Business Management

Retirement Planning: Why Business Trusts May Be a Smarter Choice Than an LLC

Expertise: Business Management, Personal Finance
79 Articles Written

You’ve done all the work to prepare for retirement, investing in your future by contributing to your individual retirement account (IRA) or self-directed IRA (SDIRA).

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

You’ve done your research to choose the right investments at the right risk level for you to ensure your future is stable and well funded.

So, it would probably surprise you to know there are other dangers lurking that could end up depleting these funds and destabilizing the future you’ve been planning for.

Today, I want to tell you what I tell my clients about business trusts and how they can help real estate investors protect their assets both today and in their retirement years.

Related: Anonymity & Asset Protection for Dummies: How to Avoid Lawsuits

Extreme macro or close up of the word LAW-SUIT. Very shallow depth of field is intentional and shows only the word LAW-SUIT in focus.

How Are My Investments at Risk?

If you're a doctor, corporate executive, or landlord, you already know that your profession puts you at a high risk of litigation. Did you know that your retirement assets are also at risk if you file for bankruptcy, divorce your spouse, or end up in a civil lawsuit?

If you are a parent, your investments are equally at risk if your child causes an injury to another person. An injury happening on your property, whether your boat or your land, can also lead to financial ruin in the case of a lawsuit.

Related: The Traditional LLC vs. the Series LLC: Which Is Better for Real Estate Investors?

Built-In Asset Defense

Some state and federal laws can protect your assets in these situations. For example, up to $1 million in IRA contributions and gains are protected from bankruptcy. The same goes for qualified employer-sponsored plans such as SEP and SIMPLE IRAs. In addition, the Employee Retirement Income Security Act (ERISA) protects many plans from bankruptcy and litigation.

What Is a Business Trust?

To build in a more robust defense of your assets, most experts recommend establishing a business trust or LLC to hold them. (This method is fully allowed by the IRS as a protective strategy.) There are many resources online to learn about the benefits of an LLC to protect your assets, but a business trust can take things a step further and offer more robust protections.

man in suit sitting at desk sheltering wooden model home on desk with hands, gavel and scale of justice in view

Privacy and Reducing Personal Liability

You are not legally required to make your business trust a public filing. The Declaration of Trust, trustee names, addresses, or any personal information are all private when part of a business trust.

On the other hand, an LLC has to submit its Articles of Organization with the Secretary of State, which makes public your name, address, and the manager of the business.

Related: Cover Your Assets: How to Use Corporate Compliance to Keep Your LLC Legal

The investments made by your business trust and all gains from it are legally separate from your personal assets. This benefits you in two ways: Your personal assets are protected from legal ramifications if your business trust defaults on a property loan, and your business assets are protected in the event of a personal bankruptcy.

While these protections are in effect in theory for an LLC, you must remain in complete compliance with regulations for that to be the case. This means staying on top of annual filings, fees, and requirements.

Business Trusts Are Fast & Easy to Establish

There are no fees to start or maintain your business trust, and since they are not a public filing, there are no approvals needed to start. In contrast, an LLC requires name reservations, applications, waiting periods, government filing fees, and regular reports with the Secretary of State (varies by state). Plus, it can take up to three months to finally become an approved legal entity for investments.

Related: Landlords, Legal Liability, and LLCs: How Property Owners Cover Their Assets

Disregarded Entities

A business trust and an LLC both give you the choice of filing taxes as a partnership or a corporation, but a business trust also allows you to file as a trust. (LLCs will permit personal filing, as well.) When filing as a partnership, business trusts and LLCs are required to file federal and state income tax returns. A partnership with a single owner, though, can be “disregarded as an entity separate from its owner.”

A business trust in this situation means not having to file a federal or a state tax return, while LLCs are still required by most states to file income tax returns.

These can be tricky waters to navigate, and it can be tempting to handle it all yourself for simplicity’s sake. But every penny counts when planning for your future, so be sure to hire financial and legal professionals who are familiar with all the relevant regulations to assist you in setting up and managing your business trust.

