Battle of the Real Estate Gurus: LLC vs Land Trust

The land trust is being billed as an asset protection tool by a number of the real estate gurus. Is it really an asset protection tool? Is an LLC a better asset protection tool? Why use an LLC or a land trust? All good questions.

The standard land trust has grown into a mythical animal. The first land trust law was the Illinois land trust law. It actually established the rules for which you could use a unique trust in order to own land. It is the law in Illinois. There are currently six states with land trust laws. They are: Illinois, Florida, Indiana, Virginia, North Dakota and Hawaii.

What this means is only those states have specific rules that need to be followed in order for a trust to own land. You can actually form a “land trust” in any state. All states will allow you to form a trust that owns a piece of real estate. It’s just that most states don’t have specific rules governing those trusts.

States that don’t have specific rules for land trusts simply govern them using standard trust laws. All states have extensive trust laws. In almost all cases, the folks who establish a “land trust” are establishing a revocable trust. The land trust laws and trust laws in general are clear that a revocable trust DOES NOT give the grantor (the guy that sets up the trust and puts the property into the trust) any type of asset protection. It doesn’t matter who the beneficiary is. All trust laws state that if the trust is revocable, the courts can require the grantor, when they are sued for any reason, to “revoke” the trust and give the property in the trust to the grantor’s creditors.

On the other hand, a piece of real estate held in an LLC will give the property asset protection from the creditors of the member(s) who own the LLC and put the property into the LLC. It will also protect the members form liabilities associated with the property in the LLC. (See articles on charging order protection and on the corporate shield.)

The cost of using only a land trust versus setting up an LLC to hold the property can be dramatic in some states. Land trusts don’t require any state or federal fees to establish. On the other hand, an LLC requires state fees in order to establish or register within a state. If an LLC owns a piece of land in a state, it must be established or at least registered in that state. There are no exceptions to this rule. So, an LLC can be expensive to operate depending upon which state the property is in. New York, New Jersey, and California are the most expensive states to do business in. (Welcome to big government states.)

Does a land trust give you anonymity? The answer is not really. In today’s world, we can find out which brand of underwear you are wearing without much trouble. Technically, the property is held by the trustee of the land trust for the benefit of the beneficiaries. That’s the way all trusts work. The trustee’s name is on the deed. If you are the trustee, you are tagged with the property. If there is a mortgage on the property, you are tagged with the property. Unless you pay cash for the property and are not the trustee (which means you are not in control of the property), it is very easy to find your relationship to the property.

Because of the charging order and corporate shield protections of an LLC, I would recommend its use over land trusts in most cases. In those few places where the costs associated with an LLC are prohibitive, instead of paying state fees, you should use that money to buy property casualty insurance. You need some kind of protection, and land trusts aren’t going to provide it on their own.

19 Comments
  1. Can a land trust open an LLC?

  2. Agree with the first question….could you place a land trust within an LLC?

  3. A land trust is just a revocable trust. A revocable trust can own an LLC as the member.

  4. An LLC can act in any of the three roles in a trust which are grantor, trustee, or beneficiary.

  5. If the LLC is trustee, don’t you have limited liability as well as anonymity? Especially if the mortgage is accelerated due to being owned outright by an LLC.

  6. Gary,
    Using a third party management company is a low level asset protection advantage. If it is the third party manager’s fault that there is a problem, they could be held liable and not you the owner. However, if ownership of the property can be tied to the problem, which it often can, then the owner would be liable. Banks don’t really know what they will do with the transfer to an LLC by the owner, where the owner owns the LLC. Technically, the due on sale clause could be called. They won’t call the loan until interest rates start to go up significantly. I assume you are in California, where the cost of an LLC is big. Cost is a consideration, and then the property taxes and insurance are also considerations. Carry a lot of insurance.

  7. If I have several land trusts. Should each land trust have it’s own llc. I was told that a nevada llc could protect multiple land trusts so only one is need. For some reason if I have several buildings in several land trusts nd only one llc I feel like that is commingaling the assets

  8. Ron,
    I don’t understand what you are doing with the LLC and the land trusts. Is the LLC going to be the beneficiary of the land trusts? A Nevada LLC doesn’t protect anything more than your hometown LLC. I think you are being sold a bill of goods some place.

