Trust Fund Accounts (Do you mingle them with your business?)

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Security Deposit Trust Fund Accounts

There is a lot of debate about whether or not a Security Deposit should be put into a separate bank account.

Some States require you to deposit a Security Deposit into a Trust Fund Account, which of course would be separate from your personal and business bank accounts.

Some States require it to be put into an interest-bearing Security Deposit Trust Fund Account.

But let’s just say that your State doesn’t care, and allows you to co-mingle it with your business bank account. Is that okay? Is it a good idea?

Lately, I have seen a lot of investors creating an LLC for just one property of theirs. Most LLC's cover at least 3 to 5 properties per LLC. But, once again I am seeing an LLC per property by more and more upcoming investor's

The reason being, if that investor (landlord) is sued by a tenant, a neighbor, or whomever, and they win, they wouldn't be able to take everything this Investor Owns, because they are only suing one company, one LLC and not all of the LLC's this landlord/investor owns.

(An LLC protects the owner from having all of his assets attached to a lawsuit, but limits it to only the LLC the plaintiff is suing )

So, let's say this LLC has been sued, and the person suing took him for everything he was worth, in this LLC.

And let’s say this investor, was able to co-mingle the tenant’s Security Deposit with their own business bank account.

Or let's say they did have a separate Security Deposit Bank Account but didn't call it a Security Deposit Trust Fund Account. What do you think would happen to that Security Deposit in that LLC that is being sued? It would be confiscated!

Once an LLC has been sued, and I'm using a scenario where the plaintiff suing won big time, they would devour that LLC, put it out of business, etc. But, If the Security Deposit was put into a Security Deposit Trust Fund Account (which would be in a separate bank account of its own), the plaintiff couldn’t touch it. A Trust Fund account cannot be attached to the lawsuit.

Now, I’m not an attorney, giving legal advice. I am only repeating what I've learned and experienced firsthand. The reason we have LLC's is to protect our other properties from a lawsuit. From preventing someone taking everything we own. The same thing is true when you make a Security Deposit a Security Deposit Trust Fund Account. It can't be touched. It protects the tenant's money.

Here is an excerpt from an article online regarding Security Deposits:

Establish trust accounts for security deposits. Make sure your bank knows the deposit account is for “trust” or “escrow” funds. This will prevent forfeiture of those funds in the unlikely event that you or your company encounter legal issues.

?Keep security deposits in a separate trust account that is under your control, even if state regulations allow you to mix it with rents or turn it over to the rental owner.

Never mix accounts because it’s far too easy to accidentally spend the security deposit funds.

So, if you are sued, and you have your Security Deposit setup as a Security Deposit Trust Fund Account, at least you have the Security Deposit left to pay the tenant(s) back if you lose the business.

Nancy Neville

@Account Closed In most cases, co-mingling is not a good idea. This is from an accounting, audit and transparency point of view. 

I don't know why newbie investors are using property-specific LLCs. Most people buying a house or two, can just go the cheaper and equally, if not more, effective route of buying in their name and purchasing umbrella insurance. When buying in their own name, they can also qualify for better financing. 

It is patently stupid to be putting 1 residential property (assuming the house is below $500K-$1M) per LLC. People grossly over-estimate the chances of being sued (too much TV... lol). The corporate veil can be easily pierced esp. when the accounts are co-mingled.