Questions? Comments? Concerns?

Weigh in below.

Scott Royal Smith is an asset protection attorney and long-time real estate investor. His law firm, Royal Legal Solutions, helps thousands of real esta...
Read more
    Neil Aggarwal Lender from Richardson, TX
    Replied 2 days ago
    In Texas, when using the trust in any legal document, you need to show the name of the trustee.
    Gregory Stanley Attorney from Alabama
    Replied 2 days ago
    Since there are no filed documents, how does a notary confirm the signor represents the trust? If the trust wants to sell property or enter into any notarized agreement the signor must prove they legally represent the trust. This is why we don't recommend land trusts to our property investors.
    Lynnette E. Rental Property Investor from Tennessee
    Replied 2 days ago
    Most of the time a Trust comes with a Summary page that has the basic required information to allow someone to prove that they are the Trustee or Trustor or beneficiary and what authorizations the person has such as entering into a contract or entering into debt, selling trust assets, etc. I have sold 3 properties in a Trust and had no problems with just the summary sheet. That lets the details of the Trust remain confidential. My Summary sheets are notarized. I have not had a problem in TN or CA using the notarized summary sheets to do anything I needed, from opening and closing bank accounts to buying or selling properties.
    Cameron Lam from Gilbert, AZ
    Replied 2 days ago
    In this case wouldn't you hold title in a land trust with beneficiary being some named LLC, and if you want to sell move title back to individuals name?
    Thomas Abella
    Replied 2 days ago
    So, in what format does the trust file its taxes?
    Lynnette E. Rental Property Investor from Tennessee
    Replied 2 days ago
    I use family trusts to hold my real estate so I file it intermixed with my other taxable income under my SSN. BUT once I die the Trust must use its own EIN to file. One could file the Trust taxes under its own identification before the Trustor dies, but then it will not have the basis reset on the value pf the Trust assets when the Trustor passes away. I would guess that a business Trust would file for itself, but my advisor would not recommend that because the reset of the basis is important when one has rentals.
    Raphael J. Realtor from Kansas City, MO
    Replied 2 days ago
    Interesting concept.
    Malcolm Coleman
    Replied 2 days ago
    I am in the process of starting a business trust for my real estate business. I have not actively participated at this time because I am still not quite clear on the functions and processes. Can you go more into details on how it works. Thanks Malcolm
    John Shipley Investor from Batavia, Ohio
    Replied 2 days ago
    Hi Scott - Interesting article. Can you discuss the issues with having a trustee in charge of your assets? Any discussion I've seen about choosing a trustee just says 'have someone you trust'. There is no mention that the trustee also needs to have some level of investment comfort/sophistication, even if they are just following directions from the beneficiary. That eliminates my options. ;-) Many investors do not have family/close friends who are both trustworthy and capable of handling the responsibility. Also, in my state (Ohio) we can avoid disclosing name, address, etc. by having a service file our Articles of Organization and act as statutory agent for the LLC. I enjoy your articles and appreciate the time you take to contribute to the group.
    Christian Carson from Cleveland, Ohio
    Replied 2 days ago
    This is a very state-specific recommendation and the article should state as much. In Ohio, business trusts and REITs are regulated by R.C. 1746-1747, and chapter 1111 prohibits entity trustees other than banks. Further, the settlor's creditors may reach the assets held in trust to the extent the settlor can access them per R.C. 5805.06. Quite frankly, these vehicles are true headaches to undo in Ohio. It's trying to shove a square peg into a round hole. Trusts are estate planning mechanisms, full stop. There is zero Ohio case law on point limiting the liability of a trustee running a business for their own benefit, probably because the wheels fall off as soon as any liability arises. By very stark and strong contrast, there is voluminous case law defending the limited liability nature of entities INTENDED to be used for business. Considering that Ohio doesn't require the disclosure of any business owners and registration is only a one-time $99 fee, a "land trust" in Ohio is a terrible idea. I understand that forming an LLC in NY is more onerous, but that's only one state.
