Do you need an LLC? Absolutely. There is No Debate About It.

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Do you need an LLC? Absolutely. There is No Debate About It.

Jonathan Twombly
Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes

The LLC debate rages on here at BP. Rarely does a day pass without an investor asking whether they should use an LLC or not. Perhaps BP should have a whole forum just devoted to this question . . .

Having an LLC is a no-brainer. Real estate is a business, and if you are in business you should not be operating in your own name -- unless the law requires it, such as for certain professionals like lawyers and doctors who society feels should not have their professional liability limited. My knowledge is not exhaustive here, but I am unaware of any jurisdiction that requires you to own investment real estate in your own name.

People are confused because they get a lot of bad advice about LLCs -- what they can and cannot do. They are told -- wrongly in my view -- that they should not bother with LLCs because an LLC will not protect them from liability to a lender or because insurance does the same thing. I will expose the incorrect thinking below.

But first, let's discuss what an LLC actually is. A Limited Liability Company is a corporate form with a separate legal identity. As the name implies, it limits your liability to the value of the asset. It does not eliminate your liability, so when people say you should not bother with an LLC because it does not eliminate all liability, they are confusing the issue. An LLC provides important liability limitation and risk-management capability, and if you are in business you should be taking advantage.

It is true that lenders won't lend to an LLC with no history. If you are new, and the LLC does not have a proven cash flow, a lender will make you sign on the debt yourself. But you should still organize your business in a corporate form, like an LLC. Why? Because banks are not your only potential creditors. Who else is out there? Practically the entire world is a potential creditor. Tenants, vendors, guests of tenants, the mailman, UPS, the cable guy -- in other words, anyone who ever sells anything to the property or sets foot on it is a potential creditor. (Anyone who sets foot on the property is a potential creditor if they slip and fall on the property -- or if they claim they slipped and fell even if they did not.) If the property is owned by an LLC that you own, the LLC is the debtor. If you own the property directly, YOU are the debtor. If an LLC owns the property, the worst the creditor can do to you is take the property. If you own the property, and the property is not worth enough to satisfy the judgment, then the creditor will take the property AND THEN go after your personal assets -- that means your house, your car, your 401(k), your children's 529 plan, your baseball card collection, your monthly paycheck.

Insurance is another must, but it does not replace an LLC. If you have insurance, that's great. It will cover what's in the insurance contract, up to the coverage limit. But insurance does not cover it when you don't pay a vendor. And what if someone is injured on your property and the court awards more than the insurance coverage? If you have an LLC, they may try to go after your assets, but they won't be successful if you have run the business properly. If you own the property in your own name, then you should re-read the previous paragraph about your house, your car, your 401(k), etc.

A very important note about LLCs is, as I said above, that they are separate legal entities. To get LLC protection against creditors, you must respect the separate legal entity. You must IGNORE the advice that some real estate gurus give, which is to run a whole bunch of personal expenses through the LLC. THIS IS THE ABSOLUTE WORST THING YOU COULD POSSIBLY DO. Will it save you some taxes? Maybe, if you don't get audited. Will it destroy the limited liability protection and expose your personal assets to seizure by creditors? Absolutely.

The biggest complaint against LLCs is that they cost money. Yes, you need to file tax returns for them. Yes, you need to do proper accounting. All this is true. These are all costs of doing business. But, remember, this is a business. You are not in real estate for a hobby. This is where the big boys and girls play. If you are not willing to spend a couple hundred dollars a year on LLC costs, you probably should not be in this business at all. But the real question is: Would you rather have the couple hundred dollars extra each year or the peace of mind knowing that your and your family's personal assets are not exposed because you decided to buy an investment property? That choice is up to you, but to me the answer is obvious.

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Scott TrenchPro Member
Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
11y

I'm a young investor, and purchased a property via the "house-hacking" method back in November of 2014.  The property is under my name, and I rent out the other side to two wonderful tenants.

The work has been done Do-It -Yourself style, and I have gone a few months now successfully living rent free.  

