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Investors who hold property in their own name risk losing everything in court. But Trusts and Limited Liability Company (LLC) structures can give you some much-needed protection in an industry where 90% of us are sued at some point in our investing careers.
I'm here to offer my perspective as both an asset protection attorney and fellow investor on what you should know about Trusts and LLCs. Let's look at how these structures work, what needs you should consider, and how you can use these tools to defend your investments.
Trusts and LLCs Explained
Effective asset protection plans require both anonymity and separation of assets. The Anonymous Land Trust, or Title Holding Trust, is the tool that protects your anonymity. When you secure your property in a Land Trust, you are no longer the owner, but the beneficiary of the Trust. The Trust is listed as the owner on state documents. Because your name is neither on file with the state nor accessible by a public records search, the Trust keeps anonymity intact.
By contrast, LLC structures separate your assets while also limiting your liability. Smart real estate investors use Traditional LLCs and Series LLCs to hold and manage their properties. These structures secure your investments by separating them from your personal assets. If you're ever sued personally, investment properties held in an LLC can't be affected.
What to Consider When Deciding Between LLCs and Trusts
Your unique situation will influence which asset protection tools are best for you. Here are the most important factors you should consider.
Lending Needs
Trusts are superior to LLCs for investors in need of financing. As Brandon Hall pointed out in his article on LLC formation, getting a loan to an LLC is difficult and unnecessarily expensive. But you can get personal financing much more easily and cheaply, then move the property into a Land Trust for asset protection purposes.
If you like, you can later incorporate the land trust into an LLC structure without violating the due-on-sale clause. You can learn much more about this strategy from my previous piece on how the Land Trust solves the LLC lending problem.
Current Properties and Growth Goals
LLCs are the better tool for lawsuit prevention. But investors with a single property will have different needs than investors with multiple properties. Ideally, you should have one asset per LLC. A Traditional LLC is a great solution for an investor who has one investment property. But investors with more than one valuable asset shouldn't risk pooling all of them inside the same LLC. If a lawsuit against one property within an LLC is successful, all of the properties held within that company are vulnerable.
The Series LLC solves this problem for investors with multiple assets. This entity's structure allows you to create as many new Series, which function like mini-LLCs complete with liability protection, as you like at no additional cost. When you buy a new property, simply create a new Series to keep it protected.
Even if you have a single property today, you should consider using a Series LLC if you intend to acquire more properties. The Series LLC's infinite scalability makes it great for investors who plan to grow their portfolios.
Use LLCs and Trusts Together For Maximum Asset Protection
The easiest way to reap the benefits of Trusts and LLCs to simply use both structures. In fact, the best way for most real estate investors to protect their properties is to separate each property within its own LLC or Series, then list an Anonymous Land Trust as the owner of the LLC structure.
If you want the most protection possible, it's hard to beat the Anonymous Trust and Series LLC combo. A lawsuit can ruin your life once it's in motion, but this asset protection strategy can prevent one altogether.
Scott Smith, Esq. is the lead attorney and founder of Royal Legal Solutions, one of the country's only asset protection firms that exclusively serves real estate investors. If you have questions about defending your real estate investments, schedule your personal asset protection consultation now.