    Patrick O'Neill
    Replied 1 day ago
    Excellent response. I am becoming very skeptical of advice/articles from BiggerPockets. It seems they have limited quality control, and are way too high on a pedestal so to speak. Thank goodness for replies of actually experienced investors!!
    Amber Boll
    Replied about 8 hours ago
    Lets get back to the Brandon only days. I know BP is trying to up their game, but Brandon is our trusted man. Let's stick with what built BP...not the other flash. Thanks!
    Stan Wu Virtual Assistant from Bend, Oregon
    Replied 2 days ago
    Brother Christian with the referenced disclosure. Awesome response. Just returned from Ohio and closing cash on a complex and deciding if having it in my LLC is wise (LLC is a real business and exposes me risk since it is working in public w workers). I will halt Looking at business trusts. Appreciate all the feedback
    Houston Porter
    Replied 2 days ago
    Although this article brings up some interesting points, it is so vague (and not state specific in any way, nor does it mention how different these can be from state to state) that I figured it to simply being an advertisement for Scott's services. Fair enough, but I feel like that should be disclosed right up front instead of writing this as an informative "article".
    John Shipley Investor from Batavia, Ohio
    Replied 2 days ago
    Thanks for that very thorough response Christian.
    Eduardo Conde New to Real Estate from Alexandria, VA
    Replied 2 days ago
    Thanks for this answer, I also felt that the article was way too broad
    Emmett Bond Investor from Bellingham, WA
    Replied 2 days ago
    Thanks! Great answer. I didn’t feel like this article was painting a full picture.
    Mike Arman
    Replied 2 days ago
    Dudes and Dudettes . . here be dragons! First, free legal advice you find on the internet is worth exactly what you paid for it. Second, an aggressive state's attorney could consider this UPL, which is punishable in various degrees state by state, and Third, get competent local legal advice if you are considering this! Your local attorney knows the local laws (which can vary widely and wildly) and has errors and omissions insurance if they screw it up. This message is approved by my wife, who IS an attorney in Florida, and doesn't play one on TV.
    Scott L. Investor from Flower Mound, Texas
    Replied 2 days ago
    Frankly, that's absurd. A generic article in a business publication discussing benefits is the Unauthorized Practice of Law. Any State's Attorney bringing such a case should be sanctioned by the court and his state bar.
    Mike Arman
    Replied 2 days ago
    Scott, I absolutely agree that it would be an absurd overreach, but all you need is ONE aggressive State's Attorney looking to make a name for themselves. Read up on Richard Nixon (remember him?), that's how he got his start, sue everybody and everything. Even if they did get sanctioned later, eventually, or even not at all, YOU still will have had the expense of defending. Baseless lawsuits get filed constantly, some of them get kicked out, some of them get laughed out, but if you don't defend, you've lost even if the suit makes zero sense. Courts don't look kindly on pro se (representing themselves) defendants, even if the defendant is correct. Remember, if the other side has or is a lawyer, you'd better get one for yourself or you will get SMASHED in court - I've seen it happen.
    Arijit De
    Replied 2 days ago
    Hi Scott. Thanks for the insightful article. I am currently in the dilemma of whether to go with LLC or a business trust. Does Business trust allows you to have properties under your name but in case of liabilities, have the liabilities only restricted to the property alone and not to the personal property?
    Curt Smith Rental Property Investor from Clarkston, GA
    Replied 2 days ago
