For high-net-worth individuals and families, privacy and liability protection are often key concerns when it comes to real estate ownership. If you own investment property, a vacation home, or want to safeguard your primary residence from potential legal exposure, placing the property into a limited liability company (LLC) is an option worth considering.
While LLCs can offer meaningful benefits, they also come with legal and financial implications, especially here in Connecticut. Below, we’ll walk through the advantages, potential drawbacks, and the steps involved in transferring or purchasing property through an LLC.
Why Use an LLC for Real Estate?
LLCs are commonly used by investors and estate planners to manage real estate for several reasons:
- Limited liability: If the property is owned by an LLC and a lawsuit arises—say from an injury on the premises—your personal assets are generally protected from exposure.
- Privacy: In Connecticut, property ownership records are public. Holding the title through an LLC can help keep your name off the land records.
- Estate planning flexibility: Transferring membership interests in an LLC can be more efficient than transferring deeded real estate, making it a useful tool for generational planning.
- Asset segregation: If you own multiple properties, placing each in a separate LLC can help isolate risk and simplify accounting or tax reporting.
How to Set Up an LLC for Real Estate in Connecticut
If you decide to hold property in an LLC, here’s what the process typically involves:
1. Form the LLC
File a Certificate of Organization with the Connecticut Secretary of the State. You’ll also want to draft a comprehensive Operating Agreement, particularly if more than one individual or entity will be involved.
2. Transfer the Property
If you’re placing existing property into the LLC, you’ll need to prepare and record a deed transferring ownership from yourself (or your trust) to the LLC. As with any real estate transfer, this requires proper execution, including signing before a notary and recording with the Town Clerk in the jurisdiction where the property is located.
Important: If there’s a mortgage on the property, speak with your lender first. Most mortgages include a due-on-sale clause, which could be triggered by transferring title to an LLC.
3. Update Insurance and Notify Local Authorities
Once the LLC owns the property, your homeowners insurance policy should reflect the new ownership. The LLC should be listed as the named insured. You may also need to notify the local assessor to ensure tax bills are addressed correctly.
Key Considerations and Common Pitfalls
1. Financing Can Be Complicated
Many banks are reluctant to lend directly to LLCs—especially single-member LLCs—since they lack the credit history of an individual. You may need to close in your own name and transfer the property later, or work with a lender who offers commercial or investor-focused financing.
2. Connecticut Estate Tax and Situs Rules
If you’re a nonresident holding Connecticut real estate through a pass-through entity like an LLC, it may still be subject to Connecticut estate tax. This is especially relevant for out-of-state clients with significant property value in Connecticut. Be sure to speak with legal and tax advisors familiar with the state’s situs-based tax rules.
3. Insurance and Liability Gaps
Standard homeowners policies often don’t extend to properties owned by LLCs. You may need a landlord or commercial policy with different liability limits. It’s critical to work with an insurance advisor who understands how ownership structure affects coverage.
4. Maintaining Legal Separation
To retain liability protection, the LLC must be treated as a distinct legal entity. That means keeping a separate bank account, maintaining accurate records, avoiding personal use of LLC funds, and filing required annual reports with the state.
Is an LLC the Right Fit for You?
You may want to consider holding property in an LLC if:
- The property is a second home, rental, or investment
- You want added privacy or asset protection
- You have substantial personal liability exposure (e.g., you’re a business owner or public figure)
On the other hand, an LLC may not be necessary if:
- The property is your primary residence and you plan to live there full time
- You’re not at unusual risk for lawsuits
- Your mortgage agreement prohibits title transfers
Final Thoughts
Owning real estate through an LLC can offer real advantages, especially when it comes to liability protection, privacy, and estate planning. But the structure must be set up and maintained properly to be effective. From forming the entity to drafting the deed and coordinating with your insurer, this is not something to approach casually.
Need legal help with your next real estate closing?
At Pederson Real Estate Law, we assist clients throughout Greenwich and Fairfield County in evaluating the best structure for their real estate assets. If you're considering an LLC, we can work with your financial and tax advisors to ensure the arrangement aligns with your goals and complies with Connecticut law.
