Posted by Randy M on January 24, 2001 at 15:17:08:
TRandle,
I’m sure Bud will give you some great information - as he always does - but here are a couple comments from my perspective, as well.
On having more than four properties in one LLC - probably the main reason against holding more than four is that if there is a problem with one, the others in that LLC could be spoiled - at least temporarily and potentially damage their marketability. I’m sure there are other reasons, but this one came to mind first.
In Texas, do you have a franchise tax on all business forms that exempt personal liability?
Typically, we do arrangements a bit different than you describe here to keep the trust from actually being an operating business. Because trusts are great pass-through vehicles, we want to maximize the protection provided. Here is how we would do something like what you’re talking about here:
We would set up the land trust - it would be an irrevocable trust. We would then set up the LLC, LP, corporation or whatever entity to purchase the property and operate as the business entity. The land trust owns all of the interest (shares, units, whatever is applicable) in the business entity. We then would have a person or another entity be an outside beneficiary of the land trust. We are always very careful to add a Spendthrift Clause and other provisions to protect the assets of the irrevocable trust.
Even though there are three entities here, it works really well because (i) the outside beneficiary (typically an LLC) can be beneficiary for literally all of our trusts because the only thing it does is distributes income and therefore has no liabilities or cause for liabilities, (ii) the business entity takes all of those business expenses, including salaries, consulting fees, modeling expenses for my kids’ Roth IRAs, etc. before we even need to distribute the income produced by the property through the trust to the beneficiary, (iii) this form provides an extra layer of privacy and asset protection - the very things we use this system for.
Obviously, there are many ways to do these systems, but this one has worked well for us and for many of our clients.
I need knowledgeable input on the up-side and down-side issues of forming an out-of-state LLC to serve as trustee for land trusts holding properties in your state of residence.
I know that this is technically not allowed since the LLC is not a qualified “Trust Company”, but it’s no different than forming a corporation to manage your own properties without the corporation obtaining a brokers license, since you’re not doing business with the general public.
Posted by Randy M on January 24, 2001 at 08:49:00:
Ravi,
There are several potential problems with this, but first we need to know if your land trust is going to be a revocable trust or an irrevocable trust.
If it is revocable, then it is acceptable to have your LLC be Trustee because in a revocable trust you already have power of appointment.
If it is irrevocable, there may be some potential problems because you - through your LLC - will have incidences of ownership because the Trustee (the LLC controlled by you) has power of appointment over the assets in that trust.
Let me know what you are trying to accomplish here and perhaps I can give you some ideas.
The land trusts in the scenario I described would be revocable. They are simply title holding vehicles, with no purpose other than for privacy.
The gist of my thinking was to simplify my activities, and protect against a future Trust Company failure (as has been recently reported) by setting up my own entity to serve this purpose. Again, this “Trustee” would be for my usage only.
Posted by Randy M on January 24, 2001 at 14:49:13:
Ravi,
Revocable trusts are great tools for several things. First, any assets included in one of these trusts will avoid probate. Second, they are private - and obviously that is what you’re after here. If you are concerned more about privacy than asset protection you probably have the right vehicle.
If your county recorder will allow you to record a deed with just the trust as owner, you probably don’t even need the LLC. So in this case, the deed would be to “The Ravi Real Estate Trust #1” or something like that. Of course, you would not want your name in it. One of my revocable real estate trusts is “The Western Dakota Real Estate Trust #1.” I am using this trust to hold a L/O property that I will be turning in the future with “financing help from the seller.”
Some counties have required clients of mine to record deeds like this, instead: “Randy M, Trustee of the Western Dakota Real Estate Trust #1.” Obviously, in this case the privacy may be breached. Some times the county recorder just wants to make sure there is really a trust and at that point we will show the recorder a Memorandum of Trust. Usually that will take care of the problem.
Hopefully this will help clarify the issue for you. If not, post again and I will do my best to help you.
One of the reasons you use a land trust is for privacy. While the Nevada privacy laws may not divulge owners of the LLC your name is likely to go on a deed for something you sell. Oops you were just exposed if you are the one they are after.
The other aspect that an attorney would attack is that it is not really a trust because you are in effect the trustee and beneficiary. By having that neutral third party as trustee and the LLC as a co-beneficiary your armor is very hard to penetrate.
Posted by TRandle on January 24, 2001 at 11:17:57:
Bud,
For Texas, what do you think is the appropriate entity structuring? For example, we have a C Corp for our flips and typically use land trusts with our LLC as beneficiary for keepers.
I had been told a while back that having the same LLC beneficiary for more than four properties was not wise. Currently, we just keep doing things this way and I’m getting concerned. I don’t want to form numerous LLC’s due to the franchise tax issue and the initial costs. My eventual goal will be to have probably 30 to 50 keepers. Most attorneys and CPA’s don’t seem to get it, even the ones who are somewhat knowledgeable regarding REI. Should I form an LP? What would you suggest (besides an attorney/CPA) for this intended strategy? Thanks…