    Thanks Scott. No detraction from Scott, but this was just a drop in a big bucket. As with any complex topic this was tursely covered as is understandable FWIW the national teacher Dyches Boddiford teaches a trust class, or did, which is a whole weekend. Neal/Gregory good questions, both are googleable. But worth mentioning here. Boddiford sells a trust couirse (as some teachers do as well) . I have no affiliation, only a happy student. A few clearifications; There's only one maybe 2 states where theres statutory support for that states trusts (specificly crafted) that offer liabiity protection. 100% of good advice would be to have all trust's beneficiaries be a pass through LLC. For me its a multi member, hustband wife, pass through LLC. I suggest forget about using fancy out of state trusts (Delaware, NV etc) you'll end up needing "foreign registration" etc in the local states. It ends up being the tail wagging the dog situation. More on why just keep things simple in a bit. Punch line up front: All said and done, after studying A-Z, talking to attorneys, insurance agents, most of this is nice fancy talk to sell $995 courses; the best protection is having high liability insurance then add a large umbrella on top. Period, best advice. To much to pack in here; has to do with the suing attorney deposing you, POOF he now has a complete list of addresses you own,,,, unless you attempt to lie, which with attorneys and judges never goes well. HA! so much for anninimity. Plus; if you have debt on properties, debt 99.99% lists your name. It then is useless to cloak ownership when the debt spells out who owns. I've never heard any pitchman for trusts mention this. Aninimity is only preserved when you buy and hold in cash, zero debt. Commercial lenders are open to closing into LLCs some may be open to trusts, but its a jump in costs and worse terms (balloons etc) to finance simple SFRs with commercial loans. ;( Good news and bad news of umbrella policies; Per above its good advice to push liability up to some number above the typical max of $1M / per. Maybe $2M maybe more. Umbrella policies (as all insurnace) is "named" both for the insured people or entities AND in insured addresses. An umbrella will list every property you own. A trial attorney will ask you t provide you insurance policies. POOF again; all of your properties are listed. @gregory You'd learn in a subject to closing course, where trusts, warrantee deeds etc are covered, that an excerpt of the trust doc called, affidavid of trustees powers, is appended to the warrantee deed so that when you sell, that closing attorney, invariably ignorant of trusts, can read the powers of the trustee. Which need not be the original trustee (some one other then the owner/beneficiary/investor, but can be and for me I'm my own trustee) it could be a 2ndary trustee or someone else entirely. They just need to show up to closing with a "assignment of trustee..." (notarized) doc showing they are the new trustee. Who is the trustee?? This is the stumbling block for many newbies to trusts. The $995 teachers give crazy stories about choose someone named S Smith who lives in Main or Alaska to be your trustee. LOL LOL, this tactic makes closing a hassel and an expense (travel) should the closing attorney not be comfortable with a remote closing with some stranger named S. Smith... A corp or Attorney to be your trustee? Very few corp or attorney trustee services but there are a few. $50/yr per deed. A lot of doors that adds up. I'm my own trustee because aninimity is impoosbile if you have ever had debt on a prop. I use trusts for estate planning 100%. By putting my heirs as successor beneficiaries in the private trust doc. Changable any time. I coordinate estate planning with a Living Trust, my LLC op agreement listing the Living Trust as a member, all my bank accounts etc etc. Trusts are very useful for managing who owns the property without re-filing. Its a felony in some states to xfer ownership between unrelated parties and NOT pay the xfer tax and file that ownership change. It also breaks title insurance so I don;t use the change of ownership feature except for between myself and my LLC. A non IRS taxible and none county xfer taxible event since I'm also a member in the llc. No felony or fraud. Some advanced investors will talk big re use of trusts but they maybe committing fraud... Also;;; This authors odd us of "business trust" vs just a trust makes it sound like there's a difference. I see Scott is in Alabama. In my education and contacts and in GA there is no difference between a business trust, which is a trust is just used to title assets into (real estate as well as personal trusts to hold cars and boats). Googling; Alabama does have tweeks for business trusts, which are "express" trusts. ??? but most other states don't. No difference if the beneficiary is a person or a business. Most states require the trustee to be a "natural person" not a LLC but could be another trust (via an authorized trustee of that other trust). Just keep it simple. I'd be ok helping folks with more trust details as a help, PM me. In GA and in my education, anyone can setup their own trust. In GA and prob most states re-titling into the trust must be by an attorney or title office (depending on the state). But I agree that most folks don't have good trust docs in their collection of docs so they need to pay for education or buy the docs from some reputable source. I just checked does sell a trusts course with docs. I would not be giving away the docs, just advice re trusts. This is an interesting topic. As with LLCs theres more complications and dis-information and mis-understandings of the true value of trusts and LLCs. Much miss understood re LLCs too. Best to all.
