I’ve read a number of great posts on this site regarding liability protection but I have a couple of questions which I have been unable to answer. I gather that the general concensus is to place the property within a land trust and establish an LLC as te beneficiary. In a case where there are 4 investors is the offer made by the LLC or by the 4 investors joint tennant? I’ve run into resistance obtaining financing for an LLC but I do not want to pay the 1% transfer tax to place it into an LLC (if it were bught in joint tennancy).
Does the land trust provide any asset protection or is that the sole purpose for having an LLC as beneficiary? Also, what should one lok for in appointinga trustee?
land trust by itself doesn’t provide asset protection, although it does provide some level of anonymity (beneficiary isn’t public record).
vesting the beneficial interest in an LLC provides the same asset protection as holding title in the LLC directly.
the easy thing is to find a lender who will loan to an LLC with personal guarantees. I would think that with 4 of you, this shouldn’t be a problem. Then you can have 4 owners of the LLC, which owns the property.
if you can’t do it the easy way, then any method that gets the property into either the trust or the LLC will “work”, but it may be costly and/or a hassle.
Mark,
I say this with all due respect I have read your posts and you one of the most knowledgable accountants Ive seen so I beg to differ as to land trusts not providing asset protecton.
My understanding that following the multiple beneficiary rule which encompasses the ruling of Kenoe on Land Trusts (1989) Illinios ruling which bascially stipulates that having multiple beneficiaries in a subject trusts does not allow the trust to be partitioned for purposes of a creditor claim etc… If there is only one beneficiary is is considered in most states a dry or passive trust commonly called a grantors trust and you are correct there is really no asset protection in that case.
The worst case is if there is a charging order in a mulitple beneficiary trust the creditor or lender can file a UCC-21 to claim that beneficiary’s interest but can NOT pierce the trust in a properly structured trust…due to it is unlawful to bind other beneficiaries whom are unrelated in every way including business dealings.
The thing is that takes time and alot of effort since the beneficiaries are secret so they do not find out short of a court order…
The LLC does readily compliment the trust in that from my research is one of the best asset proection vehicles going…this has been said by Bill Bronchick, Bill Gatten, Mark Wadra ( Florida Trust attorney) among others.
The other issue is the due on sale vesting title to the LLC will lenders still allow it maybe but using the LLC as a beneficiry in the trust avoids all those issues legally thus following the Garn St Germain Act of 1982 under section 8a…
As to johndito the trustee plays a pivotal role in servicing your trust I always suggest a corporate trustee for that function but you can designate anybody you want.
The things to look for in a trustee I reccommend a bonded insured company with experience as a trustee so that means a corporate entity whom hold millions of dollars of title asset real estate.
A trustee that acts on your behalf without bias and has that fidiciary responsiblitiy to act in the best interest of the beneficiaries and you get the idea.
Mark and Colvegas, thank you for your responses, I really appreciate the help.
colvegas, you wrote “The other issue is the due on sale vesting title to the LLC will lenders still allow it maybe but using the LLC as a beneficiry in the trust avoids all those issues legally thus following the Garn St Germain Act of 1982 under section 8a…”
does this mean that we would obtain the loan as individuals and vest title to the LLC at closing?
As far as the transfer tax is concerned, the transfer tax is essentially a sales tax. If you are transferring the property into a land trust where the beneficiaries are the owners then there is no sale, therefore no sales or transfer tax is due.
To johndito: If you take out the loan as individuals you can then vest title to your LLC but to play if safe and yes mark is right it is abit more hassle you can vest title to your trustee in the trust as your LLC holding the beneficial interest it is your call…
Mark is correct in that lenders most likely will not call a perfoming loan for the change in title or but in times of higher interest rates especially sub prime lenders whom can loan those monies out at a higher rate it could potentially happen… I heard of investors it happened to not a fun thing to deal with…
As to Mr Blue Ribbon INvest your are absolutely correct no sale is taken place so there is not transfer tax on a sale since there is none.
The land trust actually is a vehicle to defer taxation since there is no reported sale the tax assesor can NOT tax the property on a proposed higher purchase price due to a sale of the property… The thing I like also is it pushes out your capital gains regarding the 121 exclusion rule to get you to that 2 yr mark to qualify for that exemption on the owner occupied property if you are setting it up as a rental property…
The beneficiaries of the trust actually pay taxes per their beneficial interest percentages and the trustee has no tax reporting obligations he is basically exempt… Mark can double check that one though…
Guys great discussion on this topic…Thanks to all…
I need you to explain your comment. The Section 121 exclusion requires two years of ownership AND two years of occupancy as a primary residence during the five years prior to sale. How does your strategy allow you to convert your primary residence to a rental and still get you to the “2 year mark”?