to use for this?
Hello [Name]! That’s a great question! What state is the property in?
We live in Ohio but the lake house we’re buying is in Tennessee, so we also weren’t sure which state would be best to use.
Got it! Ok so here is what you can do: 1. Create the trust; 2. Create the LLC; 3. You can make the trust the sole member of the LLC; 4. You can put the property in the name of the LLC as well; 5. You should get an EIN for both the LLC and for the trust separtely; 6. You can open up an LLC bank account to manage the funds for the management of the property; 7. Then, you could deposit any profits from the LLC into the trust bank account; So the way it would works is if the LLC is sued by a renter, the LLC still serves to limit your personal liability and even the liability of the trust because the LLC is a distinct entity. Moreover, you can retain control of the trust and its operations. The LLC will be an asset of the trust, so should you and your partner pass away suddenly, the trust can still sell and control the LLC and its underlying assets. So if you pass away, what will happen is that the trust will then become irrevocable and whatever trustee you have assigned to manage the trust can still operate the LLC and its rental. You can even direct the trust to sell all or part of the LLC and that money can be given to your beneficiaries. The idea is that this will avoid probate while limiting your liability.
Do we need to create them both before we close so that we don’t trigger a due on sale clause for the loan? or is there a way they can they be created after and the deed transferred to the name of the llc? The biggest issue we seem to be facing at the moment is we’re trying to close by the end of the month before the lake season starts because June and July’s rents pay for the entire years mortgage and then some. So we don’t want to delay closing to wait for the entities to be created if that’s avoidable, but I’ve been reading it can take a few weeks to set up the trust and we’re currently having a hard time getting local lawyers to call us back and get started. Also should we establish the llc and or trust in the state we live in (Ohio) or the Tennessee where the house is?
Sure thing! Let me take your questions one by one: 1. No, you don’t have to create them before closing. You can close in your name, then transfer the property later into an LLC or trust. However, transferring into an LLC could trigger the due-on-sale clause if the lender chooses to enforce it, while transfers into a revocable trust generally don't. Your lender will know for sure. 2. To your second question, yes, the deed can be transferred post-closing. You’ll just need to execute a new deed from yourself to the LLC or trust later, and file it with the county recorder. Make sure your title company and lender don’t object. 3. For the LLC, form it in TN since that’s where the property is as this avoids foreign registration and extra fees. For the trust, you don't have to set it up in any particular state because these aren't state-specific. You can create it wherever you live and it's good wherever. Unlilke an LLC, there are no filing requirements at all.