Land Trust, LLC as Beneficiary, Ownership %'s and Operating Agreement?

Question

Hi everyone,

Hoping to get some insight/ideas on the 3 questions below, prior to confirming with legal counsel. I am new to this particular land trust setup. I can't be the first person that's done this for sure.

I have an LLC setup with partner(s) with all the very specific terms in our operating agreement (Ownership Percentages, profit/loss, who's responsible for what initial costs, etc.) We have a specific "Purchase Resolution" that spells out all of our terms for every purchase we make straight into our LLC. Some of these partnerships have different Ownership percentages and capital contributions (50/50, 80/20, etc.)

But let's say, one of the partners buys a property in his or her own name (loan/title), then deeds it to a Land Trust that has our LLC as beneficiary.

1. How do we make sure all of the terms we've agreed to as partners in our original LLC agreement (purchase resolution) still hold true with this new property deeded to the Trust(LLC as Beneficiary)?

• Does it Happen automatically since the LLC is beneficiary?
• Do we need to have all our terms spelled out in the Land Trust Agreement?
• Do we need to have a separate resolution drafted to accept this new property into our LLC via this Land Trust that spells out the terms? How's this done?

2. How would it play out tax-wise since we aren't making the purchase in the name of the LLC originally? Will the LLC still be able to depreciate closing costs after the property is deeded to the trust with only one partners individual name on the HUD?

3. I'm almost certain the answer is yes, but just making sure that the LLC will be able to take depreciation on the property after it's deeded to the Trust. It will right?

Any advice for things I didn't think about as well would be appreciated. Thanks so much in advance! :)

Steven Hamilton II · Answer

Mehran,

From our conversation we had on the phone I figured I could mention this here too.

The land trust is treated as though it does not exist.

The big issue is basis in this type of partnership. If you receive a distribution for more than you have contributed you will have taxable income. In other words if you contribute 0 to a partnership and the partnership shows a loss that year on paper due to depreciation; however, if you receive a distribution you will still be subject to income tax on the distribute in excess of your basis.

Account Closed explained it very well.

Account Closed · Answer

In addition to dancing around DOS, another advantage to having a separate Land Trust (each owned by the same LLC) for every property is that if a Judgment is recorded against any one LT or LLC, it won't automatically attach to the others. Whereas if all properties were held in that same LLC, a J against the LLC would attach to everything held by the LLC. In other words, there is limited asset protection even though a LT is not a legal entity.

Wendell De Guzman · Answer

I can only answer #1...

1. How do we make sure all of the terms we've agreed to as partners in our original LLC agreement (purchase resolution) still hold true with this new property deeded to the Trust(LLC as Beneficiary)?

• Does it Happen automatically since the LLC is beneficiary? (Answer: YES)
• Do we need to have all our terms spelled out in the Land Trust Agreement? (Answer: no need)
• Do we need to have a separate resolution drafted to accept this new property into our LLC via this Land Trust that spells out the terms? How's this done? (Answer: no need)

Further Answer: The land trust owns the property. Your LLC being the beneficiary owns the trust. The trustee (I am assuming, this is YOU) controls the affairs of the trust. Having said all these though, consult a real estate attorney in your state as well as an accountant or tax expert.

Steven Hamilton II · Answer

2. See number 1.

3. Yes, it can.

Mehran K. · Answer

@Rob K. We originally had this plan so we can try and get around the due-on-sale clause with the mortgage. We've come to the conclusion that there is too many moving parts and the strategy isn't bulletproof. We'll likely be just deeding the property directly to the LLC, or going with a commercial loan all together.

@Steven Hamilton II Thanks for that clarification Sir! Question:

If the partner buys the property in their own name, then either quitclaim or warranty deeds the property to the LLC (2 members, the partner and I), what are the tax implications?

Example: He puts $25k down on a $100k property. Then deeds the property to our LLC.

The LLC would either be a 50/50 or an 80/20 ownership split.

Thanks in advance. If anyone else could chime in on that tax question, It would be a great help as well!

Rob K. · Answer

As you already have your LLC set up and defined, I am just wondering why you are incurring the costs, formalities, selection of trustee, potential financing hassles. etc.. of adding the land trust layer? Why transfer a property in your partner's name into a land trust instead of your LLC when you already have the LLC and its operating terms established?

Land Trust, LLC as Beneficiary, Ownership %'s and Operating Agreement?

Land Trust, LLC as Beneficiary, Ownership %'s and Operating Agreement?

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