When Do I Tell Clients Not to Put Real Estate into a Living Trust?

One of the most important parts of having a living trust designed to avoid probate is to have those assets which would normally require probate assigned to the trust. By this I mean that the trust needs to be the owner of the probate-causing assets (more technically, the Trustee of the trust is the owner, but in his or her capacity as Trustee). In Idaho, one asset that will almost always implicate the need for a probate after death is real estate. So, when I help clients establish a living trust for estate planning, I also assist them in getting their real estate retitled into their trust. This typically means preparing, executing, and recording a new deed for the client’s personal residence which names the trust as the titled owner of the property going forward (again, technically, the deed shows the Trustee of the trust as the titled owner, but in their capacity as Trustee of said trust). If a client owns more than one residence, we will be repeating this process for each.

However, there is a relatively common scenario in which I do not recommend a client retitle their real estate in the name of their living trust. That scenario is rental properties. If a client owns residential properties that the client rents out to third parties, in most cases I am not going to have the client title those pieces of real estate in the name of their living trust. Instead, I’m going to ask my client to consider establishing an Idaho Limited Liability Company (LLC) to own the real estate. There are some important reasons for this. Let’s run through them.

A common misunderstanding about living trusts is that they provide the same type of protection against liability that one can gain from an LLC. Like most states, Idaho allows for the establishment of an LLC as a corporate form for a business. When assets are owned by an LLC, if the LLC is sued, or faces other financial troubles, usually only the assets owned by that LLC are potentially vulnerable to attacks by lawsuit plaintiffs, creditors, etc. Notice that I wrote “usually” in the last sentence, because there definitely are exceptions – none of which I will get into here.

To explore this, let’s take the example we are concerned with here: rental real estate. If my client owns a second home that he or she rents out to a third party, and his or her renter or one of the renter’s guests gets injured while at the rental property, my client could be vulnerable to a lawsuit by the injured party. If the deed for that rental home shows my client as the owner directly, or even if the deed shows my client owns that rental home through his or her living trust, my client may have some serious problems. This is because if there is a successful lawsuit against my client, and if the amount awarded to the injured party is more than the value of my client’s rental home (and any applicable insurance coverage), my client’s other personally owned assets could be the source of payment the injured party tries to collect from. In this nightmare scenario, not only is my client going to lose the rental house, but he or she will also lose other assets (maybe even his or her own personal residence) to pay the injured party.

This danger can be dramatically reduced by establishing a simple LLC which my client can own and operate at a minimal annual cost and time commitment, but which protects my client’s other personal assets. In the example given, my client’s worst-case scenario would likely be the total loss of the rental home, but nothing else, even if the rental home was worth less than the total amount awarded to the injured person. As with all things legal, there are a myriad of rules and exceptions to the rules around this topic, but in general, having an LLC in this scenario is highly preferable.

So back to the issue of successfully avoiding probate. If a rental real property’s deed shows an LLC as its owner, not a trust, doesn’t that mean we will have to go through a probate when my client dies? What do we do when we want to get the benefits of a living trust (avoiding probate), but we also want to limit the liability that comes with owning rental real estate? In most cases, the answer is simple enough: the deed for the rental home should show the LLC as the owner, and the living trust should be the owner of the LLC. Idaho allows an LLC to be owned in a trust, and this will usually allow us to get the benefits of both the trust and the LLC. Neat trick, right? If you have any doubts about whether you’ve structured your estate plan or property ownership in the most advantageous way, talk to a qualified estate planning attorney as soon as possible.

My law firm is currently offering free telephonic, electronic, or in-person consultations concerning creating or reviewing power of attorney and other estate planning documents.

Robert J. Green is an Elder Law, Trust, Estate, & Guardianship Attorney and the owner of Kootenai Law Group, PLLC in Coeur d’Alene. If you have questions about estate planning, probates, wills, trusts, powers of attorney, guardianships, Medicaid planning, or VA Benefit planning, contact Robert at 208-765-6555, Robert@KootenaiLaw.com, or visit www.KootenaiLaw.com.

This has been presented as general information and not as legal advice. Do not engage in legal decision-making without the advice of a competent attorney after discussion of your specific circumstances.