Land Trust vs LLC | When to Use One Over the Other

Feb 3

Real estate investing can be a great way to build wealth and is often a go-to strategy to create generational wealth. These are hard assets that can be passed on to the next generation and be used to generate income in the form of rent or be used as collateral for loans to fund other wealth building ventures. Real estate investing is also something not to be done half-hearted. If you don’t have the right structure in place to manage your investing, then you may expose yourself or your family to liability or expensive debts. Below, we will discuss the fundamental question of what to do with your real estate – should it go in a trust or an LLC?

Put it In Trust

The baseline rule for what to do with any real estate you might have, whether it be your primary residence or an investment property, is to make sure it avoids probate. Probate is court oversight to manage someone’s estate if they have no written instructions or only basic wishes such as a Will. All real estate triggers probate unless the proper planning is done so if all else fails, at least put all your properties in a trust. This is something we have discussed many times, so we will leave it there.

Don’t Overcomplicate and Overspend

So long as you are following the basic rule of at least avoiding probate on each property, then depending on your level of comfortability and sophistication, you can structure your empire however you’d like. However, we caution you to keep 2 principles in mind: don’t overcomplicate things and don’t overspend when you don’t have to. When building your empire, the last thing you want to do is spend extra time doing administrative housekeeping and spending money on services and fees you don’t need.

The Trust, Simple and Inexpensive

If you are looking for the simplest method with the lowest cost overall, then a trust is going to be your best bet. With a trust, you simply title your property into the name of your trust (which you can have escrow do when initially purchasing the property or do fairly easily later with a deed). After that, you’re off to the races. The property now avoids probate thus saving your family money on court and attorney fees. You can get insurance on the property as you would anyway. Also, depending on the type of trust, you are not going to have a yearly maintenance fee as you would with an LLC for example, and taxes each year will be straightforward, especially if it is a revocable trust.

Land Trusts

A “land trust” can mean a few different things as there isn’t necessarily a set definition of what a land trust must be. Generally, it’s a trust that will operate as a typical trust, but it’s main purpose or intent, outside of avoiding probate, is to manage one type of asset – real estate. They can have some specific provisions in them specifically for managing real estate. However, for some inside baseball, unless you are in the realm of land conservation or developing properties, then those provisions are going to be substantially similar to those you would find in a typical revocable living trust. A bit of specific tailoring for the situation along with managing only real estate is usually what makes the trust a land trust.

However, for most people, when they are real estate investing, it’s typically an income-generating venture from rents and or buying and selling or flipping property. At that level, it’s usually good to look at an entity like an LLC.

The Limited Liability Company (LLC)

Entities like LLCs are very popular for real estate investing for many reasons. There’s a nice air of legitimacy since you have a business structure. You keep your business stuff in your business box as opposed to mixed with your personal assets, meaning when it comes times to sell or exit the business, you can sell your entire business box easily. And, perhaps the most enticing prospect, there is separation when it comes to liabilities of the business from your personal assets. If someone sues the business, they can only collect against the business assets, not your personal assets, unless they are able to pierce the corporate veil which is not easy but also not what we’re talking about right now.

However, LLCs is also where we see people easily overcomplicate the situation and end up overspending. Think about it, you have this business box with liability separation from it, why not create another business box for another asset? Now they’re protected from each other as well as you protected from each of them. Now you have your Los Angeles rental property in one box and the Palm Springs commercial property in another box. It makes it all nice and orderly and you can always sell off an entire box when you’re done with it.

However, you may have already caught on, that because you now have two entities, you have two sets of filings to do with the state. You have two sets of financials to keep track of. You have two insurance policies to hold and pay for. You also have two sets of initial start-up fees to create the entities and, the big thing that irks most people, you now have to pay two sets of yearly licensing fees at $800 each. We have seen folks create an LLC for each property, only to come back a year later and dissolve them all but one and move everything to that one LLC because they didn’t like paying an additional $800 per year for each LLC.

From experience, we typically only advise having more than one LLC in specific circumstances. One example is where someone was investing in a property with two others, and they wanted to have an LLC together. Another example is someone who had property in California and Oregon. The Oregon property was in an LLC and their California properties were in another LLC. There wasn’t a legal requirement to do that. A California LLC can hold both Oregon and California property much the same way an Oregon LLC can hold Oregon and California property together. This was simply a case where an already sophisticated investor wanted to have that degree of separation as a possible exit strategy for the business. By that we mean if he ever wanted to finally fully retire, then he could sell each individual property or sell the California LLC holding all the California properties to a California real estate investor. Essentially, “here, take the California box with the California assets altogether.”

Trust vs LLC Considerations

With that, we want to give you an idea what considerations you should have in mind when deciding which kind of structure is best for you. We have not talked about every little detail here, for instance insurance, but this post is already long so we think these considerations will point you in the right direction when deciding for yourself. Of course, always speak to a lawyer before ultimately deciding.

These are the considerations you should keep in mind and be weighing against each other when deciding. If you are concerned about dictating the distribution of your estate or guiding that generational wealth; a primary concern is avoiding probate; you want to keep the costs low or save money; and you want to simplify the administration of your estate as much as possible, then you should lean towards a trust. If you have any real estate, even just a home, then you should have a trust so chances are you will already have a trust, and it’s almost like a set it and forget it method.

However, if your main concerns include an exit strategy (whether it be selling the assets or business, bringing in new members, etc.); you really want that liability protection; and a separation from your personal assets, then a business structure like an LLC is likely your best bet. Keep in mind, your LLC interest should be assigned to your trust so as to avoid probate (which again you likely will have a trust regardless). Additionally, LLCs mean more administrative overhead and yearly fees so do not go overboard creating too many walls around yourself that you lose the ability to be flexible.

BETHEL LAW CORPORATION
ESTATE PLANNING | ELDER LAW | BUSINESS PLANNING

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