Using a land trust and LLC for asset protection

4 Replies

A little preliminary information.

I currently live in Los Angeles, CA. I have zero debt and enough cash saved for a down payment on a SFH. I'm looking for out of state properties in GA and AL. The long term goal is to acquire 8-10 properties over the next decade to diversify my investments and have revenue for retirement. I work full-time at a W-2 and have a side hustle and so setting this all up to be passive as possible is important.

So in this early stage, I want to create a solid structure that is streamlined, offers protection for liability and offers tax advantages for somebody living in CA.

Getting to the point...

At this stage of the game, is creating a land trust in conjunction with an LLC overkill? Or should I just take it under my name and use basic home insurance until I acquire a handful of properties then move them into a trust/LLC for protection?

Any guidance is greatly appreciated. 

Thank you!

@Michael Draper - in the early acquisition and growth stages you should concentrate on that. Once you reach your risk threshold, then you can look into asset protection strategies and structures. Sure, you can start with that, but it might be overkill.

I recommend people to look at LLC and asset protection as another form of insurance complementing regular insurance - insurance against litigation. It's not a guarantee that you'll not be sued, but it makes the target on your back smaller, more difficult to find (if complementing with trusts), unappealing and expensive to sue, and contained and difficult to collect in case you lose.

Another perspective would be to apply the "Asspro rule of 2%" (© Costin 2018) - the cost of setting up and maintaining your asset protection should be less than 2% of equity you are trying to protect. Let's say, it costs you 1.5K to get your structures in place (holding LLC or Series-LLC, with or without land trusts, with or without separate operations LLC) and 0.5K per year (for maintaining the LLC properly, bookkeeping, lawyer and CPA, etc.) for a total of 2K. You should have 100K or more in equity to protect before it makes sense to spend that money - compare that with how much you spend in annual insurance for the same property/equity (on the same FEAR principles, just in case your property might burn down).

Again, this is a simplified rule of thumb, as there is a lot more to the LLC question - when to do it, how to do it, current mortgage, proper transfer to preserve title insurance chain, DOS, future financing, management, distribution of properties per entity, insurance, partners, etc. - stuff barely touched in current thread.

There is no one-size-fits-all - the risk threshold is a subjective measure particular to each individual. And there is no absolute answer and unique tool/strategy in anything real estate. You need to learn how and when to use all the tools available to you (financing, insurance, management, etc.) and to understand how they fit together in your toolbox, as none will give you everything.

But you are in the right place (BP) to learn and get answers. Here is a diagram to help you on your quest:

"Ignorance is bliss. Knowledge is power, but also a burden. The cure to both - the 4 ions: education, action, progress(ion), not perfection".

@Costin I. - Thank you for the insight! I'd never heard of the Asspro rule of 2%. I was trying to listen to my gut, and it felt like some of these upfront costs didn't quite warrant were I'm at at this moment. I'll continue to evaluate. I appreciate you taking the time to help me out! 

@Costin I. - also, that diagram is really helpful. Where could I find more of that style? That suggests a kind of "order of operations" so to speak. Sometimes I get snagged up in what "order" to do things - (should I buy a property first, or start a land trust first? - which that diagram suggested an answer for). I know that every situation is different, but having a rough guideline could be helpful! 

Thanks again!

I'm not a lawyer,  so take it all under advisement. The 2% Asspro Rule is my opinion on how much it makes sense to spend on this kind of insurance. The diagram is something I put together to help others in their quest for answers, as I went through the same process you are going now, and trust me, there are many deep rabbit holes to follow. 

I don't know where you can find similar graphic resources, you can PM me if you have other questions or want to chat more. And if you want professional and specialized advice in this arena, Scott Smith here on BP is a good resource to contact. Tell him Costin sent you.