How important is privacy when designing holding structure?

Question

Hi everyone,

First time poster, long time reader. My family is slowly building a residential rental portfolio and live in Florida. I'm in the process of re-designing our long-term real estate holding structure and would appreciate your experience, thoughts and comments. Our goals are balancing costs, limitation of liability, ease of maintenance, scalability and privacy.

Proposed structure:

1. Florida rental real estate is purchased (cash) by a Florida Land Trust (FLT).

2. The trustee of the FLT is a Wyoming LLC (WLLC). The beneficiary is a Florida LLC (FLLC1).

3. FLLC1 is owned 100% by another Florida LLC (FLLC2).

4. FLLC2 is owned by myself and my wife. FLLC2 also owns WLLC.

Sorry for what may seem complicated. I wish I knew how to post a PowerPoint here.

Apparent benefits:

Costs:

Setup costs will likely run somewhere between $400-500. I'm using a Wyoming registered agent that set up WLLC for $200. I'm drafting the legal documents myself so that saves.

Maintenance will likely be about $300 annually for filing fees. The only tax reporting entity is FLLC2 as a partnership.

Limitation of Liability:

While the FLT is looked through, the WLLC & FLLC1 offers limitation of liability coming from the property. FLLC2 offers charging order protection from liability coming from my wife and I.

I understand piercing of the veil arguments. We follow proper protocols.

Ease of maintenance:

Should be easy to maintain. Pay annual fees, perform annual meetings. No different than a single LLC but with a few more meetings.

Scalability:

Essentially, the WLLC is what is known as a private trust company. It can serve as trustee of other FLTs you create, one per property. The structure can be replicated by adding an additional FLT and FLLC1 per property.

Privacy:

The title to the property will be WLLC as trustee of the FLT. No other public information will be available. WLLC doesn't require personal information to be public so that remains private.

Yes, my name will appear in the public records of FLLC1 and FLLC2 but these entities are not publicly linked to the property.

Apologies for the long post and thanks for reading all the way down here. Would appreciate your thoughts on the above before I consider pulling the trigger on it.

Thanks!

Art

Stuart Udis · Answer

@Art Giacosa What you are proposing is a more complexed entity structure than my past employer who owned a hotel portfolio valued over $1 Billion dollars. As an attorney you already have the upper hand as you should value contracts, the importance of insurance and understand the mechanisms of litigation. Applying those principle, focus your energy on doing the preventative things on a day to day basis that reduces the risk of claims from occurring in the first place  (siginign vendor agreeements /collecting insurance certificates) and carry appropriate levels of insurance. The plaintiffs attorneys chase the insurnace money, don't do anything to pique their interest into sniffing around any more. That's all you are doing with your contemplated entity structure as they will be more inclined to want to see what's hidden leading to an even more thorough and invasive discovery process. The deed holder should be an LLC, but no need to over complicate the process. An LLC in the state in which the property is located is sufficient. Most trip up by focusing on the elaborate entity structures but then completely ignore the day to day operations. Most are more concerned with what happens when the claim occurrs than preventing the claim in the first place and those who fall under this category don't even understand the true purpose of functions of the entites they create or how these claims play out in court.

Bob S. · Answer

You are WAY overthinking, I have dozens in two JUST TWO LLC'S, why so many?  . You are 100% making this much more complicated, your accountant must love you LOL

All the best

Charles Carillo · Answer

@Art Giacosa

Setting up an LLC in a state where there is anonymity is great for protecting your privacy; however, privacy is really the only additional thing you are achieving. It will not protect you or deter your property from getting sued. If your LLC is sued, you will be required to defend the LLC, your name will then become known, and the plaintiff's attorneys will amend the complaint to include you. Suppose you are personally sued; during the discovery process, you must provide information on all of your income and assets (including your LLCs in any state (with or without anonymity). Anonymity is great, but it only does so much.

I am not an attorney. Speak to an attorney before making any decision.

Account Closed · Answer

The new reporting law is just for the IRS internally. Outside of the IRS, no one knows you filed this. Recently it was ruled unconstitutional in Alabama (I believe) So keep that in mind

Art Giacosa · Answer

All,

Thank you very much for all your thoughts and perspectives. They truly helped and confirm my initial sense that privacy is something we think about but not something we overly worry about when structuring.

