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LLCs vs. Trusts: Which is Better For Real Estate Investors?

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Limited liability companies (LLCs) and trusts are two powerful tools real estate investors use to protect their portfolios. Each structure has its own advantages and disadvantages. The right structure for your portfolio depends on your goals, long-term plans, and risk tolerance.

May 14, 2024
Author: NCH

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That said, understanding the difference between the two is crucial to making the right choice. Below, we’ll discuss which is best for your real estate investments: LLCs or Trusts?

Understanding The Difference Between LLCs and Trusts

There are distinct differences between LLCs and trusts. An LLC is a distinct business entity typically formed to protect its owners from the liabilities of running a business. 

LLCs can be divided into two main types: single-member and multi-member. Single-member LLCs only have one member, the owner, and are a common choice for individual real estate investors. 

Meanwhile, multi-member LLCs have two or more members and are more suitable for partners who want to own rental properties together.

Conversely, trusts are not business entities. Instead, they’re legal arrangements typically used in estate planning to determine how a person’s assets will be distributed upon death.

Trusts can hold various assets, like real estate properties, bank accounts, and ownership interests. 

Unlike LLCs, trusts don’t have owners. Instead, they have a grantor who created the trust, a trustee who will manage it upon the grantor’s death, and a beneficiary who will receive its benefits. 

In addition, trusts can be categorized into two main types: irrevocable and revocable. Irrevocable trusts cannot be changed or revoked by the grantor. On the other hand, revocable trusts can be altered by the grantor at their instruction. 

LLCs vs. Trusts: Which is Better?

Before you can pick between LLCs or trusts, you must understand their advantages and disadvantages:

Advantages & Disadvantages of LLCs

There are several advantages to creating an LLC for real estate investments, such as:

  1. Limited liability: LLCs protect you from any liabilities your properties may incur. If someone files a lawsuit on your property for an injury they sustained, they can’t go after you or your assets. 
  2. Multiple members: LLCs can have as many members as they want, making it easier for you to invite more investors. 
  3. Pass-through taxation: The IRS treats LLCs as pass-through entities, which means they don’t pay taxes. Anything the company earns or loses goes to its owners, who must report it on their tax returns. 
  4. Transferable ownership: LLC members have the right to buy and sell ownership shares in the company. 

However, it also comes with the following disadvantages: 

  1. Costly: Depending on where you are, the formation fees for LLCs can be expensive. They can range from as low as $35 to $500. 
  2. Compliance requirements: LLCs must submit annual reports and pay annual fees to maintain their legal standing. 
  3. Piercing the corporate veil: LLC owners could lose their limited liability if found guilty of using the company to commit fraudulent acts. 

Advantages & Disadvantages of a Trust

Similar to LLCs, trusts also come with several advantages: 

  1. No recurring costs: Unlike LLCs, trusts don’t need annual fees to be maintained. 
  2. Multiple owners: If a rental property has several owners, a trust can help outline their relationships and ownership interests. 
  3. Reduced tax liability: Assets within a trust are not considered part of the grantor’s personal assets, effectively reducing their tax liabilities. 
  4. Avoids probate: Trusts avoid the probate process by streamlining the transfer of assets to the grantor’s beneficiaries upon their death. 

However, its more notable disadvantages are:

  1. No liability protection: Since real estate trusts are not business entities, they cannot protect real estate investors from any liabilities the property incurs. 
  2. Complexity: Trusts are harder to set up than LLCs. You’ll need to work with an estate planner and a lawyer to create a trust. 
  3. Rigid structure: Changing a trust’s structure is much more difficult than revising an LLC’s operating agreement. 

Factors to Consider When Choosing Between LLCs and Trusts

There are three factors you must consider when picking between LLCs and trusts: 

Risk-tolerance

How much risk are you willing to take on? If your risk tolerance is low, it’s best to establish an LLC for your real estate investments. This way, you can guarantee strong liability protections for your assets. 

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Potential liabilities

Potential liabilities can vary depending on factors like the type of property you have, the location of your property, and the nature of the investment itself. For example, commercial real estate and rental properties are at a higher risk of encountering liability claims like slip-and-fall accidents and property damage. 

So, before you pick between trusts and LLCs for your real estate investment, carefully assess the potential liabilities associated with your property. 

Real Estate Portfolio

Your rental portfolio is another important factor when choosing between LLCs and trusts. Do you plan to invest in more properties in the future? If you want to grow your portfolio over time, you’ll have to think about the scalability of your business structure. 

Tax Implications

The tax implications for LLCs and trusts are vastly different. Since LLCs are pass-through entities, they don’t pay income taxes. Trusts, on the other hand, do. A trust’s tax liabilities vary depending on its type.

Revocable trusts are taxed during the grantor’s lifetime. Meanwhile, irrevocable trusts pay taxes on any income it generates. Examples include interest, dividends, capital gains, and other similar earnings. 

Understanding the tax implications of both structures will help you effectively reduce your liabilities. 

Make the Right Choice Today

Ultimately, LLCs and trusts can be invaluable tools for a successful real estate investor, provided you learn how to combine them effectively. 

If you want to learn how to maximize the benefits of LLCs and trusts, look no further than NCH. 

NCH, a trusted leader in Nevada’s business formation services, is home to a team of dedicated business specialists and estate planners. With their expertise, we can help you confidently and precisely structure your real estate investments.

Rest assured, with NCH’s years of experience, you’re in safe hands. Our business specialists will guide you through every step of forming LLCs for real estate investments, ensuring you make the right choices for your business.

Make the right choice today with NCH. 

Learn more about our services by visiting our website here or call us at 1-800-508-1729 to schedule a consultation with one of your business specialists. 

Disclaimer: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.



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