Make no mistake about it, I consider this Duplex to be a business, and run it as such.  I manage the tenants with a separate email address and have a separate bank account for property related expenses.  I pay rent to the business and take money out of the business.

But the property is under my own name.

Reading the OP, I am committing a basic fail against common sense as a real estate investor. But I disagree completely. I had several immense advantages in putting this property under my own name that would have been forfeited were the property under an LLC:

1) I used FHA financing. Try putting down less than 5% on a property within an LLC, especially as a first-time buyer.

2) I am the occupant of the home.  I can rent to whoever I want, and for any reason whatsoever.  It's MY house, not a rental property, and the laws governing it are as such.

3) I had much better interest rates on my mortgage than the LLC would have had access to.

4) My mortgage interest is tax deductible.  In the first few years, where the bulk of my mortgage payments are comprised of interest, this is more advantageous than depreciation.

5) Assuming I live in the property for more than two years, and the property appreciates, I can sell for a tax-free capital gain.

The disadvantages are as follows:

1) Limited protection.  I'm 24 years old and this property is basically the grand total of my worldly assets.  I don't have much to protect.  I also have an umbrella insurance policy.  
This type of protection is good enough for millions of landlords with far more to lose than I. 

2) I'm obviously the owner of the property. I can't hide ownership behind an LLC. In my case, this advantage to the LLC is totally moot. The tenants live next door! I'm obviously the owner.

Conclusion:

Investing through an LLC would have been extremely expensive for me, setup and legal costs set aside. Furthermore, it would have delayed my first purchase significantly, and taken away subjective advantages in running my business as a personal asset.

I think that it is shallow to claim that having an LLC is a "no-brainer". I think that at the very least, my argument here shows that it is a debatable topic and that a reasonable person could conclude that there are indeed strong advantages to operating real estate assets under your own name.

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    11y

    I've never seen a thread get so off topic! 

    After the "how should I set up my LLC" we got to retirement accounts, now we have investment portfolio distributions......Really!

    I think Paul summed it up nicely and you'll notice he owns RE personally as well. 

    My opinion takes into consideration the guy that rents an apartment as a tenant, has car payments, a day job and wants to buy a house as an investment....MUST he have an LLC? I addressed that, not beating a dead horse here.

    For those who think that I disagree with the points made by the OP, I do not, only the part about the "must have" as an "absolutely must have", otherwise, it was an excellent post.

    As mentioned, the financing will be more difficult starting out with an LLC as a borrower......period. It is a commercial loan, not a residential loan, that can not be accepted in the secondary market. GSEs (Fannie, Freddie, etc.) absolutely will not make or allow to be kept in portfolio any loan made to a business entity, that is not the purpose of the secondary market. Non-owner occupied residential loans are not considered commercial loans when owned by an individual or Trust. These loans are the best a beginning investor can obtain, 30 year fixed rates for crying out loud and you can't have them in your LLC.

    Does that mean you should not get into RE until you can obtain commercial loans? I don't think so. :)  

    2Reply
  • Thomas Coburn
    Real Estate Investor · Seattle, WA · Member since 2014 · 40 posts · 12 votes
    11y
    Originally posted by @Dmitriy Fomichenko:
    Originally posted by @Thomas Coburn:
    @Dmitriy Fomichenko:
    2) Make new contribution. Unfortunately traditional and Roth IRA contributions are only $5,500 per year so it would be difficult to do some serious investing with that amount. If you are self-employed or a small business owner however, you can start Individual (also known as Owner-only) 401k and contribute as much as $53,000 per year! With this amount you have a lot more investment choices to self-directed your account.

    Dmitry - Your answer helps A LOT. Thank you.

    We are self-employed. Our business attorney set us up with SIMPLE IRA's about 7 years ago. So, my wife and I are both contributing whatever the maximum is. I think it's about $12K/year each.

