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LLC or trust?

39 posts by 11 users

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K C


I am new to real estate and rentals. I bought a duplex last year in July and it's rented out now. I am wanting to know about LLC and trusts. I was wanting to make an LLC, but someone who is a landlord here said to just put the property into a trust because it is cheaper and provides the same protection as an LLC. Then another landlord told me not to bother with LLC or trusts because they only provide a false sense of protection because I can still be sued personally regardless.

I live in KY. Could someone help me understand what the difference is in protection via LLC or trusts? Do I need one, both, neither?

I'm wanting to buy more property and I want to make sure I have this figured out beforehand.

Also, can I file my own paperwork for LLC and/or trusts or do I have to consult with a lawyer? I would prefer to file my own if I can.

I currently do have home insurance for landlords through Allstate.



Real Estate Investor · Westchester, Illinois


Education generally teaches to put rental property in an LLC or series LLC because then they are treated as a company and you can't be held personally liable.
My accountant is encouraging me to put properties in our personal name into Trusts. I am in the process of finding out about that as well because with these issues you seem to get a different answer from everyone you talk to.
As far as doing it yourself, depending on your state it is usually cheaper to do it yourself, but be sure you have all the details and such you need in your operating agreement. This is the area where your lawyer may be worth the money to understand your situation, what you want to do in the future and tailor it to that.



Real Estate Investor · Baltimore, Maryland


Originally posted by K C:
I am new to real estate and rentals. I bought a duplex last year in July and it's rented out now. I am wanting to know about LLC and trusts. I was wanting to make an LLC, but someone who is a landlord here said to just put the property into a trust because it is cheaper and provides the same protection as an LLC. Then another landlord told me not to bother with LLC or trusts because they only provide a false sense of protection because I can still be sued personally regardless.

I live in KY. Could someone help me understand what the difference is in protection via LLC or trusts? Do I need one, both, neither?

I'm wanting to buy more property and I want to make sure I have this figured out beforehand.

Also, can I file my own paperwork for LLC and/or trusts or do I have to consult with a lawyer? I would prefer to file my own if I can.

I currently do have home insurance for landlords through Allstate.


Land trusts have not been tested in the courts of law thus it's a grey area as far as I am concerned. As for LLC, the law is very specific what is covered and who is protected.
Don't take someone else's word, always do your DD



Rehabber · Santa Clarita, California


Education generally teaches to put rental property in an LLC or series LLC because then they are treated as a company and you can't be held personally liable.
This is just not true. Having an entity does not remove you from liability and there are many ways of how you could still get sued. Keep in mind that liability protection from an LLC is inside liability only, and not outside liability.
What that means is if you drive drunk and kill someone, you will be sued for everything you own, INCLUDING your LLC which owns an asset. However, if you get sued because a tenant falls off the porch, they can only sue the LLC and its holdings, and not you personally, UNLESS - negligence is involved. In that same example, if the tenant sent you a letter stating that the proch was unsafe because it lacked a railing and you did nothing about it, then they fell, guess what? You AND your LLC will be sued. This is one of many ways the corporate veil can be pierced.

If you plan to be a landlord, it is often recommended by legal and accounting professional to use an LLC AND have proper insurance. Keep your books cortrect, operate in a professional manner and do not comingle personal and business funds. Also, do not act in a negligent manner.


Small_be_logoWill Barnard, Barnard Enterprises, Inc.
E-Mail: [email protected]
Website: http://www.barnardenterprises.com
http://www.InvestorExperts.com


Real Estate Investor · Westchester, Illinois


You're right Will. This was a much more thorough answer.

I failed to elaborate on what I meant by you can't be held personally liable.



SFR Investor · Orange County, California


Originally posted by K C:
I was wanting to make an LLC, but someone who is a landlord here said to just put the property into a trust because it is cheaper and provides the same protection as an LLC.

False. Most trusts do NOT offer ANY asset protection. If your duplex is owned by a revocable trust (which lists you as the beneficiary) and somebody gets hurt on your property, they will sue YOU. The trust may hide the true owner, YOU, a little, but any good lawyer with a solid case against you will have no problem getting at you personally.

