Good Information from Steve Gibbs of Gibbs Law Firm:
Hello Friends & Colleagues!
This week’s topic is a key asset protection question for real estate investors who hold multiple properties. This question concerns how to hold real estate investment property, and this depends upon the goals and preferences of the investor.
The 2 most common “recommended” ways to hold real property investments are an LLC or Land Trust.
Exploring the pros and cons of these estate planning options is the stuff of this week’s article.
For Florida Investors Doing Estate Planning, Florida LLCs and Florida Land Trusts Are Both Effective Ways To Hold Real Property Depending Upon One’s Goals.
An Easy Way To Think About The Benefits and Detriments of LLCs Verses Land Trusts Is That LLCs Are Arguably Simpler To Establish and To Administer Whereas Land Trusts Offer a Some Added Asset Protection Benefits.
LLCs are extremely simple to set up in virtually every State and everyone in the real property world, from brokers to County workers, essentially knows about them. This means that people are not typically confused by your asset protection structure (of holding assets in an LLC) and this means that your daily life may be less complicated. LLCs are extremely flexible, and if prepared properly, offer key asset protection benefits. Of course, by prepared properly, I mean that setting one up yourself without an Operating Agreement may not be an effective strategy, whereas, getting professional help and creating a solid LLC structure goes a long way.
If you set up an LLC for estate planning purposes to hold your real property investments, you’ll need to decide whether you’ll be the only owner of the membership units (a single member LLC) or whether you’ll have other partner members (multi-member LLC). In many jurisdictions, such as Florida, multi-member LLCs offer a more solid asset protection plan than the single member LLC.
My recommended process to create an LLC is to file Article of Organization with your State of choice and then have supporting documents created to support your LLC. The State will require a renewal fee every year and you’ll need to decide who your Registered Agent will be…whether you or a third party. For more information about what should be considered in creating a solid LLC, visit our previous post. After this, the real property may be transferred to the LLC and you’re good to go, noting that the LLC needs to be administered with certain formalities.
The Land Trust option is different because it typically is not filed with the State and thus offers greater privacy and anonymity. A Land Trust is essentially holding real property by contract. So, the Trust document (contract) is created and the Trustee (who must be a third person or entity) is appointed by the Trust. The Trustee will essentially hold the real property for you or your entity of choice as the Beneficiary. So, privacy is an added benefit for Land Trusts. Key disadvantages in my experience are that City and County officials tend to more easily become confused by Land Trusts. You also need to be comfortable essentially conveying your title to a third party as the Trustee if you go this route, noting that the Trustee will be bound by fiduciary duties and the terms of the Trust. Land Trustees often charge annual fees as well.
If you decide to go with the Land Trust option, you can still utilize an LLC as the Beneficiary of the Land Trust, so as to essentially double your asset protection. For more information about Florida Land Trusts, visit here.
Real Estate Investors In States Other Than Florida, Texas, Arizona, Ohio, Illinois, Indiana, North Dakota, Virginia and possibly California, may not have the estate planning option of a Land Trust.
The states referenced above are the only ones that have land trust statutes and generally the real property must be situated in the State that the Land Trust is created. This is a key distinction with LLCs because a Florida LLC can hold real property located in Texas, and this is usually the case with LLCs in various States.
Moreover, the Trustee ideally should also be located in that same jurisdiction as the Trust and the real property, so the rules are more restrictive than LLCs, because the LLC Managers can be anywhere although the Registered Agent must be locally based in the State. Also, with Land Trusts, if you have multiple real properties in the same State, they must be “contiguous” (next to each other) in order to title them in the same Land Trust, and this is not the case with LLCs.
Of course, all of the above is a basic distinction and a great asset protection plan may utilize both Land Trusts and LLCs. All of the above should also tie into your overall estate plan and this may require directing the real property in your LLC or Land Trust to your Revocable Living Trust upon death.
As always, I hope this clears up a bit of confusion and…
Until next time.
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Gibbs Law Office, PLLC
8695 College Parkway #2330
Fort Myers, Florida 33919