    HOWEVER... a few of my mentors have personally drained all of their retirement accounts. They've paid the gains just to be done with them, and then used the cash to invest in real estate, betting on themselves rather than being tied to the stock market. 

    I've seriously been considering this. I'd be very interested in hearing your investing opinion on this.

    Thomas, did I understand you correctly: are you saying that some of your mentors took early distributions from their retirement accounts, paid taxes and penalties and used what's left to invest in real estate?

    In my opinion this is a poor financial choice for most people. Taxes and penalties could wipe out 35-50% of your retirement savings if you take early distribution. 

    I agree that investing in the stock market that most of us have no control over is not a good choice, but that is where self-directed IRA or Solo 401k comes in. It allows you to have total control over investment choices and gives you the ability to invest in something that you understand and have more control over (real estate, trust deeds, tax liens, private lending, private businesses, etc).

    Correct. They emptied their accounts. Took the penalty and tax hit now, while still earning income. Thank you for your opinion.

    And Bill, sorry if topic went astray. I was commenting on the returns cited by another member in his reply. It was good learning for me. Thanks, and take care.

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  • Timothy Murphy III
    Real Estate Broker · Cleveland, OH · Member since 2012 · 771 posts · 252 votes
    11y

    @Jonathan Twombly

    Thanks for getting the ball rolling with some detailed discussion on the merits of an LLC for real estate investors. What I've got to say was more relevant a few pages ago, but I just now saw this thread. I hope you don't mind me piggy backing on here to throw in my two cents.

    @Joe Kim

    You specifically asked if anyone had any real life experience in using an LLC to protect assets. I have. Please excuse the following wall of text, but this can be a rather complex subject. Also, every situation is unique and has its own set of factors that should be considered. The following should not be construed as actionable legal advice by anyone and you should not make decisions based on this information. Instead, consider the following a starting point for your research and retain an attorney to consult you on your specific situation.

    Earlier this year, I defended a lawsuit that was filed against a client of mine that went to trial and final verdict. In this case, the plaintiff had attempted to pierce my client's corporate veil and hold the company's owner personally responsible. While the plaintiff did prevail in winning a judgment for breach of contract against my client, we were able to successfully thwart the attempt at piercing the corporate veil and holding the company's owner personally liable for that judgment. With respect to the limited liability protection offered by LLCs or other corporate entities, the controlling law varies from state to state. I am neither licensed nor educated in the controlling case law for most states, I can tell you that Ohio law requires a very high burden for a plaintiff to successfully pierce the corporate veil.

    When determining whether an LLCs corporate form may be disregarded and its owners may be held personally liable, Ohio courts apply the Belvedere test. It states that:

    [T]he corporate form may be disregarded and individual shareholders held liable for corporate misdeeds when (1) control over the corporation by those to be held liable was so complete that the corporation has no separate mind, will, or existence of its own, (2) control over the corporation by those to be held liable was exercised in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity, and (3) injury or unjust loss resulted to the plaintiff from such control and wrong.

    The test is conjunctive and requires that the plaintiff can satisfy all three prongs of the test. The first prong is essentially the traditional "alter ego" test, requiring that the plaintiff show that the individual and the company are fundamentally indistinguishable. In determining whether the company is the alter ego of the individual, Ohio courts consider the following factors:

    (1) grossly inadequate capitalization, (2) failure to observe corporate formalities, (3) insolvency of the debtor corporation at the time the debt is incurred, (4) shareholders holding themselves out as personally liable for certain corporate obligations, (5) diversion of funds or other property of the company property for personal use, (6) absence of corporate records, and (7) the fact that the corporation was a mere facade for the operations of the dominant shareholder(s).

