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.