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Business Development

Land Trust Essentials: Why an LLC Should Be Your Beneficiary

Hey Moguls, Randy Hughes, the all-knowing Mr. Land Trust, is continuing his super-informative series about all things Land Trusts with another awesome installment today.

In case you missed his most recent lesson, check it out here. Randy gave us loads of good info about which states have the best Land Trust Statute Law and why. Plus more awesomeness, of course!

And, to check out the entire series from the beginning, here’s Part 1.

So, we’re gonna let Randy take it away from here…           

From Randy Hughes…                             

There are lots of ways to hold the Beneficial Interest in a Land Trust (i.e. individually, through another entity or via the Trustee of another trust). This lesson will concentrate on using a Limited Liability Company (LLC) to hold the Beneficial Interest in a Land Trust and the many benefits of this strategy.

Just because you put your property into a Land Trust does not mean you have avoided all liabilities stemming from that property. The liability from property held in a Land Trust flows through to the Beneficiary of the Trust. This is why most real estate investors (holding title to investment property in a Land Trust) make the Beneficiary of their Land Trust, an LLC.

Linking the Land Trust with the LLC is a good structure that yields the privacy (of ownership) benefits from the Land Trust AND the asset-protection benefits of the LLC.

Privacy Please

The basics of asset protection are rooted in privacy, and the most inexpensive (and effective) way for real estate investors to obtain privacy is through the use of a Land Trust to hold title. Unlike all other forms of holding title, the Land Trust is NOT registered anywhere on planet Earth! This prevents everyone from “looking you up” via the Internet to determine your assets (and your suability potential).

Yes, most attorneys will try to determine your assets prior to suing you to make sure if they win their lawsuit against you, they will get paid (thus, your “suability potential”).

Not holding title to real estate in your name will help you avoid 90% of potential frivolous lawsuits. The remaining 10% of potential lawsuits can be effectively dealt with at the Beneficiary level with your LLC. However, many real estate investors are under the mistaken assumption that all LLC’s are the same when it comes to asset protection.

THAT IS NOT TRUE! (Sorry, didn’t mean to shout at ya, but that’s important!)

Single-member LLC’s are particularly vulnerable to attack. Here’s why...

Real estate investors use LLC’s primarily because they seek the protection of a Charging Order in case of legal attack.

A Charging Order is the remedy a creditor uses to place a judgment against a Limited Liability Company. A judge may award the creditor the rights of an assignee (distribution of profits) but not the membership interests of an assignee (ownership).

The judgment creditor cannot force distributions, maintain managerial rights or exercise any measure of control over the Limited Liability Company. Additionally, the judgment creditor is obligated under IRS Revenue Ruling 77-137 to report and pay taxes on their share of income regardless of whether such earnings are distributed or retained!

So – the charging order protects LLC owners and investors from the creditors of a debtor owner.

All my Single Members, Put Your Hand Up

(Beyonce, anyone?)

In a Limited Liability Company owners are called "members" and a single-member LLC has one owner. The IRS disregards a single-member LLC as a separate entity and looks to the single-member as the responsible party. The courts also look to single members as the liable party – as did Colorado in the 2003 bankruptcy case of Ashley Albright wherein the court stated,

"A charging order protects the autonomy of the original members and their ability to manage their own enterprise. In a single-member entity, there are no non-debtor members to protect. The charging order limitation serves no purpose in a single member limited liability company, because there are no other parties' interests affected." [Ashley Albright, 291 B.R. 538 (Bkr. D Colo.2003)]

vegasThe state of California agrees and determines each charging order not by state statute, but by court decision. Thus, owners of single-member LLC's have no assurance of liability protection in most states.

Nevada and Wyoming, in particular, afford a single-member LLC the same charging-order protection as a multi-member LLC.                     

In addition to the standard-type LLC that many real estate investors use to hold their Beneficial Interests, many investors use the Series LLC instead. While explaining the use and benefits of a Series LLC in this lesson is not possible due to space limitations, I encourage you to find out all you can about this subject.

Bring it Home

So, what did we learn in this lesson?

We learned that just because you put your property inside a Land Trust does not mean there is no more liability. Also, (for asset-protection reasons) it’s smart to hold the Beneficial Interest in a Land Trust via a Limited Liability Company.

wyomingJust like in my previous lesson where we learned that not all state’s Trust laws are equal, we learned in this lesson that not all state’s LLC laws are created equal… and some states have better laws than others.

We also learned that Nevada and Wyoming have the best single-member LLC protection laws.

Stay tuned as we continue this great series with more helpful Land Trust info soon.

In the meantime if you want to continue your Land Trust education, please feel free to enjoy a webcast training I’ve prepared on how to create your first Land Trust.

Randy Hughes, aka, Mr. Land Trust

Wanna Know More?

Did this lesson spark any thoughts or questions? Let me hear from you in the comments section below.


Do It To It! Immediate Action Steps

Investigate your state’s LLC laws to see if you should form your LLC elsewhere.

Ask other real estate investors where they formed their Limited Liability Company.

Learn all you can about the Series LLC and how it can save you from having to form multiple LLCs.

Is there a topic you'd like to learn more about? Request a Lesson


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