The only trust I know of that does offer solid asset protection is an irrevocable trust, where you basically give away your property to somebody else. But these are definitely NOT cheaper than an LLC. Especially if you're giving up control of your assets.

Then another landlord told me not to bother with LLC or trusts because they only provide a false sense of protection because I can still be sued personally regardless.

You can always be sued personally for something you personally do wrong. The purpose of a limited-liability entity such as an LLC or Corporation is our sue-happy nation goes after the owner(s), not necessarily the wrong-doer. If your duplex is held in an LLC and somebody tries standing on the edge of a wet soapy bathtub to install a shower curtain and falls and breaks something important on their body, they will sue the OWNER, your LLC, not YOU because YOU didn't do anything wrong. Sure, they can still try, but I'm sure the court will have a hard time finding you personally liable unless you told the tenant to stand on a wet soapy bathtub to install a curtain.

I wonder how many people who downplay the protection of an LLC or Corporation know somebody, including themselves, who failed to maintain the entity properly and had it set aside in court? Perhaps this forms the basis for their belief in the inadequate protections of a limited-liability entity.



· Orlando, Florida


Originally posted by Mitch Kronowit:
Originally posted by K C:

I wonder how many people who downplay the protection of an LLC or Corporation know somebody, including themselves, who failed to maintain the entity properly and had it set aside in court? Perhaps this forms the basis for their belief in the inadequate protections of a limited-liability entity.

I would love to know the answer on that too...



Rehabber · Santa Clarita, California


That happens all the time. Many attorneys have been successful in piercing the corporate veil. The important factor to know is to make sure you stay on the proper side of the fence on these issues to prevent such an occurance. Do not think that it is talk and it actually does not happen, IT DOES.


Small_be_logoWill Barnard, Barnard Enterprises, Inc.
E-Mail: [email protected]
Website: http://www.barnardenterprises.com
http://www.InvestorExperts.com


· Orlando, Florida


^ I set up the LLC in case the tenant does something beyond my control (brings in a trampoline, against their lease, and someone gets injured on it before I even knew the trampoline was there). I am hopeful that it would protect me in a situation like this. I don't expect it to protect me if I'm willfully negligent about something.



K C


Yeah, I assumed that if I personally do something stupid, then I can be sued and still lose my LLC assets. I'm just wondering about accidents due to unforeseeable circumstances or clumsy tenants.

So is it better to have an LLC set up than to have insurance? I am keeping my insurance either way. I'm just not sure if it's beneficial to also have LLC set up in addition to the insurance.



SFR Investor · Orange County, California


Originally posted by K C:
So is it better to have an LLC set up than to have insurance?

:protest:

An LLC is NOT a substitute for insurance. It's just another layer of protection. Think of an onion, K C, with you in the center and all those sleazy tenants and attorneys outside the skin. :wink:



· Orlando, Florida


Originally posted by K C:
Yeah, I assumed that if I personally do something stupid, then I can be sued and still lose my LLC assets. I'm just wondering about accidents due to unforeseeable circumstances or clumsy tenants.

So is it better to have an LLC set up than to have insurance? I am keeping my insurance either way. I'm just not sure if it's beneficial to also have LLC set up in addition to the insurance.

You always want to have insurance, regardless of whether you own the property in an LLC or not...

In my opinion, the the least cumbersome solution is to get a good umbrella policy with at least $2 million liabililty coverage, put properties you own in your own name under that umbrella, and once you reach the max number of properties allowed under that umbrella, start using LLCs for any properties you acquire beyond that.

If you plan to own a lot of properties and use entities, you'll probably need to create and manage multiple LLCs, because putting 20 properties in one LLC is essentially putting all your eggs in one basket and may defeat the purpose of what you're trying to do. Also some insurance carriers will only allow you to have one property per LLC. Check with your insurance agent about what their carriers' rules are about LLCs.



