Is a California LLC or Living Trust Better For Asset Protection?
|Prepared By: Melissa C. Marsh, Los Angeles Business And LLC Attorney
Written: March 2009 - Last Updated: July 2016
So you want to protect your assets and you are trying to figure out how to do it. Should you form a living trust, or a California limited liability company (LLC)?
Limited Liability Company, also commonly referred to as a Limited Liability Corporation.
A California LLC is a legal entity, like the corporation, that is designed to protect an individual member's personal assets outside of the LLC from the LLC's business debts and obligations. A properly formed and maintained LLC can prevent a judgment creditor from seizing the personal assets (outside of the LLC) of the members of an LLC, if the judgment resulted from the LLC's business. In other words, the LLC members' personal assets (bank accounts, personal residence, vehicles, stocks and bonds, etc.) are insulated (shielded) from attachment in the event the LLC incurs a debt, liability or judgment against it.
A California LLC formed to hold title to real estate, or investment property, is an especially good asset protection device. If you are a landlord and own multiple properties, placing each of those properties into a separate real estate holding LLC can significantly reduce the owner's risk of liability. Why? Let's assume you own three rental properties: (1) an 8-unit apartment building; (2) a condominium; and (3) a commercial building. If each rental property is in its own separate LLC, then any liability that may flow from one of the properties (from a tenant or guest injury, lease, environmental problem, etc.) would only affect the LLC holding title to that particular property. If a fire broke out in the condominium complex and the tenant was severely burned, the tenant's recourse would only be against the LLC that held title to the condominium. The tenant would not be able to go after the member(s) other personal assets or properties (caveat: that is so long as the LLCs are properly formed and maintained and the manager of the LLC was not negligent).
Now you may be thinking isn't that what insurance is for. That's true, liability insurance is your first line of defense, but sometimes insurance is not enough. If the judgment exceeds the amount of your policy, of if your insurance company declines coverage for some reason, you are still exposed. This is why we suggest holding title to real estate investment property in an LLC. To read more, see, Why Title to Real Estate Investment Property (Rentals) should be held in a California LLC.
In addition to providing an additional layer of asset protection, a California LLC also provides a unique tax benefit. Both a single member LLC and a multi-member LLC can elect either corporate, or pass through taxation, but with a single member LLC (including LLCs owned by a husband and wife or domestic partners), the member does not need to file any additional federal tax returns. The profits and losses can be reported on the single member's personal tax return by attaching Schedule C. It is therefore possible to have multiple LLCs each holding title to a single investment property and still only have to file a single federal tax return.
Revocable Living Trust, also commonly referred to as a Living Trust.
A revocable living trust is not meant to be a vehicle for asset protection, but a vehicle to avoid probate. It provides absolutely NO ASSET PROTECTION. A living trust is meant to hold title to an individual's assets until the individual passes away. At that time, the trust provides an orderly distribution of its assets to the deceased individual's heirs without the time, cost and expense of probate. Consequently, a revocable living trust is not meant to be used for any form of asset protection. In some cases, depending on the size of the estate, a living trust can also be used to reduce estate taxes. Another advantage to the living trust is the fact that it ensures a modicum of privacy. When a person passes away, their will must be filed with the court, and it in turn becomes a public document exposing all of the deceased assets listed in the will. A revocable living trust, on the other hand, is not filed with a court so your list of beneficiaries, assets and the valuation of those assets are not available for public inspection.
Irrevocable Living Trust.
Unlike a revocable living trust, an irrevocable trust is just that – once the assets are transferred to an "irrevocable" trust, the assets cannot be moved, the trust cannot be dissolved, and the person effectuating the transfer of the assets cannot later change his or her mind. In effect, once assets are transferred to an irrevocable trust, the person making the transfer no longer owns the assets placed in the irrevocable trust, and that person can no longer exert any control over the assets in the irrevocable trust. Since legitimate repositioning (transfer) of assets from you to an irrevocable trust is perfectly legal, if you are willing to give up complete control of your assets the irrevocable trust is a very strong asset protection device. If you own an LLC or a corporation, your membership interest or shares can be placed in an irrevocable trust, which would make such assets untouchable.
If you would like to retain the services of Melissa C. Marsh to form a California LLC to hold and own real estate call 818-849-5206, or if you have additional questions to see what entity, if any,is right for you please schedule a low cost telephone consultation by completing our Telephone Consultation Request Form and Melissa Marsh will call you back at the time you select.
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