    The Ohio Supreme Court has recently revisited the Belvedere test in Dombroski v. WellPoint, Inc., 119 Ohio St. 3d 506 (2008) to determine how broadly the second prong should be construed and to reconcile various interpretations from several Ohio appellate districts. The Dombroski Court stated “we continue to adhere to the principle that limited shareholder liability is the rule and piercing the corporate veil is the 'rare exception' that should only be 'applied in the case of fraud or certain other exceptional circumstances.'” In reconciling competing views from the Ohio Appellate Courts, the Dombroski Court found it “necessary to modify the second prong of the Belvedere test to allow for piercing in the event that egregious wrongs are committed by shareholders” and held that in order to “fulfill the second prong of the Belvedere test for piercing the corporate veil a plaintiff must demonstrate that the defendant shareholder exercised control over the corporation in such a manner as to commit fraud, an illegal act, or a similarly unlawful act.”

    Whether an Ohio court will pierce an LLCs corporate veil is a fact specific inquiry that will vary from case to case. That said, absent fraud or similar illegal acts, the limited liability protection is rather reliable under current law and a plaintiff will have a difficult time piercing the corporate veil.

    I could get into even more detail on this but this should be more than sufficient for most readers of this forum. The point is that piercing the corporate veil under Ohio law requires a very high burden. An LLC, if properly structured and operated, provides liability protection for its owners that is not easily defeated even if challenged in court. That said, the limited liability protections of an LLC should be used in conjunction with other tools and techniques to provide yourself with a comprehensive asset protection plan. Appropriate insurance coverage, including an umbrella policy should be considered. Debt can also help you protect your assets by discouraging a suit. For example, a $250k property owned free and clear may be an enticing asset for a potential plaintiff. That same property, with a $200k mortgage and lien against it may discourage a plaintiff from pursuing a claim against you because the asset has insufficient equity to justify the time, hassle, and expense of litigation and collection efforts.

    If you're not operating in Ohio then this won't apply to you. Instead, you should talk to an attorney in the state(s) you do operate and make sure that he or she can provide you with this level of detail on the protections provided by an LLC so you can determine exactly where the thresholds of limited liability protection fall, and you can make sure you stay within those parameters.

    3Reply
  • Isaac A.
    Grosse ile, MI · Member since 2014 · 117 posts · 46 votes
    11y

    Scott,

    You could hire a property manager. Why do it yourself? There is no need to collect rent yourself. That's where the property manager come in.

    0Reply
  • John K.
    Investor · Mahopac, NY · Member since 2015 · 110 posts · 32 votes
    11y

    @Jonathan Twombly

    Like I have read plenty of times, and as you stated it will be close to impossible for a bank to approve of a mortgage under an LLC with little to no history. Then you proceed to talk about how the whole world is a potential creditor.

    I am a little confused on this point. I am still very new but hoping you can help.

    Without the property being financed under an LLC. How would it benefit me? Would I still have the bank accounts and everything else under the LLC? Using your example if someone were to fall and sue how would an LLC help me if the property is still under my name? Sorry if it is a bad question but I scrolled through five pages briefly and did not see any relevant information.

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  • Scott TrenchPro Member
    Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
    11y

    @Isaac A.

    Collecting rent from people who live less than 50 feet from where I sleep is perhaps the easiest job of all time... literally. I have an online system that bills the tenants once per month, and then spend 15 seconds once per month transferring it from the online bill pay platform to my bank account. Asides from mowing the grass and normal household chores (which every homeowner in the country also does) that's about the extent of the work that I do to manage the property.

    Why on earth would I spend $100-$200 per month on a property manager? Managing a house-hack property is not any more difficult than managing a house if you live there, except for politely dealing with the tenants from time to time (perhaps once every few months outside of neighborly interactions).. Would you hire someone else to manage your home?

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  • Jonathan Twombly
    OP
    Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes
    11y
    Originally posted by @John K.:

    @Jonathan Twombly

    Like I have read plenty of times, and as you stated it will be close to impossible for a bank to approve of a mortgage under an LLC with little to no history. Then you proceed to talk about how the whole world is a potential creditor.

    I am a little confused on this point. I am still very new but hoping you can help.

