I have an investment property in Florida and a commercial 5 unit in Illinois. An associate of mine mentioned I should look into puting these in a trust and keep seperate from my personal property. Is there a internet site I can search for info and how this works or maybe someone has experience with this and can share some advise. Thank-you.
James 
Your associate needs to explain how a trust gives you any asset protection. After that, come back and explain it to us. I don’t see it in the absence of some entity structuring.
Thanks for the reply Dave,
It was explained to me that a trust will keep the property owners identy unknown. Also, any measureable equity on the properties can be used by the bank as colleteral towards additional purchases. I have done some research and spoken to a very knowledable real estate attorney whom I discovered has investment properties himself. I guess you could say I hit a gold mine with this referral. Seek out a good real estate attorney and ask questions. In this case, he is now my real estate attorney and for a very reasonable fee, he is assisting me. We have also addressed the opportunity of investing together. Seems to be a good potential partner. My background research, inquiries at the title companies, inquiries with area brokers, inquiries at the court house have satisfied my coureosity that this is a good and honest attorney.
James
Anonymity is not asset protection, and the cloak of anonymity is rather easily pierced by a good researcher. For example, title history shows that title transferred from yourself to a trust. There is a lien on the property, a mortgage given by yourself as collateral for a loan (a loan which you personally guaranteed), and there is no evidence of satisfaction or release of the lien. How much of a leap is it to conclude that you are the beneficial owner of the property held in trust?
Now that your interest is exposed, how does the trust shield your personal assets from attack? If you believe a trust will protect your personal assets in the event of a lawsuit, I believe you are operating under a false sense of security.
Time to get another legal opinion, maybe from a specialist in trusts and entity structuring.
I have to disagree with part of the previous post. While a land trust doesn’t completely protect you…nothing is 100% foolproof…it does put up a big smokescreen, and takes your name off of ownership. If you get sued, it makes it a lot harder to find out what you own. As far as public record is concerned, if your properties are all in separate land trusts, how can they find out you own them, without doing a lot of research? They key is to make it more difficult…thus ending most lawsuits before they start. If you are on public record as an owner, it is easy for an attorney to find you, and in that situation, he will take a case on a contingiency basis. If he can’t find you easy, most will require an upfront retainer to continue to research. This alone stops a lot of lawsuits before they stop.
The main point is trusts do protect you to a certain degree…simply by making it more difficult to find your assets. It doesn’t protect them if they find them all…but it’s a lot harder to find everything unless you do a lot of digging. If an attorney looks on public record to see if you own anything, and your name is not there, most won’t proceed unless they are paid upfront, which ends a lot of lawsuits. They have to find your stuff in order to try to get it.
I do agree with the last part, get more opinions from professionals who deal with this. Find a good attorney dealing in asset protection, maybe by going to your local real estate investors association and finding out who successful investors use.
Bobo,
I don’t see that you disagree with anything I said. In a nutshell we are both saying that a trust provides anonymity, but once your interest is discovered, the trust does nothing to shield your assets from a lawsuit.
I agree with that part, but my main point is the anonymity in itself stops a lot of potential lawsuits before they start, because if an attorney can’t find you with relative ease, he won’t proceed further without a retainer. I agree 100% that a trust doesn’t shield your assets from a lawsuit once you are found…but you do have to be found first.
With regards to land trusts, I would never own a property without it being in it’s own land trust. There are many benefits, and as far as I have ever known, there is nothing negative.
WOW, that was good stuff. I know a little about land trusts. What you two just talked about was great. I was under the same understanding, but to see you both bring up SOLID points was very educational/reassuring. Thanks for helping us all out.
HI,
That was a great point. The question that comes to my mind is that what if u were living in a home u own and say own a couple of rentals,one can have separate land trust for every property and say name the three trust based on the property address with yr attorney as the trustee, i can understand that if some one were to run the check its is more than unlikely that he would find the two others, but what about the one u live in… its pretty evident because u owned it before now it transfers to a trust… there seems to be a link dosent it?
Also what if he calls u to a deposition and asks u stright under the penalty of perjury… " do u own any interests in any trusts" …
So whats the best way here?
Pls epand on it
thanks
pkay.
