When it comes to protecting real estate investments, many owners eventually ask the same question: Should I use a trust or LLC for real estate?
The answer isn’t one-size-fits-all. Both structures offer protection and planning advantages, but the right choice depends on your specific goals, risk tolerance, and even the state where you live. Whether you’re acquiring a rental property, managing a family estate, or diversifying an investment portfolio, understanding the pros and cons of each option can help you make an informed decision.
Why Investors Consider a Trust or LLC for Real Estate
Real estate can be a great wealth builder, but it can also expose you to legal and financial risks. Lawsuits, creditor claims, family disputes, and tax complications are real concerns for property owners.
That’s why many investors consider forming an LLC (Limited Liability Company) or placing property into a trust. Both options are ways to keep your real estate assets separate from your personal assets to help shield you from liability, but they come with different advantages and trade-offs.
The Pros and Cons of Using an LLC for Real Estate
Pros:
- Liability protection: An LLC separates your personal assets from your investment property. If someone sues over an injury on your property, they typically can’t go after your personal bank account or home.
- Flexibility: LLCs can have one owner (single-member) or multiple owners (multi-member). This makes it easy to share ownership.
- Tax benefits: LLCs can be set up as “pass-through” entities, meaning profits and losses pass through to your personal tax return, avoiding double taxation.
Cons:
- Ongoing costs: LLCs have formation fees, annual reports, and sometimes franchise taxes, depending on the state.
- Banking and corporate formalities: You’ll need a separate bank account for the LLC and must maintain corporate formalities, including keeping record of corporate minutes.
- Limited estate planning: While an LLC protects you during life, it doesn’t avoid probate unless additional estate planning steps are taken.
The Pros and Cons of Using a Trust for Real Estate
Pros:
- Avoids probate: Real estate held in a trust can pass directly to heirs without the delays and costs of probate court.
- Privacy: Trusts are typically private, unlike LLCs, which are often part of the public record.
- Asset protection: Certain types of trusts (like irrevocable trusts) can protect property from creditors and lawsuits.
Cons:
- Less flexibility: Some trusts, especially irrevocable ones, can’t easily be changed once set up.
- Costs and complexity: Setting up a trust typically requires upfront legal guidance and drafting fees. Depending on who is administering the trust after its initial setup, you might also have ongoing administration fees.
- Tax implications: Trusts may be taxed differently than individuals or LLCs, depending on the type and setup.
The Tennessee Investment Services Trust (TIST)
If you own real estate in Tennessee — or are thinking about investing here — there’s a unique option worth knowing: the Tennessee Investment Services Trust (TIST).
A TIST is a type of self-settled asset protection trust. It allows you to place assets (like real estate) into a trust for your own benefit while shielding them from future creditors — something not available in every state. A TIST requires that at least one of the Trustees be a Tennessee resident (but cannot be the client creating the trust) and that at least some of the trust property be held in Tennessee.
Why consider a TIST?
- Powerful asset protection: A TIST is an irrevocable trust that can protect you from personal liability for creditor claims and lawsuits related to the property.
- Estate planning advantages: You can build terms for passing property to heirs upon your death.
- Flexibility: Although a TIST is an irrevocable trust, it offers greater flexibility than other irrevocable trusts. You can still retain the right to receive distributions, appoint and remove Trustees, and control all investment decisions.
- Tennessee-specific benefits: Tennessee law makes it easier and more cost-effective to set up and maintain compared to similar tools in other states.
TISTs aren’t for everyone. They require careful drafting, adherence to strict rules and a clear understanding of your financial situation. But for real estate investors looking for both protection and control, they can be a powerful tool.
Trust or LLC for Real Estate: Which One Is Right for You?
Ultimately, choosing between a trust or LLC for real estate comes down to your priorities.
At Hudson, Reed & Christiansen, we help clients weigh all their options and design custom strategies that protect what matters most. Whether you’re managing one property or building a portfolio, our team can guide you through the best legal structures for your real estate investment goals.
Ready to find the right fit? Reach out today to schedule a consultation.
.