Real Estate – LLC or Trust?

Should you hold your residential real estate in a trust or an LLC? Trusts may be emerging as the better option. Here is why.

Background Regarding LLCs and Colorado Real Estate

Over the last 20 years, LLCs became the preferred way to hold Colorado rental real estate because the LLC provided privacy and limited liability at little additional expense or hassle. Starting several years ago, rules and fees surrounding LLCs began to change. Today, LLC filings require disclosure of the individuals causing the articles of organization to be filed. Annual filing fees have increased from $10 to $25. Delinquent filings are $100. While currently on hold pending appellate review, the federal Treasury requires filing beneficial ownership information on most LLCs else face fines and prison. Almost every legislative session now, Colorado legislators attempt to pile on additional fees to real estate held in LLCs. As a matter of personal example, about two years ago I attended a legislative committee meeting where the mayor of Salida, a commissioner from Summit county, and a host of legislators advocated for the commercial taxation of all residential real estate held in LLCs. It seems like every legislative session the general assembly is looking for ways to further regulate and tax real estate LLCs.

The proverbial handwriting appearing on the wall.

We can expect further erosion of LLC benefits, increased disclosure requirements, and increased fees. Trusts, on the other hand, require no secretary of state filing fees, do not require disclosure, and are not the subject of additional taxation.

Taking Title To Your Home Directly In Trust

While personal residential real estate (i.e., your home not your rental) is usually not placed in an LLC, the reasons to take title directly in the name of a trust are increasing. Most homes are taken in the name of the individual and later transferred to their estate planning trust. This can cause issues and additional expense. Loans, for example, can be called upon transfer to the trust but usually aren’t. While the current ALTA title insurance policy provides for transfer to the trustees of the real estate owner’s revocable trust, questions have arisen because in Colorado, we transfer title to the trust and not the trustees. Many homeowner associations require payment of fees upon any transfer, and these fees can be substantial. These issues and expenses may be avoided by taking title directly in trust.

Are Real Estate Trusts Expensive?

But trusts are expensive and require detailed estate planning, right?  A basic real estate trust can be a short, simple document. The trust can be designed to provide stand- alone asset protection or can be amended in the future to become the primary estate planning trust. Consider with your next residential real estate purchase whether title should be taken directly in the name of a trust.