Limited Liability Companies and Your Second Home

By

Brian P. McMahon

If you own a second home, a vacation home, vacant or rental property, it should be owned by a limited liability company (“LLC”).  A word of caution, a LLC is usually not appropriate for ownership of your principal residence because you will likely lose your Principal Residence Exemption (formerly known as the Homestead Exemption).  Because this Exemption is not available for second homes, vacation homes, vacant property or property rented to others it is not a factor in deciding whether to use a LLC to own these types of properties.

A limited liability company is a form of entity that provides the entity owner with the same, and in some circumstances more, personal liability protection than the more common s-corporation.  However, unlike s-corporations, a LLC, specifically a “single member limited liability company”, can be formed in a manner that is the same as if you owned the property in your individual name.  That is, you will not incur any additional taxes, you do not have to file any tax return for the entity and you do not have to have any meetings.  This is true for rental properties that generate “passive income” (i.e. rent) as well.  Except for having to file an Annual Report and pay the State of Michigan a $25.00 a year fee, LLCs are basically “form and forget” entities.  But it is very important they are formed and the property is transferred into them by an attorney that is knowledgeable in this area of the law.  There are certain pitfalls that need to be considered, not the least of which is making sure your title insurance and property insurance are properly transferred into the name of the LLC.

When it comes to second homes or vacation homes, LLCs really shine.  Not only do LLCs provide limited liability protection for your personal assets or trust assets while you are alive, they are a very effective estate planning tool.  LLCs are useful in estate planning in many ways including being an excellent method of maintaining parity between a husband’s and wife’s revocable trusts (also called "Living Trusts") and by providing a method of reducing your “gross estate” for federal death tax purposes without giving up control over the property.  But even better, perhaps, is the fact they provide a method of making it more likely your second home or vacation home “stays in the family” and that the use and expenses of the second home or vacation home are shared, equally or in any other manner you choose, between the beneficiaries of your estate plan.  These benefits have the obvious result of reducing the chance for family discourse after your death.

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The Troff  Petzke  Ammeson Newsletter is published as a free service to our clients and friends. The articles in our Newsletter are for general information and cannot be relied upon as legal advice or opinion.  It is simply not possible to provide competent legal advice without knowledge of the specific facts attendant to a particular  situation.  Therefore, you are encouraged to contact the author to discuss the topic further.