    Without the property being financed under an LLC. How would it benefit me? Would I still have the bank accounts and everything else under the LLC? Using your example if someone were to fall and sue how would an LLC help me if the property is still under my name? Sorry if it is a bad question but I scrolled through five pages briefly and did not see any relevant information.

    Some confusion here seems to stem from some people talking about having "an LLC" and sticking everything under it, and having each property owned by an LLC. At the smaller end of things, as some people have pointed out, the bank will lend only to an individual, not an LLC. However, once you get over a certain size of asset, the lender will require the property to be in its own LLC, known as a "single purpose entity," meaning that its only purpose can be to own that asset and that asset only. To be perfectly honest, I am not sure where the line is drawn, but all the deals we have done have had each asset owned by an LLC. All the bank accounts, insurance, etc., are in the name of the LLC. All the investors are members in the LLC.

    Let's turn the question around a little bit. If you could buy for cash, and did not have to worry about getting debt, it would still be a good idea to have the asset owned by a separate LLC, because that would protect your other assets from claims against the LLC-owned asset. If it's true that banks won't lend to an LLC for certain types of assets, that is too bad, since they are depriving the owner of additional asset protection. That does not mean that it's not a good idea to put each asset into its own entity -- you would want to do that if you could. If you can't, because the bank won't let you, that's too bad for the investor, but I guess there is nothing to be done about it: you have to get the money to close the deal.

    All this aside, it may be a good idea to have an LLC through which you are doing your real estate business, rather than just doing it on your own. It does not make you 100% bullet-proof, for if you do something that makes the LLC a sham (and there was a great post on this earlier in the chain), it will be worthless. But if you are dealing with investors and other creditors and they know that they are dealing with an LLC rather than an individual, this affords you a certain amount of protection, as long as you maintain the integrity of the LLC and don't commingle your own assets with it. So don't do what the gurus say and run all your personal assets through the LLC. Keep it strictly business, keep separate books, etc.

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  • Eric Wallace
    Flipper · O Fallon, IL · Member since 2014 · 7 posts · 1 vote
    11y

    I just read "Loopholes of Real Estate" by Garret Sutton which is part of the "Rich Dad Poor Dad" Series. I am not quoting word for word and may very well not convey what is in the book accurately but I highly recommend reading it. In his book he covers LLC and asset protection along with tax strategies. There are a few things he writes about that have not been covered in this forum post and he also speaks to how LLC's vary in cost from state to state. Like someone said earlier California LLC's cost $800 while Michigan LLC's cost $50. He also writes about how some states laws offer stronger LLC protection than others. He writes that a LLC in Wyoming that is sued and loses can only have a charging order against the property and not get the property itself. What this means if I understood correctly is that since most lawyers work on contingency if they see a property is owned by a Wyoming LLC they are less likely to take a case because even if they win it will be hard to collect. Furthermore he writes that an LLC that holds a property in Georgia can itself be held by an LLC located in Wyoming and enjoy the Wyoming protections. (Again I stress this is my understanding of what I read). IF you spend $400 a year on an umbrella policy it seems to me that another $100 to hold your property in an LLC might be worth the effort.

    Either way I highly recommend this book to anyone who is on the fence about the need for an LLC. I only have a few properties and have not formed an LLC but am leaning toward do so this year.

    I have also recently found information about a Series LLC in Illinois that greatly reduces the cost of multiple LLC's while affording multiple LLC protection. If there are any lawyers on the site from IL that might have insight on this form of LLC I would love hear from you on the benefits or drawbacks of this type of entity.

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  • Mark S.Pro Member
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 539 votes
    10y

    Interesting discussion.   I've debated about this as well.  Much of the time, it seems the advice given depends on the source asked. I hope to purchase my first rental investment this year and will have to make this decision.  I'm interested to continue reading here.  

