Transferring San Francisco real estate for asset protection or estate planning purposes may cause problems
A Reader Asks:Recently I contacted our friend at the title company to see about transferring our properties into entities such as an LLC or a LP to protect our assets. The information I got back from her is shocking. Who is the best person to contact when trying to do these types of transactions?
Our reply:
We know!!! After a wealth planning seminar with a nationally-known CPA, one of our clients came away with a plan to move properties out of their name and into entites; a Limited Liability Company (LLC) for some properties and a Limited Partnership (LP) for others. The managing partner in all cases was a California C Corporation owned by one the business partners.
At the start (and in theory) it sounded slightly complicated, but simple enough to execute. However, when they went to do the transfers, there were a few things that hadn't been considered:
- To transfer out of state properties, the deed needed to be prepared by an attorney specializing in this area (costing about $250 for the title company to handle it).
- Another issue was that a transfer tax would be due based on the percentage the original owner of the property not owned in the new entity. (Let's take an example of a $1M property owned by Joe Smith. In the entity, XYZ, LLC, his percentage of ownership in the company is 49%, another individual owns 49% and the C corporation owns 2%. This means transfer tax was due on 51% of the property.)
- The transfer would probably void the title insurance.
- The event could give the lender grounds to call the loan.
Needless to say, they were disappointed since these entities are expensive to set up and maintain. Each one requires:
- registering with the state and preparing legal documents
- separate bookkeeping
- separate bank accounts
- the added burden of IRS reporting and taxation
In short, this is a very complicated and expensive undertaking. Be sure to consult an attorney who specializes in this type of asset protection and see if it is worth the amount of protection you will receive versus the potential cost of not doing it. There are companies that will set up the entities online, but may not be worth the expense if you are not sure what you are doing and set them up wrong!
- Mick Orton and Janis Stone
posted by SFResidence.com @ 7:50 AM
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