I do want to mention, the above structure is mostly transparent from a Federal tax perspective. My accountant is only filing one partnership return for the top LLC. Tax accounting costs are not causing this structure to be less desirable. Moreover, I use Quickbooks for each entity that needs it so don’t pay for bookkeeping.

I hope some of you appreciate how using different laws (Wyoming, Florida and Federal) allows for different benefits. Again, definitely more intellectually interesting to me than actual value but to each his own.

Thanks!

David M. · Answer

@Art Giacosa

yeah, you have a different situation since time expenditure and cost aren't an issue.  Normally, I'd recommend looking at the cost benefit to having insurance for all your LLC's since most people would go broke just defending the corporate veil of their LLC's without the insurance company's legal team to step in for you!  But, you don't have that problem --- or you don't consider it a problem.  Oh, and personally those who see insurance companies not ready to pay to me means they need to understand their coverage better and/or hire a more reputable company.

The board doesn't even have much of any threads about actually being frivously (is that the term/category we are talking about?) sued.  Its not even in the news cycle about "ambulance chasing laywers" suing high networth individuals.  I only seem to see it here and any investor related "topic."

My main point is to chase down "sampling error" and perhaps confirmation bias.  A few years ago, I listed a property and the sellers were asking about if they could get $40l-$50k more than asking --- it was and still is pretty common in my market.  I pulled the listings for the past 12 months.  Literally half the properties sold for under asking, and half sold over asking.  And yes, there were properties that sold for $50k under asking.  You don't hear about those --- who is going to go onto facebook and brag about that?

While I agree that I think there is a segment of wealthy individuals who pay good money to keep themselves "hidden" --- whatever they do.  I understand the need for privacy.  But, there are plenty of wealthy people out there who aren't hiding.  Take identity theft..  I've been wondering for nearly two decades how famous people survive when their birthdays and entire life story is available on wikipedia.  I don't understand how that isn't some sort of PII violation.  But, life seems to go on for them...

On a slightly different note, I think the nature of your investments may dictate how you structure yourself.  Mine are in "quality" areas that attract "quality" tenants.  I've had police officers, nurses, lawyers (talk about quality, an attorney was one of my evictees...), etc.  Forming a repoire with them I think was beneficial and personally satisfying.  They were more satisfied realizing that I wasn't running just a one-off rental property.  Many times they thought about my concerns and even put them ahead of their own.  On the flip side, if you are in a "rougher" neighborhood where you have to keep responding that you will ask "Mr. Big" that question, well then maybe you need to have a more opaque structure.

Similarly, people have actually told me that they looked me up and saw that I had a number of properties / recordings (not sure if some actually sifted through the public records results).  Bottom line, that was good.  The "spectre" of lack of information usually gives people pause...

Hope that helps give you some perspective.  Good luck.

Chris Seveney · Answer

@Art Giacosa

If you get a loan you have zero privacy as you need to sign the loan docs.

There is a great quote out there that that says

“You will stop worrying about what other people think of you when you realize how seldom they do”

Why do I share this, people think they need privacy because they are worried about other people - other people don’t care. I have worked for and with billionaires and hundreds of mult-millionaires and rarely do they go to this extreme. They keep life simple. I share this as you overcomplicate things, you are just spending money and making everything harder than it has to be.

David M. · Answer

@Art Giacosa

Oh, if you are an attorney than having this setup is no big deal...

With the new Corporate Transparency Act, I see a big change.  Its not intended for general public consumption.  People can argue otherwise...  To me, its like saying something like since the DMV has your personal information, anybody can find you from your name or license plate.  I don't believe its that easy.

I think the privacy issue is somewhat overblown.  With your experience you may see it differently ...  I think much is a matter of "sampling error."  You hear about the "ambulance chasers" etc, but I don't know of anybody who really has had those sorts of frivolous lawsuits, if thats the correct term.

I've been a landlord for over 20yrs with a good number of properties in my personal name.  There are plenty of other investors who use their personal name...  Actually, in my case realtors would ask for my property by name..

So, I'm not familiar with developing structures for anonymity.  It just seem overkill.  I guess which public record are you staying out of?  And, to what degree of searching?  If you just used one LLC, after searching the deeds I'd have to search the LLC ownership. So, apparently you want to cover yourself for two degrees?  But, if i looked at the deed wouldn't I see your name/signature?

But, anyway just look at how you could/would perform any transactions.  I'm guessing you are good with purchase, sale, 1031, or anything else?

How important is privacy when designing holding structure?

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