    As a side note, someone earlier in the thread mentioned trusts.  If one puts their primary residence into a revocable living trust for the purpose of estate planning (which, by the way, according to my attorney meets a federal exemption from the due-on-sale clause as long as you remain an occupant and it's for the purpose of estate planning - in my case, to avoid probate if I were to pass prematurely), what about the protection on personal assets?  In other words, since my trust owns the house and I am the trustee of the trust, how, if at all, does this protect my personal assets (car, bank accounts, etc)?  I forgot to ask this question, as it wasn't my primary motive for setting it up.  

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  • Matthew Kreitzer
    Attorney · Winchester, VA · Member since 2015 · 726 posts · 387 votes
    10y

    I'm going to respectfully disagree. There are plenty of different styles of organizational structure available to businesses, and an LLC is not the only one for asset protection purposes. It has merely been the one that has reached cultural parity. Everyone knows what an LLC is. What most people are not aware of, however, are all the other statutory corporate structures available in their jurisdiction, or even why a limited partnership may be in one's best interest. I maintain my stance that absolutely no one other than a licensed attorney should be talking about the *LEGAL* ramifications and *ASSET PROTECTION* ramifications of a particular organizational structure for a particular case. There are far more options available than most people are aware of.

    I have no objection to people discussing the tax ramifications of a partnership v. LLC v. corporation v. trust/LLC hybrid v. PLC v..... you get the point. But at the end of the day, every case is unique, and the answer is not always "obviously go for an LLC". That is wrong, and that will cost many people thousands of dollars in legal costs.

    1Reply
  • Jeffrey S. Breglio
    Attorney / Investor · Salt Lake City, UT · Member since 2015 · 228 posts · 198 votes
    10y

    @Matthew Kreitzer has good advice. When we structure asset protection packages for our clients, we use a variety of entities, in combination or stand alone, such as:

    Family living trusts

    "Land" trusts

    LLCs

    Series LLCs

    Holding/Sub LLCs

    Single v multi-member LLCs

    S-elected LLCs

    Corporations: C (rarely) and S

    Family limited partnerships

    Multiple other variations of partnerships

    TOD Agreements

    Joint venture arrangements

    TIC arrangements

    insurance options, and I probably could go on.

    In very rare, limited circumstances will we set up entities outside of the investor's home state and in which they are investing. Usually not worth the hassle.

    The point is, we look at:

    the value of your assets

    what types of assets

    the number of assets

    where those assets are located

    what kind of real estate investing you're doing

    other income streams

    other businesses you own

    your family situation

    your long term financial and real estate investing goals

    your risk adverseness

    and etc.

    HOWEVER, let me add, that for the vast majority of investors who have a rental or two, the LLC is still the preferred entity and a great place to start. Can you get more complicated or use another structure? Sure. But why. The more complicated your structure, the more likely you are to screw up the maintenance of it. And then you've blown any protection the legal work provided. We provide education to all our clients on corporate governance (maintaining the LLC) as that is just as important as deciding on the structure. The LLC can be a simple entity with very good protection and easy to maintain. As your assets grow and diversify, then your structure can grow with it. There's a ton of info on my website if you need more info.

    Also, a pet peeve, is when investors are "sold" into very expensive "asset protection packages"with fill in the blank forms for all of the above entities at these big real estate sale pitch events. These are not worth it!!! Don't buy in.

    Talk to a lawyer with experience in real estate investing. That's easy. We're very nice people! And we want you to succeed.

    Happy investing!

    Jeff

    2Reply
  • Jeffrey S. Breglio
    Attorney / Investor · Salt Lake City, UT · Member since 2015 · 228 posts · 198 votes
    10y

    @Mark S., there are options including TOD agreements between entities that hold some personal assets (for protection purposes) and your family living trust (for estate planning purposes). To some degree, you can achieve both goals. Discuss with a competent attorney for these.

    Jeff

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  • Mark S.Pro Member
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 539 votes
    10y

    Maybe I wasn't clear.  Here is my question: does my revocable living trust that owns my house give me any protection in the event I am sued?

