Setting up a Land Trust?

Question

My partner and I live in Alabama. Weâ€™ve been given the opportunity to purchase the house weâ€™re renting with seller financing. We need to take advantage of this now before we lose it. However, my partner has some collections which could turn into judgments down the line.

We decided to buy the property in a land trust. Question; How do we set this up?  I know the basics; need beneficiary, forms. Do I need an attorney, or do we just fill out some forms and record it at the state?

Not quite sure who to set this up. Any help would be appreciated.

Ivan

Jon Holdman · Answer

Asset protection for properties typically involves protecting your other assets from a liability created by the property.  For example, you own a rental and have a bunch of stocks.  A tenants sues you for something with the rental.  They win, and the judge awards a judgment based on all the stock you have.  Having the rental in an entity (LLC, corporation, NOT a land trust) might limit the assets that could be attached by the lawsuit to the assets that belong to the entity.  So, it protects your stocks from a lawsuit against the property.

An LLC can help, to some extent, in the other direction.  You get sued personally (which is the situation with your partner).  They can go after all your assets.  If you own the property, its fair game, though it may be protected by homestead laws.  If you own an LLC, or memberships in an LLC, they can get a "charging order" against the LLC.  If the LLC makes a distribution, they can take the distribution.  But if you're property organized the LLC, they can't directly take control or force the LLC to make a distribution.  They are, OTOH, on the hook for any taxes created by the LLC.  So, if the LLC makes a profit, they can be liable for the taxes from that profit.  However, if the LLC elects not to make a distribution, they would have to pay the taxes out of their pocket.  That makes the charging order unattractive.

All that said, having your residence inside a LLC may not offer much protection.  A judge can decide the LLC is an alter ego for you and set it aside.  If you're buying this as a residence, and wanting to be sure these creditors can't take it, you may have less ability to protect that than you might think.

Some time with a lawyer would be money well spent.

Bill Gulley · Answer

Hi, you might try buying it your name first. Then you will have many options available. You could give your partner an installment contract to purchase an undivided one half interest in and to the property and finance it. Even in bankruptcy I have never heard of a creditor attempting to acquire an interest in a property that was highly leveraged (loaned up) to acquire an undivided one half interest in a property, that they would have to sue, for the partition of the property, to force sale and then only be entitled to one half the remaining equity. If that is done in an LLC you would have many strategies to work with under the Operating Agreement.

Buying the property in your LLC at first and then admitting your partner might be something to consider. Your partner could buy into the LLC. Which could be financed. Also, you can have a buy-out agreement, the LLC could be for the benefit of one partner and the one half undivided interest could be financed to another member, any contract or benefit with or for a member can be spelled out in the Operating Agreement and can be limited or terminated upon certian events, like death, incapacitation, filing for bankruptcy or upon any lien or judgement filed against the company or any member.  An LLC is usually cheaper than a Trust, and it provides another level (or many levels) of liability protection.

See your attorney. Bill

Jon Holdman · Answer

Get an attorney.

Typically, its just a bunch of documents.  Nothing gets filed.  You just create the trust, then the trust buys the property.

Realize, though, that a trust offers ZERO asset protection.  It obscures the ownership, and may make someone give up before they figure out who owns the property.  But it doesn't actually give any protection.

Further, it works to obscure ownership of the property.  Sounds like you're trying to hide an asset you own.  It may not offer much hiding of that at all.  You still "own" the property in the sense you're the beneficiary of the trust.

Why doesn't your partner just clear up these debts?
See an attorney.

Jonathan Rexford · Answer

Jon gave you good advice on getting a lawyer. On top of that consider holding the benificial interest in an LLC.