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Should I Put My Rental Property into a Trust or LLC?

For many of the doctors and high-income earners who are venturing into real estate investing for the first time, the topic of asset protection is top of mind. It makes sense, they earn a lot and they often have a lot of assets outside of real estate. They may even have had past experience with lawsuits or have been the target of a scam. 

 

[Disclaimer: We are not accountants, lawyers, or financial advisors, so please consult your own team of professionals about the topics covered in this article.]

 

While LLCs are often viewed as the gold standard for protecting real estate assets, they can be expensive to implement and maintain. So naturally, many ask us if trusts can be used for asset protection, since many already have trusts or are in the process of setting them up.

But before we get into the details, a disclaimer. We are not lawyers, and the information contained in this post should not be considered legal advice. We gathered the information contained in this post over the course of the last three decades of investing, through our own reading, research as well as personal experience with LLCs and trusts. 

So what’s the answer? The short answer is, trusts do not provide asset protection, unless you are setting up an irrevocable trust, which have downsides. So most investors will be better off using LLCs for protecting their real estate assets. If you want to see a discussion about the best LLC structure for rental properties, CLICK HERE.

Understanding Revokable Trusts in Real Estate

Trusts, particularly revocable trusts, are often discussed in the context of estate planning rather than asset protection. A revocable trust allows for the smooth transition of property ownership upon the trustee’s death, bypassing the often lengthy and costly probate process. However, it’s crucial to understand that a revocable trust does not offer asset protection. Since the grantor (the person who creates the trust) can alter or revoke the trust at any time, the assets within are still considered part of the grantor’s estate and are accessible to creditors.

How Irrevocable Trusts Differ

On the other hand, irrevocable trusts do provide a level of asset protection that revocable trusts do not. By placing assets in an irrevocable trust, you are effectively removing them from your personal estate. The catch here is that you’re also relinquishing control over these assets to a third-party trustee. This loss of control is a significant consideration for many investors, particularly those who wish to remain actively involved in the management and decision-making processes of their real estate investments.

Navigating the Trade-Offs

For high-income professionals, the choice between an LLC and a trust—specifically, an irrevocable trust—often boils down to a trade-off between asset protection and control. An LLC offers a simpler, more flexible approach to asset protection that aligns well with the active management of a real estate portfolio. Meanwhile, an irrevocable trust provides a robust shield for your assets but at the cost of giving up control to a trustee.

Combining the Benefits of Revocable Trusts and LLCs

Now what if you wanted the benefits of both estate planning AND asset protection? You can use a hybrid approach! For instance, it’s possible to structure your investments such that the real estate assets are held within an LLC, which is itself owned by an irrevocable trust. This setup can potentially offer the best of both worlds: asset protection and a degree of control over the investment, moderated by the trust’s terms and the trustee’s governance. We do this using a Wyoming umbrella LLC structure that we describe in more detail in this article.

How to Implement the Hybrid approach

For doctors and other high-income earners diving into real estate, the priority is clear: protect your investments without losing sight of your long-term estate planning goals. If you’re ready to move forward with a hybrid approach, you can either use the “do-it-yourself” or you can outsource it. We DIY’d it for years until we realized that it would be better to outsource it than try to navigate complex legal and tax issues on our own (the LLC structure you choose can have tax implications). So now we outsource it and you can too!

Do you want to learn how to creatively fund your real estate portfolio and achieve financial freedom? Join the conversation! Follow our Semi-Retired MD  Facebook page and join our Doctors or Professionals  group!

Semi-Retired M.D. and its owners, presenters, and employees are not in the business of providing personal, financial, tax, legal or investment advice and specifically disclaims any liability, loss or risk, which is incurred as a consequence, either directly or indirectly, by the use of any of the information contained in this blog. Semi-Retired M.D., its website, this blog and any online tools, if any, do NOT provide ANY legal, accounting, securities, investment, tax or other professional services advice and are not intended to be a substitute for meeting with professional advisors. If legal advice or other expert assistance is required, the services of competent, licensed and certified professionals should be sought. In addition, Semi-Retired M.D. does not endorse ANY specific investments, investment strategies, advisors, or financial service firms.

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Hi, we’re Kenji and Leti

we provide coaching and mentorship for doctors and high-income earners

Several years ago, we were newlyweds working as full-time hospitalists. On paper, it looked like we had everything: the prestigious careers, the happy marriage, the luxurious rental home, the cars, etc.

But in reality? Despite having worked for several years, we had very little savings. Despite our high income, we had very little freedom in terms of time or money.

One thing was clear: we had to do something.

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