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  • Matthew Kreitzer
    Attorney · Winchester, VA · Member since 2015 · 726 posts · 387 votes
    10y
    Originally posted by @Mark S.:

    Maybe I wasn't clear.  Here is my question: does my revocable living trust that owns my house give me any protection in the event I am sued?

     The answer to that question depends on local case law and statute, and for an answer to that question you would be restricted to seeking the help of a local attorney. I could probably answer that question, but there are strict laws in place that govern when an attorney may and may not help another person. Generally speaking, at least in my own jurisdiction, assets that have been placed in a trust do have some degree of protection from the judgment creditors of beneficiaries or settlors. The extent of that protection and how a creditor may reach trust assets should be discussed with local counsel only.

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  • Jeffrey S. Breglio
    Attorney / Investor · Salt Lake City, UT · Member since 2015 · 228 posts · 198 votes
    10y

    No. A trust provides no corporate protection or charging order protection, i.e., no asset protection. When you say "revocable living" trust, I assume this is your family estate planning trust. This is great for your personal residence. It's tough to protect that through entities, and usually not worth the hoop jumping to try to protect it. But any rental properties should be in an entity, preferably owned by more than one person. I prefer transfer on death agreements to pass that entity to the family trust upon your death. But, in a pinch and if you are single, you could have the family trust own the LLC. But you need the LLC (or some other asset protection entity). Trusts work in combination with those entities to achieve other goals ALONG WITH asset protection.

    If you mean a "land" trust (which is a type of revocable living trust), then again, No. there is no asset protection. It's great for privacy reasons. But the land trust should name an entity as the beneficiary for the protection.

    Hope that helps.

    Jeff

    1Reply
  • Matthew Kreitzer
    Attorney · Winchester, VA · Member since 2015 · 726 posts · 387 votes
    10y
    Originally posted by @Jeffrey S. Breglio:

    No. A trust provides no corporate protection or charging order protection, i.e., no asset protection. When you say "revocable living" trust, I assume this is your family estate planning trust. This is great for your personal residence. It's tough to protect that through entities, and usually not worth the hoop jumping to try to protect it. But any rental properties should be in an entity, preferably owned by more than one person. I prefer transfer on death agreements to pass that entity to the family trust upon your death. But, in a pinch and if you are single, you could have the family trust own the LLC. But you need the LLC (or some other asset protection entity). Trusts work in combination with those entities to achieve other goals ALONG WITH asset protection.

    If you mean a "land" trust (which is a type of revocable living trust), then again, No. there is no asset protection. It's great for privacy reasons. But the land trust should name an entity as the beneficiary for the protection.

    Hope that helps.

    Jeff

    Not that I intend to debate this at length, but I've seen clever estate planners utilize non-revocable trusts in combination with ownership operational LLCs to effectively dodge judgment creditors. The protection coming not from the ownership operational LLC, but from the trust itself. Then you start having to get into the UFCA/UFTA and local fraudulent conveyance law. I have an on going case involving a credit dispute with land that has been placed in a combination medicaid planning/land trust. I'm having to set aside the trust to get at those land assets. So I do think it offers some marginal degree of protection from specific types of creditors. I'm sure we could talk shop for hours on this, but I have to disagree on the unqualified statement that "trusts don't offer any asset protection". Sure they aren't anywhere near as good as LLCs for the purpose, but I do think they offer some protection.

    0Reply
  • Jeffrey S. Breglio
    Attorney / Investor · Salt Lake City, UT · Member since 2015 · 228 posts · 198 votes
    10y

    Oh, no, @Matthew Kreitzer, you are correct about irrevocable trusts. They can be excellent protective tools.  I wasn't referring to those as the question was about family living and standard land trusts. And I find that the irrevocable trust arrangements just usually don't function well for 99% of my clients in 99% of their situations. So, for the most part, I don't recommend them.