I believe the point that Dave T is trying to make here is that a Trust is more beneficial when your name has never been in the chain of title, such as when you purchase a property Sub2. Once your name is in the chain of title, and you have a mortgage in your own name for the property, it is much easier to locate you as the beneficiary for the trust, especially if you have several properties that are set up this way. On the other hand, if the property had no mortgage, then you could transfer it to a trust that might help obscure the ownership.
Wilson
I think a lot of confusion here is the concept of “asset protection” itself. What assets are actually protected?
One of the underpinnings of the discussion is how liability is contained. One of the reasons to incorporate our real estate business is that, in the event of a lawsuit arising out of our corporate activity, only the assets owned by the corporation are exposed to liability. The corporate structure “shields” our personally owned assets from exposure to liability.
This same firewall between personally owned assets and business owned assets is available with a Limited Liability Company. The LLC also shields our personally owned assets from liability in the event of a lawsuit arising out of the LLC business activity by limiting liability exposure to only those assets owned by the LLC.
When you read the term “asset protection” in these forums as well as other real estate websites, the context is that of a suit of armor that protects your personally owned assets from attack in the event of a lawsuit. The business entity limits or contains the liability exposure to only the assets held by the entity. The members of the LLC are not held personally liable when the LLC is successfully sued.
A trust is the cloak of invisibility that hides your ownership. In the absence of a business entity, all your assets are exposed to liability in the event of a lawsuit. When you are operating as a sole proprietor, you are personally liable for the conduct of your real estate activities. You do not enjoy the personal liability protection offered by the LLC. This liability puts everything you own at risk. The cloak of invisibility makes it less obvious that you are a person of means that has anything of value to be gained from a lawsuit. But, if your cloak of invisibility is shredded, there is nothing that limits your liability exposure.
There is nothing to keep one from employing both a trust and a business entity for the strengths each provides. The trust wraps your assets in a cloak of invisibility but the cloak does not deflect the slings and arrows of a lawsuit. The business entity is the suit of armor that protects the assets behind the armor should the cloak be removed.
Extend the asset protection concept even further. Once you have the firewall between your personal assets and your business assets, you might consider ways to compartment your business assets to further limit liability exposure. For example, you have several rental properties owned by your LLC. As your equity in the properties increases, your liability exposure also increases. One approach is to set a limit on the amount of equity the LLC will own to $250K. In the event the LLC is successfully sued, only $250K is at risk.
Under this plan, the rental property owner with (let’s say) $1 million in equity will form several LLCs and title property to each LLC so that the maximum equity in any LLC is $250K. Nothing prevents the property owner from having each property titled in the name of a trust with the LLC as the beneficial owner of the trust.
Just where I am coming from.
Great post Dave. The last paragraph is how I am set up. I currently have 3 rental properties, each titled in it’s own land trust. The beneficial interest of each trust is my LLC. I will limit the value of each LLC…right now, there is not enough equity to worry about that right now. Your post pretty much covered how I am set up. This is just me, I believe everyone should consult a professional regarding asset protection.
Hi,
Thanks for clarifying Dave.
So if i understand correctly one should buy investment properties in a Land Trust with the beneficiary being the LLC, limited to lets say $250k,correct?
Any suggetions on who the best person to designate as trustee… how about forming another LLC and making that as a trustee and what disadvantages if any?
One last thing what is the best way to protect yr personal asset e.g. a home one owns. Do u think an separate LLc would shelter the home?
Yr help will be greatly appreciated.
Thanks in advance
Pkay
Just to chime in on your discussion. A corporate trustee in Texas is subject to the banking laws. If the entity is yours then the you are not likely to be bothered. Personally I like individuals but at one time Bill Gatten at landtrust.net had trustee services at $12/mo.
Another point is that a land trust does povide separability from liens and judgements. Because the real property is owned by a trustee not you then a lien or judgement does not automaticly attach to that property.
Be careful when considering asset protection. If all of your properties are in one entity and it is sued all of your assets are at risk. A charging order is only effective against other entities that were not part of the suit.
Do not forget the liability insurance for your entities and yourself.
I am planning to purchase an umbrella policy that my insurance company offers… It covers up to 1 Million Dollars worth of lawsuit. I doubt most lawsuit can go up to this amount unless Medical Malpractise. But I am not a doctor so I have nothing to worry about. I only own 2 properties. But when I have more that has quality equity, I will just refinance it and take out those equality.
