A Matter of Trust, hosted by Creative Planning Attorneys Annie Rogers and Christina Knopke, is a thoughtful, informed discussion about ideas, trends and developments in estate planning. Our mission is to educate and inspire people to make better financial choices through knowledge, tools and strategies that ensure a more prosperous future.
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Chrissy Knopke: Welcome to Creative Plannings a matter of trust, I’m Chrissy Knopke. And I’m here with my friend, and colleague Annie Rogers. We are both estate planning attorneys at Creative Planning. And today we’re going to discuss the pros, cons, and in and outs of LLCs. So right off the bat people will create LLCs to get liability protection. And so people just automatically think, oh, I’m creating an LLC I get liability protection. The reason for doing this is if you put a certain asset into that LLC, and then you get sued regarding that business or that entity it is going to be limited. That lawsuit will be limited to that asset that is inside the LLC. So that they cannot sue you personally and attack all your other personal assets. So a lot of our clients look at doing LLCs if they have rental property, or other businesses, or small family owned farms, or property with a farm.
So Annie is going to tell us about how there are very specific criteria for ensuring you get the best limited liability protection with an LLC.
Annie Rogers: Right. And first the LLC has to have a legitimate business purpose.
Chrissy: Yep. So you can’t just throw your personal assets into an LLC, and say, “hey, I’m going to go be reckless. And I can’t get sued because I put everything in an LLC.”
Annie: Yeah. One of the main things you have to do when you have an LLC is keeping your personal assets separate from the business assets. And part of doing that is following all the business formalities like having an operating agreement maybe having minutes for meetings between the owners.
Chrissy: Annual meetings.
Annie: If you have rental homes and you need to replace the roof on a property but there’s not enough money in the business, you have to make a capital contribution from your account to the business bank account and pay for it from there. You can’t just receive the rental checks and put it in your personal bank account or pay for personal things with your business credit card. Because then they do something called piercing the corporate veil. Which means that you’ve undone all the things you’re trying to do and they can go after your personal assets again.
Chrissy: So there are very specific criteria for keeping that liability protection. Because like Annie was saying, they could pierce the corporate veil and then come after you personally. So we always recommend an operating agreement. We recommend that you have a checking account in the name of that business. You always have to remember even though you paid and filed for that LLC in a specific state, each and every year there’s going to be an annual filing fee due. And if you don’t pay that filing fee they will dissolve your business, and you may still be running it, but it’s dissolved.
Annie: It’s not going to be in good standing with the secretary of state, and that’s going to create a lot of issues.
Annie: And the LLC may also require an additional tax return depending on who the members are. If it’s a sole proprietorship LLC you can probably just report it on your individual return, but that’s something to keep in mind as well. So it’s really important to follow those formalities. And also the LLC might require its own insurance.
Annie: Like commercial business insurance.
Chrissy: And the big overall number one recommendation is to not commingle. So don’t commingle your personal assets with the assets of the LLC because that is one of the reasons they could pierce that corporate veil.
So we’ve talked about the considerations you have to put into effect, and all the things you have to follow to have in LLC, but even just the creation of an LLC takes a lot of thought. And there’s a lot of things that need to be weighed pro and con of actually creating an LLC. And so Annie is going to talk to us about some of those issues.
Annie: Well, and it’s not a one-size-fits-all situation. So if you have one rental property and it’s a single-family home that your brother lives in, you probably have a very low risk of being sued. So I don’t think you need an LLC for that property. Unless there are some other circumstances that might be factoring into that. You could probably just make sure you have an umbrella insurance policy that would cover any additional claims above and beyond the homeowner’s insurance. If you have a commercial property, or multiple rentals, or an apartment complex, that might be a good idea to have an LLC, but even it depends on what state you’re in. In California if you have an LLC you’re paying an $800 franchise tax every year, in addition to the secretary of state fees. So if you have one property it may not be worth it.
Chrissy: Right. The other big consideration we ask every single client who’s putting real estate into an LLC is whether they have a mortgage. Because, although we can do some transfers that are exempt under the law, moving a piece of real estate into an LLC is not an exempt transfer. Which means that once that transfer takes place, it can trigger what’s called the due-on-sales clause, making unpaid mortgage due immediately upon that transaction. So oftentimes if we can’t get the lender’s permission to move the property, or the client is just unwilling to take that risk of possibly having to pay the entire mortgage when they make the transfer, we do not advise clients with mortgages move their property into a trust.
Annie: Right. Because those lenders consider that — even if the owner of the property before it goes in the LLC are the same — they consider that a change of ownership. And I certainly have clients who have done it without asking for guidance, and they got away with it. But as an attorney I wouldn’t recommend you do it without getting something in writing from the lender that they’re not going to evoke that due on sale clause.
Chrissy: One of the other recommendations is always making sure that you could also get the LLC listed on the title insurance. So when you go to sell that house there’s also an additional insured for the title insurance as well. But like everything Annie and I talk about if you have questions or concerns or you’re thinking about creating an LLC, reach out to your attorney and they can provide the best advice for your specific situation.
Annie: Yeah. Walk through the pros and cons for you, and see what works best in your situation.
Chrissy: Thank you.
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