  9. Lee,

    Is this a good plan? Deed rental property to Florida LLC. Have a Florida land trust be the sole member of that LLC (owns the LLC).. then have a manager New Mexico LLC (great for anonymity) be the Trustee, aka myself, of the the Florida Land trust?

    Another question: In the Land trust, what property should be in the trust? The rental property address or have it state it owns the Florida LLC?

  10. Or in the above example,

    Can the Florida LLC, that is deeded the rental property, aka property management also be the Trustee of the Trust that owns the LLC?

  11. If I have 10 properties under 1 LLC and there is a law suit against one the other 9 may be at risk. I was told that if each property is held in its own land trust with the LLC as beneficiary, this would protect each of the other 9 from the suit without having to have 10 LLC’s. Is there any merit to this or will it be necessary to have each of them in their own LLC and incur the set cost plus the annual meeting documentation and filing each year?

  12. Kurt,
    I have discussed with many attorneys the use of a land trust with an LLC as beneficiary of the trust and the asset protection value of this setup. We have all failed to see any logic in this structure. I would love to have someone who promotes this structure tell me why they think it works. As far as I know there is no merit to the structure. Having multiple LLCs is a headache. I have ten properties in three LLCs. Maybe you can lump a few properties in each LLC. That cuts the headache. Ten baskets to hold ten eggs is great, but it is hard to carry ten baskets. You can maybe carry three baskets. If one basket drops, you only lose three eggs or maybe 4 eggs. Much better than having all your eggs in one basket.

  13. Doug,
    Yes, an LLC could be the trustee of a trust. That is unusual for an living revocable trust. I am not sure what you are trying to accomplish.

  14. Hi Lee,

    Thank you for your thoughtful post! Just one clarifying question:

    Does utilizing an LLC as the trustee of a trust protect individuals from liabilities? It seems most here are asking about an LLC as a benefactor, but trustee makes more sense to me since that is who typically holds liability within a trust.
    What do you think, Lee? Thank you again for your advice!

  15. Blaise,
    The trustee doesn’t have liabilities for the assets of the trust, unless it is your living revocable trust, which is considered you, because the trust is revocable. it isn’t your relationship to the trust as trustee that gives you the liability. It is your relationship as the grantor, who didn’t really give up control of the asset, because the living revocable trust is revocable. I could be the trustee of your trust and wouldn’t be liable. HOWEVER, the fiduciary duties of a trustee are very strict, and the trustee is liable for violating those duties. The LLC as trustee would help avoid personal liabilities. However, technically, the trust is not a “grantor” trust when you make an LLC the trustee, so you would be in a different position with the IRS and courts (maybe the courts) I would just be the trustee and don’t overthink the issue. Carry insurance as normal to protect yourself.

  16. Hello.
    Is it true that a married couple could avoid probate simply by placing its assets into a Nevada LLC? It seems that the surviving spouse would inherit the dead spouse’s membership share automatically as it is a community property state. Also, if the Nevada LLC’s operating agreement includes a provision to automatically transfer membership to any surviving children, it seems that probate could be avoided even when the surviving spouse dies. Thank you.

  17. Hi Lee – Firstly, thank you for your videos. Some people binge watch Netflix, I’ve been binge watching LegaLees :). Regarding Kurt’s comment, are you saying multiple properties under separate revocable trusts, but all with with same LLC as beneficiary is less or same protection as just putting it in the LLC directly? You said your industry peers and yourself “fail to see any logic in this structure” and just wondering why? less protective or just less sensible because there’s no added protection other than the perceived anonymity. Thank you!

  18. Ashwin,
    Any anonymity is at best imagined. There is basically no such thing as anonymity today.  Putting property into a revocable trust gives you NO NO NO asset protection. It doesn’t matter who or what the beneficiary is. The beneficiary has nothing to do with the asset protection afforded by the revocable trust. There isn’t any asset protection associated with a revocable trust. I have no clue why people tell you to use a revocable trust with an LLC as beneficiary for asset protection. Somebody please explain it to me. The only reason I can see for it is the attorney gets to sell you a trust plus an LLC, or you have to buy a trust kit and an LLC kit. 

  19. Mo,
    Operating agreements can be written to transfer ownership to specific individuals upon death of the current member. The fact that is a Nevada LLC and Nevada is a community property state means nothing about transfer between spouses. Community property does not transfer ownership from one spouse to another. Your state’s laws will determine what happens when you die. Unless you live in Nevada, don’t entertain the idea of a Nevada LLC.

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