    0Reply
  • Account Closed
    Lender · Los Angeles, CA · Member since 2015 · 399 posts · 174 votes
    10y

    @Matthew Kreitzer, @Jeffrey S. Breglio

    Correct me if I'm wrong but a revocable trust with a trustee other than myself does offer some asset protection in the sense that an abstract of judgment recorded against me personally will not attach to the trust thus allowing me to sell/refinance without dealing with the judgment.  Of course the judgment creditor could go to court and blast through the trust but that doesn't always happen.

    0Reply
  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    10y

    "Need" implies can't function without.  Interestingly, even though I started down this path, with only one MFU, I found the expense and effort to keep current didn't provide enough for me.  

    Been operating for 18yrs now without.  When one stays within proper bounds and treats tenants as you would like to be treated, there's zero risk - - and I don't feed the lawyers / state agencies for zero value returned to boot.

    Too much emotion in the expression of "need" here - - It might be well advised, but honestly,  never "needed".

    0Reply
  • Matthew Kreitzer
    Attorney · Winchester, VA · Member since 2015 · 726 posts · 387 votes
    10y
    Originally posted by @Account Closed:

    @Matthew Kreitzer, @Jeffrey S. Breglio

    Correct me if I'm wrong but a revocable trust with a trustee other than myself does offer some asset protection in the sense that an abstract of judgment recorded against me personally will not attach to the trust thus allowing me to sell/refinance without dealing with the judgment.  Of course the judgment creditor could go to court and blast through the trust but that doesn't always happen.

     I cannot speak to your state, but that is not the case in Virginia. Revocable trust = creditors can get to any trust assets.

    NOTE: Not legal advice for Virginians. VSB may consider this post legal advertising.

    0Reply
  • Jeffrey S. Breglio
    Attorney / Investor · Salt Lake City, UT · Member since 2015 · 228 posts · 198 votes
    10y

    @Account Closed. same in Utah as VA.

    And as for title and in Utah, I wouldn't insure the transaction if the party to transaction and/or the grantor/trustee of a revocable trust has judgements against them, even though technically the trustee holds legal title and the grantor holds equitable, for the very reason Matt said. I'd have to clear those judgments first.

    0Reply
  • Polar Prutaseranee
    Flipper/Rehabber · Tustin, CA · Member since 2015 · 433 posts · 103 votes
    10y
    Any benefits to creating an LLC in a specific state even if you plan to do business not within that state. For example, create in Nevada but do business in California. Any cons?
    0Reply
  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    10y
    Originally posted by @Polar Prutaseranee:

    Any benefits to creating an LLC in a specific state even if you plan to do business not within that state. For example, create in Nevada but do business in California. Any cons?

     Extra costs to Foreign File in Calif.

    0Reply
  • Ekaterina Gelashvili
    Staten Island, NY · Member since 2016 · 36 posts · 12 votes
    10y

    @Jonathan Twombly

    thank you for your post.

    if investing out of state should you have LLC from that state or the state you are from?

    thanks

    sincerely

    Ekaterina

    0Reply
  • Account Closed
    Lender · Los Angeles, CA · Member since 2015 · 399 posts · 174 votes
    10y
    Originally posted by @Matthew Kreitzer:
    Originally posted by @Account Closed:

    @Matthew Kreitzer, @Jeffrey S. Breglio

    Correct me if I'm wrong but a revocable trust with a trustee other than myself does offer some asset protection in the sense that an abstract of judgment recorded against me personally will not attach to the trust thus allowing me to sell/refinance without dealing with the judgment.  Of course the judgment creditor could go to court and blast through the trust but that doesn't always happen.

     I cannot speak to your state, but that is not the case in Virginia. Revocable trust = creditors can get to any trust assets.

    NOTE: Not legal advice for Virginians. VSB may consider this post legal advertising.

     Same in CA, Revocable trust = creditors can get to any trust assets.  However, a creditor would have to go through the judicial system to even know who the beneficiary of the trust was, and as we have seen from this post in CA that can take multiple years and many thousands of dollars, not everybody is able or willing to do that ... you can have as much justice as you can afford, as the attorneys say.

    1Reply
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