If you own commercial real estate assets you need a plan to protect them. Two of the best ways to protect yourself against lawsuits are land trusts and LLCs. Here are some tips regarding these strategies to help you avoid lawsuits.
Land Trusts
A land trust provides several advantages when you take the proper steps. They are revocable or grantor trusts, which means although they do provide an interim step in protecting your real estate investment, if you leave your property in a land trust then you could be held liable if a lawsuit arises.
There are three advantages to Land Trusts that stand out:
1. Land trusts make the transfer of property easier than an LLC. Because a land trust is equipped with detailed instructions for the grantor, trustee, and beneficiary, you won’t deal with a complicated will. Instead, the new beneficiary is assigned, and the instructions of the land trust will remain.
2. Land trusts provide privacy of ownership and transferring interests if you wish to keep the value of your real estate assets off the public record. The value of a land trusts’ real estate assets can’t be accessed, so in the case of a lawsuit, it is difficult for people to go after assets they can’t find. They won’t be able to easily prove your real estate assets’ value.
3. Land trusts help you avoid transfer taxes unlike transferring property into an LLC. When you transfer your property into a land trust it is usually done tax-free. This is because the federal government often treats land trusts like they are owned outright by the beneficiary. Many state laws allow the transfer of property by a beneficiary to a revocable trust without paying transfer taxes. And in most cases, you will also still qualify for homeowner’s or senior citizen’s real estate tax exemptions if applicable.
Just keep in mind land trusts serve more as an interim step. You will also need to transfer the trust into an LLC.
Disadvantages of Land Trusts
As mentioned above, your land trust is an interim step. A lawsuit can be submitted against a lone beneficiary which could mean the courts could force a beneficiary to change the terms to benefit the claims of a creditor. As well, when a lawsuit does present itself a legal professional can easily trace how the land trust was created. In this case, anonymity will be eliminated resulting in legal action against the beneficiary while also eliminating the tax advantage of a land trust.
In many states, land trusts are not legally recognized which again can put your assets at risk. Because of this, it is very important to work with a lawyer or real estate agent that understands up-to-date state statutes. In homestead states, you still have to take the right steps to enjoy the homestead exemptions.
LLCs
Once you transfer your assets into a land trust, for complete protection you then have to transfer the trust into an LLC. The LLC completes the asset protection needed should a lawsuit come up.
Here are some recommendations for real estate LLC investors:
Avoid multiple properties in one LLC
If you place more than one property into an LLC and one of your properties faces a lawsuit, your other properties will be at risk. Rental properties are at the most risk, so be sure to have multiple LLCs for your investment properties. There is no limit to the number of LLCs you can have as long as they are set up correctly.
Proper setup
When you setup your LLCs properly, you don’t have to file tax returns. Instead, they flow down to your personal 1040e.
Multiple LLCs and more insurance
Determining proper coverage through your insurance policy can be difficult. There are several clauses and sub-clauses that can make it seem like you are covered when you aren’t. Increasing your insurance can be helpful, and even though insurance is a safety net you need, multiple LLCs provide further asset security.
Up to date LLC statutes
Because the LLC is a new option for real estate assets in the United States, the laws governing this entity can change. As well, each state has its own set of statutes. Make sure that your team is up to date on your state statutes, so you know your LLC is actually protecting your assets. If you aren’t up to date on the laws, you could unknowingly be left unprotected if a lawsuit is presented.
Working with the right investment and property management professionals who understand how to protect your assets is the best way to avoid lawsuits. Contact us today to learn more about your investment opportunities!