Rehabber · Santa Clarita, California


So is it better to have an LLC set up than to have insurance? I am keeping my insurance either way. I'm just not sure if it's beneficial to also have LLC set up in addition to the insurance.
No, it is not better. It is better to have both adequate insurance AND an entity (LLC). What if you were to be sued above your insurance limits? With the LLC, they can only go after the LLC assets, assuming negligence or any other opportunity to pierce the veil is out.


Small_be_logoWill Barnard, Barnard Enterprises, Inc.
E-Mail: [email protected]
Website: http://www.barnardenterprises.com
http://www.InvestorExperts.com


SFR Investor · Riverside, California


An LLC will protect YOU; the land trust will protect your property...Why not use them together?
Deed the property to your land trust, make your LLC the trustee of the trust, yourself as the beni, a second unrelated person also as a beneficiary of the trust. The benies now have only a personal property interest in the trust, and no further ownership of the property. Personal property cant be partitioned, so you added an additional layer. You could also make your LLC the benificiary additing another layer, but I would just get a good insurance policy to protect you instead.



SFR Investor · Orange County, California


Originally posted by Silvio:
An LLC will protect YOU; the land trust will protect your property...Why not use them together?
Deed the property to your land trust, make your LLC the trustee of the trust, yourself as the beni, a second unrelated person also as a beneficiary of the trust.

Sounds interesting (and convoluted, which is probably the point). I'm not sure how this is suppose to protect you. If somebody at the property gets hurt and tries to sue the owner, they will find a trust on the title. I'm certain the process of discovery (interrogatories) will reveal names of the beneficiaries of the trust, the true owners.

Please walk us through and show us how this set-up actually protects anybody.



Real Estate Investor · Baltimore, Maryland


I believe a land trust has been believed to protect from slick contingency-based trip-n-fall attorneys. In case of such an accident, someone who is not familiar with specifics of a land trust would not (supposedly) take the case after discovering that it will take some efforts to get to the names of the owner.
I also believe that no anonymity will be granted should the attorney proceed with the lawsuit - any judge will instruct to reveal the names of beneficiaries.
Thus the LTs provide a false sense of security to the property owners.

Please correct me if I am wrong, and if possible - with real-life examples.



SFR Investor · Riverside, California


I'm not an expert but have done several trusts and I view them as an invaluable tool for anonymity and privacy of ownership. George is correct, this combination will probably hold the real estate beyond the reach of most attempts of litigation. Adding a certain type of co-beneficiary (not family or business partner) to a trust will bring all of the protections that the law allows towards personal property, a judge may not be able to order the sale of the real estate to satisfy a judgement due to the limited partition rights by outside parties. Why will that co-beneficiary have to suffer a loss due to the acts of someone else? I would make sure the trustee (person or LLC) owns no real estate. May not be practical to find the perfect way of setting this up as someone will always find a way to pierce thru it. I think a mix of some of these ideas will make it convoluted like Mitch said and deter attempts of litigation. Adding a good liability policy will probably give you the extra piece of mind should any of this fail to protect you. I do the best I can to take care of my properties and tenants, hopefully that will also help in not getting into trouble.



Real Estate Investor


The truth of the matter everyone seems to always have a different answer, leaving me to belive no one knows...

However, here are some things that help, I have my homes in trust owned by LLC's

The thing I like about trust, they are simple and easy, I have one LLC own an X amount of trust

I best way to protect youself is to make your self look like you do not own any property.... If an attorney looks for my asset, they are hard to find, as they are in trust like ABC trust, he will have a hard time finding my property and therfore may not be so interested in sueing me in the first place

If you are heavly insured and they can not find any property to take, they will take the insurance...



Real Estate Investor


By the way check the law, I am certain corporations are not allowed to be a truste of a property, without first going thru a ton of legal hoops..



Real Estate Investor · Baltimore, Maryland


Originally posted by Mike Gardner:
By the way check the law, I am certain corporations are not allowed to be a truste of a property, without first going thru a ton of legal hoops..

Trustees - no, but beneficiaries - yes





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