    Mark Fedorov from Allentown, Pennsylvania
    Replied 2 days ago
    Um.. did anyone think of the Income taxes... if Income is in a Trust, anything above $12,950 per year is taxed at 37% .. while if you have an LLC, set for pass through tax reporting, our does not hit the 37% level until $622K. I get the liability protection of the Trust,, but that is a high price to pay for protection if you are making income on the property.. just buy an umbrella policy to cover this liability risk that you see.... tax info:
    Houston Porter
    Replied 2 days ago
    I was wondering that same exact thing. As an estate planning attorney, we only recommend paying taxes at the Trust level of taxation when absolutely necessary.
    Terrence Arth Investor from Scottsdale, Arizona
    Replied 2 days ago
    I would like to point out that Mr Scott does use the word “may”... as in “May be a better choice”. While most of the responses are well thought out, insightful and do carry substantial weight, I really felt Mr Scott wrote this article, as many people on BP do, to get people thinking, offer different perspectives and opportunities and create conversations. As With every article written, I employ the good advice, remember the peripheral and discard that which does not work for me. Just my 2 cents.
    Monty Henson Professional from Austin, Texas
    Replied 2 days ago
    This is really State by State and not a blanket one fits all cases. This article is an over simplification of reasons for a Land Trust or “Business Trust” as he states it, and is not exactly correct in my State Texas. The author needs to be clear each State has different requirements and protections. Sounds more like a marketing name for selling some overpriced “Trust.” Note, all IRA, Roth IRA, and those types of SDIRAs are either protected by State and/or Federal law. However, any distribution from an IRA or SDIRA may be attached by judgment creditor. In my State you would still be required to file a certificate of formation for a LLC or Series LLC with SOS and any sort of required assumed name certificates to be in compliance with State law. The LLC or Series of a Series LLC would be the owner of the Asset holding Trust. Yes, I routinely buy and sell real property inside of a Land Trust where the owner of the Trust is a Series of a Asset owning Series LLC. I do this for my business and clients' business and the true owners remain anonymous and off the deed records. For example there is no recognized named “Business Trust” in my State's ( a very strong Asset Protection State to begin with) Trust Code. However, establishing a “Trust” to hold business assets assuming the goal is to remain anonymous is possible but so is remaining anonymous with using one or more LLC or Series LLC without using any sort of Trust. In my opinion there is no skipping the formation of an LLC or Series LLC. Trusts unless an irrevocable Trust or a Statutorily created Trust are disregarded entity by the IRS and the Courts. An irrevocable Trust is very limited in what it can do and the owner cannot be the Trustee. What shields the asset(s) from real or bogus creditor claims is that the Trust owner (beneficiary) is a LLC or a Series of a Series LLC. In Texas the exclusive remedy of a successful judgment creditor is a charging order. They cannot force a sale, or turnover or put a lien on the assets. A money judgment creditor is only able to receive a distribution per a charging order f and when a distribution is ever made. Monty Henson Asset Protection and Litigation Attorney SBOT
    Brian S.
    Replied about 8 hours ago
    Can anyone speak to how a Business Trust may impact getting financing for a property?
    Peter Thielemann from Burbank, CA
    Replied 1 minute ago
    Peter" Newby" here. Something doesn't make sense so please correct me if I'm wrong. How do you pay cap ex? Does the crust have checkbook control? If there is cash flow from the property does it go back into the trust? How would you withdraw if you wanted to use some of the money for Living?