Should your second home be in a trust or an LLC?

September 26, 2013, by

yoked oxen.jpgLars is inclined to use a limited liability company (LLC) to try to keep their beach place in the family for a time beyond his and Kyra's generation. Lawyer friend Duncan would help them form the LLC. Then they would transfer title to the beach into the name of the LLC. Lars and Kyra would initially be the only owners (Members), but over time they would give LLC interests to their children. The Operating Agreement (the LLC equivalent of a partnership agreement) could have a keep-it-in-the-family provision that would give the LLC and its Members the right to buy back any ownership interest that fell into the hands of a creditor or divorcing spouse of a family member.

Lars and Kyra would also be the initial Managers of the LLC, but it would be good training for them to work in one of the kids as a Manager before long. The Managers are responsible for all operations like paying bills, maintaining the property, and scheduling the use of it. It will greatly lessen the likelihood of friction over the beach if Lars and Kyra put money into the LLC along with the real estate, and maybe provide for more funds to be added via their Wills or Living Trust.

Lars and Kyra could instead use a trust to hold the beach for their kids and grandkids. It could have most of the same features. The children could each have a power of appointment, limited to descendants or otherwise, to determine who benefited from the trust after them. Trustees including successors would be named, to run things. Lars and Kyra could give money for expenses to the trust, in addition to the property.

Some people favor a trust over an LLC because a trust may be made more restrictive and protective. This is mainly because family members own an LLC but are only beneficiaries of a trust, under whatever rules are set. With ownership of an LLC comes a little more flexibility, for instance the power to amend the agreement or dissolve the entity.

Lars loves the beach but he doesn't want to force it on his family. So he's inclined to the LLC, to place the lighter yoke on them.