Real estate investors who are concerned about privacy of ownership and asset protection have long used the Limited Liability Company (LLC) as a beneficiary to their Land Trusts. The smart investor never takes title to real estate in their own personal name, but uses a Land Trust (or similar type title holding trust) to take title unbeknown to the general public. There are a multitude of reasons to hold title in a Land Trust (I have written a report called, “50 Reasons to Use a Land Trust” Please contact me if you want a FREE copy), but this article will address only one reason; to allow an LLC to be the beneficiary.
In the “old days” the truly paranoid investor would establish a separate LLC as beneficiary of each separate Land Trust. It is smart (easy and inexpensive) to put each property into a separate Land Trust, but it is difficult (complicated and expensive) to establish a separate LLC for each Land Trust. Enter the Series LLC.
Originally conceived and enacted in Delaware in November of 1999, the Series LLC is suppose to allow different assets (beneficial interests, businesses, bank accounts, etc.) to be held inside a single LLC within separate “cells.” These cells (if certain conditions are met) are suppose to be insulated from each other when it comes to liability exposure. In other words, a lawsuit against one cell would not effect the other cells (preventing the need for multiple LLC’s as beneficiaries of multiple Land Trusts).
The advantages of using an LLC for real estate became even more pronounced following the issuance by the Internal Revenue Service of the favorable ruling that allows LLC’s to be treated as Partnerships. The advantages are not enough, however, to support an unequivocal endorsement of the LLC as the title holding entity of choice for a real estate enterprise that plans frequent transactions (or even long term holding positions).
Cautionary signals appeared at an early stage concerning title issues affecting real estate owned directly by LLC’s. In practice, title insurance companies have added requirements in their commitments that encumber considerably the ease of administration that LLC proponents foresaw.
While the LLC gives tremendous tax treatment flexibility and marginal asset protection, they do not provide the privacy and ease of transferability that the Land Trust provides. By combining the LLC with the Land Trust, the investor can obtain the best of both worlds.
While much more can be written on this subject I will end this article on two notes of caution. First, to my knowledge, there have not been any state supreme court decisions upholding the purported asset protection benefits of the Series LLC. Until this happens, you may or may not be as “protected” as you think by using the Series LLC.
My second concern relates to the temptation to put a business (not rental real estate) inside an LLC (whether a Series LLC or regular LLC). The problem relates to getting profits out of an LLC. If your business produces profits and you take distributions out of your LLC you will pay ALL withholding taxes on those distributions. However, if you establish your business as a C Corporation or Sub-S Corporation you will have the opportunity to take a salary for part of your compensation and dividends for the remaining amount. Why is this important? Read on Serf!
Dividends are not taxed for Social Security, FICA, FUTA and SUTA. This will save you about 20% (depending on your state’s tax rates) on each dollar you receive as a dividend and not a salary (earned income).
Consult your tax adviser before setting up your entities. But, do not expect your accountant or lawyer to know anything about a Land Trust (and the many benefits of using them). I will be glad to answer your Land Trust questions if you cannot find accurate information on your own.