Article written by Patrick MacQueen, attorney with Medalist Legal in Chandler.

Rental properties can be costly if a tenant or guest gets hurt at the property. A very common strategy to “protect” against this risk is to place and title the rental property into a revocable living trust. Indeed, there is a perception that a revocable living trust provides asset protection if something goes wrong at a rental. But, this is not usually the case. If a lawsuit occurs and the rental property is titled in your personal name or the name of your living trust, everything owned by you and your living trust are possibly in jeopardy.

Instead, if you’re wanting the benefits of a Trust (e.g., avoiding the costs and delays of probate), you should consider having the rental owned directly by a limited liability company and structured to coordinate with your revocable living trust. In other words, convey your ownership in a limited liability company to your trust and the property itself to your limited liability company. By doing this properly, you may be able to obtain the benefits of both asset protection and probate avoidance.

Here are the steps you may need to take in order to convey your limited liability company ownership to your revocable living trust:

  1. Confirm that your limited liability company’s operating agreement allows you to transfer your interest to a revocable living trust. If it does not, you will need to amend your operating agreement. Note: Most operating agreements include such a provision.
  2. Be certain to follow any specific transfer requirements in your operating agreement (e.g., providing notice to others, etc.).
  3. If your limited liability ownership predates the creation of your trust, you will want to have an “assignment of interest” from you to the trust.
  4. Next, you will likely need to amend your articles of organization and/or other corporate records to reflect that the trust is now an owner of your interest.
  5. If you form your limited liability company after your trust has been set up, your trust should be named as the owner of your membership interest.
  6. In some instances, you may need approval from other members to transfer ownership.

And, you’ll also need to convey the property itself to have the limited liability company have direct ownership of it.

*** Success Real Estate Group can provide referrals if you are interested in legal services regarding your rental properties, including LLC and Trust creation.