I have these properties under my LLC. So I am covered up to $250K.
Ant.
Realstart,
The purpose of the lawsuit is to establish your liability for some harm or damage incurred by the plaintiff. Once your liability is established, a jury (sometimes a judge in summary judgement) will determine how much the plaintiff is to be awarded. There is no limit – remember the jury in the MacDonald’s hot coffee lawsuit awarded over $150 Million, though this was later reduced on appeal and eventually settled for a lot less.
What if you are sued and a jury awards $10 Million in damages? Having an insurance policy that provides up to $1 Million in coverage means that the insurance company will pay the first $1 Million of any judgement against you. You will be on the hook for anything above that amount.
thats very true… we are living in a cruel cruel world…
Ant.
Great discussion, especially Dave T. Couple of items:
Land trusts are massively overrated. They do NOT provide direct asset protection in the manner of an entity (LLC, etc.). As Bud mentioned, they keep certain liens from automatically applying…meaning that a creditor has to go to court and have a lien placed on the trust itself, or foreclose on the trust, or foreclose on the grantor/beneficiary’s rights in the trust. In a case involving any kind of money, that extra step is known as a “speed bump”. Mildly annoying, not likely to slow me down.
Before the internet, land trusts may have created some reasonable amount of anonymity. Given just how cheap information has become, a plaintiff’s attorney would have to truly be an idiot to be disuaded by the weak smokescreen presented by a landtrust. Finding out who is behind it is child’s play, particularly where small businesses are concerned. Even without the internet, all I’d have to do is ask a tenant/plaintiff a few questions, such as: “Who signed the lease? Who endorses rent checks? Who have you met face to face when applying or asking for repairs?”. For most of you out there, the answer is YOU! And that’s WITHOUT resorting to the data on the net! To think that the presence of a trust will alter or obliterate that line of inquiry is wishful thinking. My point: Real anonymity for a small business ain’t gonna happen through a land trust. It’s a speed bump. Of all people, as a lawyer, I am in the position to use such devices cheaply and efficiently. I generally do not bother with land trusts, especially on plain vanilla rentals. There are situations where they are useful (getting around assignment clauses or transfer taxes, for example)…but as a screening device, I don’t bother. What “protection” I get does not justify the hassle, in my view.
So much discussion of asset protection focuses on entities & trusts. Those items are relevant, but not of the highest priority for asset protection. For example, before an entity is of any use, for asset proetection purposes, four things have to happen:
You get sued for a lot of money. If a $20,000 judgment would put you under, asset protection isn’t an issue for you just yet. Your focus should be on acquiring things to protect.
You have to lose the case. People spend so much time on entities and so little time on knowing their duties under the law and how to prove they’ve met those duties. They use “guruland” contracts that no rational court would enforce (I’ve seen this with Sub2 & lease options in particular). They use complex devices (certain trust arrangements come to mind) without adequate disclosures. Such devices will often not be understood by a court, much less the parties…that’s not good for the investor. They fail to properly keep up properties or fail to build persuasive proof that they have kept the properties up, setting themselves up for the “lying tenant plaintiff”. The list goes on. Bottom line: I prefer to have a good case than a trust or entity, if I have to choose between the two (I don’t!).
Insurance has to not cover you. Happens, but it is fairly rare.
You have to not settle. The VAST majority of lawsuits settle - and they settle favorably because you have a good case, not because a land trust is present.
Only once those for things occur does an entity truly come into play for asset protection purposes. By all means, use the entities (heck, I sell a course on how to use them for RE, state-by-state, including TX. Look for it here in the near future). But FIRST focus on steps 1 - 4 ( also covered in the course).
John Hyre
Not a fan of landtrusts except in certain circumtances
Thank you John for your comments.
It should be noted however, that trusts do have an important place in estate planning. I have out of state rental property in my own name. Should I die, my out of state property will have to go through (ancillary) probate. I am exploring trusts for my out of state property just so my heir won’t have to deal with probate.
Dave T,
I agree. I didn’t mention estate planning because I’ve yet to see a land trust that even purported to cover that issue. Some special drafting is required to properly set up an estate planning trust of any sort - this is NOT something I would recommend for do-it-yourselfers.
John Hyre