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Trust Law/Level VII · Property and business/7.1 Land/Lesson 5

Holding rental property in trust

What a revocable trust does and does not do for rental property, how an LLC fits in, and the mortgage and insurance points that change with the title.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Cheapest probate fix: where state law allows, record a transfer-on-death deed for the rental; Texas, for example, makes it revocable and requires no consideration, but it must be recorded before death (Estates Code §114.055).
  2. A revocable living trust also avoids probate and keeps rental income on your own return as a grantor trust, but it gives no liability shield, and Garn-St Germain due-on-sale protection may not cover a rental you do not occupy.
  3. For liability, an LLC formed in the state where the property sits avoids registering in a second state; a single-member LLC is disregarded for federal income tax by default, though state fees apply, such as Delaware’s $400 annual tax.
  4. Landlord and umbrella liability insurance is often the cheaper first layer of protection; whatever holds title, the insurer must name the trustee or LLC as insured, and personal loan guarantees stay personal.
  5. The LLC’s membership can be held by your revocable trust so it passes without probate; that adds no creditor protection, and moving a mortgaged rental into an LLC can let the lender call the loan.

MaterialsA recorded deed for a rental property, to see who holds titleThe due-on-sale clause in a sample mortgage or deed of trustLesson 3.1.2, on funding a living trust and the Garn-St Germain ActLesson 7.2.7, on LLCs and operating companies held inside a trust

Wonder

  1. Does a tenant’s lease change when the landlord’s property moves into a trust?
  2. If a revocable trust gives no protection from creditors, why do some owners pair it with an LLC?
  3. Does the federal rule that protects home loans on transfers into a trust also cover rental property?

Explore

  1. A revocable living trust can hold rental property in the same way it holds a home: the owner deeds it to the trustee, who is often the owner. If the trust is funded, the property can pass at death without probate (lesson 3.1.2). The trust does not separate the owner from claims. A revocable trust’s property is generally reachable by the settlor’s creditors, and the assets stay in the settlor’s taxable estate (lesson 3.1.5). This lesson describes common structures and does not recommend any of them.
  2. Landlord-tenant duties do not change when title moves into a trust. Existing leases generally continue, and the trustee, as the owner of record, becomes the landlord with the same duties on deposits, repairs, habitability and fair housing. A claim by a tenant or visitor can be brought against the trustee, and when the settlor is the trustee of a revocable trust, the owner’s own assets remain exposed. For income tax, a revocable trust is usually a grantor trust, so rental income is reported on the owner’s own return.
  3. Some owners put rental property into a limited liability company (LLC) instead. The LLC holds title, and its members are generally not personally liable for its debts, though a member can still be liable for their own wrongdoing and lenders often ask for personal guarantees. The LLC’s membership interests can in turn be held by the revocable trust, which can let those interests pass at death without probate while the LLC provides a liability layer for claims arising from the property.
  4. A personal creditor of an LLC member is often limited by state statute to a charging order, which gives a right to the member’s distributions but not to manage the company. States differ, and protection is often weaker for single-member LLCs; in Olmstead v. FTC (2010), for example, the Florida Supreme Court held a charging order was not the only remedy against a single-member LLC; Florida later amended its statute. Holding the membership in a revocable trust adds no protection, because the settlor’s creditors can reach the trust’s assets.
  5. Moving a mortgaged property can trigger the loan’s due-on-sale clause. The Garn-St Germain Act (12 U.S.C. §1701j-3(d)(8)) bars a lender from enforcing that clause because of a transfer into a living trust in which the borrower is and remains a beneficiary, for homes with fewer than five dwelling units (lesson 3.1.2). The federal regulation (12 CFR §191.5) adds that the borrower remains the occupant, so a rental the borrower does not live in, or a building of five or more units, may fall outside it. A transfer to an LLC is not covered by the trust exception.
  6. Insurance should match the owner of record. If title moves to a trustee or an LLC, an insurer may need to name the trustee or the LLC as an insured, and a policy that names only the individual may leave a gap after the transfer. Title insurance also has to be checked when title moves (lesson 7.1.6). Lenders’ consent rules, insurers’ practices and state LLC laws vary.

Key facts

  • A revocable living trust can let funded rental property pass without probate, but it gives no protection from the settlor’s creditors.
  • Leases and landlord-tenant duties continue when a rental moves into a trust; the trustee becomes the owner of record.
  • An LLC’s members are generally not personally liable for its debts; the LLC’s membership can be held by a revocable trust.
  • A member’s personal creditor is often limited to a charging order, though protection varies by state and is often weaker for single-member LLCs.
  • Garn-St Germain bars a due-on-sale call for a transfer into a living trust in which the borrower is and remains a beneficiary, for homes of fewer than five units.
  • The federal regulation (12 CFR §191.5) also requires the borrower to remain the occupant, so rentals the borrower does not live in may fall outside it.

Exercise nine, six, three, one

9CollectList up to 9 facts about how one rental property is held, from a sample deed, lease, mortgage or this lesson (some sources give fewer), such as who holds title, who signs leases, what the mortgage says about transfers and who is insured.
6ClusterSort them into 6 categories: title, landlord-tenant duties, liability, the mortgage, insurance, and facts you are unsure about.
3DistillReduce the 6 categories to 3 groups: what a revocable trust changes, what an LLC changes, and what neither changes.
1CrystallizeWrite 1 sentence explaining, in your own words, why a revocable trust alone does not shield a landlord from claims.

Fact check

Dates, figures and claims checked against the published sources listed below.

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