Land Trusts Vs. LLC’s for Owning Investment Properties
Many of our entrepreneur readers are real estate investors. If you are actively involved in buying or selling real estate properties, a common question arises regarding the best “ownership vehicle” for the property. Some people choose to take ownership under their personal name, which comes with some substantial liability risks, so the majority of people vacillate between land trusts and LLC’s (the most common kind of business entity for owning investment properties). After a brief paragraph on individual ownership, we will discuss the merits and disadvantages of land trusts and LLC’s.
I do want to comment on private ownership, since there are masses of investment property owners who own them in their own name. If you are one of those, your greatest concern should be liability, better defined as lawsuits. If you choose to continue or take ownership in your personal name, all your other personal assets could be tied to that property in a lawsuit, so at least set yourself up with an insurance policy on the property with very generous payouts. And you might also want to obtain a blanket liability policy as additional coverage.
Assuming you are open to more preferred methods of ownership for properties, it will not be a simple decision whether to opt for land trusts or for LLC’s. Let’s cover them both separately.
A land trust is a version of a trust that can be used for the ownership of real estate properties. There are six states that have land trust laws: Illinois, Florida, Indiana, Virginia, North Dakota, and Hawaii. While other states do not have specific laws governing land trusts, all states allow land trusts, and they are generally perceived as a standard revocable trust that happen to own real estate. Thus, they are subject to trust law for that state.
Trusts were originally designed to facilitate transfer of ownership from the owner, who becomes the grantor of the trust, to their designated beneficiaries. As such, they are good at keeping ownership and transfer private, but are not designed to provide asset protection. If a trust owning a property is sued, the separation from the grantor’s other assets is not a firm separation and could result in the loss of other personal assets.
Some owners who use trusts are intending for this to be a temporary measure, they have intent to sell or transfer the property in the near future. And that transfer is made easier, there is no title transfer, it is simply a matter of transferring the beneficial interest to the new property owner. Trusts are sometimes used in seller finance transactions where there is no new mortgage being obtained or registered. And sometimes filing of a trust is delayed until the property is sold to a new owner. All of these can keep the property and its official ownership under the radar of people who file spurious lawsuits.
An LLC, on the other hand is designed to be a protective business entity. LLC’s are set up to operate as businesses, they create the “corporate veil” separation between business assets and personal assets, and they provide additional tax deductions for the business owners.
LLC’s exist in all states. In a few states, the cost of setting up an LLC is extremely expensive, such as New York, New Jersey, and California. The cost in these states is sometimes used as a reason for setting up a land trust in these high-cost states.
If a person plans to own and operate an investment property for any substantial period of time, owning it in an LLC will give you many more tax deductions, and also provide good protection and separation of your personal assets in a lawsuit assuming that you are operating the LLC according to good principles of separation. We encourage you to review these items thoroughly with an accountant, do not want to lose the benefits of an entity because you were shoddy in performing your business activities.
Because the benefits and concerns of land trusts and LLC’s are different, it raises a logical question. Can land trusts and LLC’s be combined in the ownership of investment properties?
The answer is yes, and it could sometimes be a good idea to do so. A common method for this combination would be for the beneficial interest of a trust to be owned by an LLC.
I always caution people when it comes to establishing protections for yourself in business. It is critical to have reasonable protections for yourself, but it is also possible to spend so much time or money in establishing your protections that you have no time or money left to pursue building your business. Honestly, this happens more frequently than you would imagine.
So, we have actually discussed three different types of protection for your investment properties: insurance, trusts, and LLC’s. Insurance should be an essential no matter what other choices you make, and the choice between trust and LLC is determined by your plans for the property, including duration of ownership and your income objectives in owning the property. Once again, we encourage you to talk and work directly with an accountant who studies these types of things and can suggest the best applications of these principles in your business. We wish you success in all your business activities.