With millennials choosing to rent rather than buy and the rise of vacations rentals, many people are turning to real estate to diversify their investment portfolio and generate sustainable income for their families.
When purchasing real estate as an investment, it is important to consider the estate planning impact: who will inherit the properties, who will manage the properties, and how to ensure that the properties are not sold to settle debts of the estate? An LLC can help answer some of these questions.
If you are considering placing your Tennessee real property in an LLC, there are several things to note:
- Once you form the LLC, the ownership and rights of the property placed in the LLC transfers. This may mean relinquishing control over the properties. For example, if you personally own property and transfer it to an LLC where your spouse and children are members, they acquire an interest in that property and thus acquire decision making authority.
- Although an Operating Agreement is not required, it is highly recommended. Without an Operating Agreement, the Tennessee Revised Limited Liability Act will govern the operations along with any disputes. Through an Operating Agreement, you are able to set forth rights and responsibilities of the members.
- If discretion is a priority, an LLC can provide this. A simple online property search can tell you who owns what real property throughout the state of Tennessee. If your real property is titled in the LLC, deciphering its true owner may be a difficult task.
- As with any business, paperwork will be required to ensure the LLC remains in good standing with the state. Even though a LLC whose income comes from passive investments may be exempt from Tennessee’s Franchise and Excise tax, proper forms must be filed to maintain this exemption.
- To secure the limited liability protections, the LLC assets must not be comingled. This means keeping separate bank accounts for income and expenses. A separate EIN number is required to set up a bank account in the name of the LLC. Typically, the bank account established will operate as a business account and may have minimum balance requirements and maximum transaction requirements to avoid fees.
Overall, an LLC provides an alternative solution to protecting assets and the benefits may outweigh the costs. However, every person’s estate planning needs are unique and all options should be discussed with your attorney prior to settling on setting up an LLC.