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Having a Trust run an LLC
Hi all,
I've heard that it's smart in an asset protection way if you setup a Revocable Living Trust to run your LLC if your LLC is a real estate investing company (i.e we flip houses). I don't know much about this concept and was wondering if there was anyone out there that would have some feedback or advice on the matter. Obviously our LLC offers us personal protection but what would be the benefit of using a Trust when investing in real estate? How would they be structured? Who is the Trustee, Trustor or Beneficiary in this situation? Any information would be helpful! Just want to learn a little more about this stuff.
Thanks!!
I just had my attorney and CPA set this up for me but I don't feel I'm qualified to fully explain it to anyone LOL.
Perhaps consult and an attorney and CPA who both understand real estate.
I highly recommend Mark Kohler at KKOS Lawyers. He serves clients nationwide.
Any trust that is not an irrevocable discretionary trust is entirely useless with respect to asset protection. The reason why people do this with real estate in combination with an LLC is typically:
1) it can facilitate things such as, for instance, title transfers
2) avoids due on sale clause for mortgages being triggered when transferring property ownership
3) anonymity when done right (Disney being a good example)
Using an LLC could help with asset protection but only when done right. Not many people do it right... As has been said many times here, usually a sufficiently high umbrella (liability) insurance policy (obviously in combination with underlying liability insurances for the properties) is usually much more useful if push comes to shove.
Then again, there are many situations where an LLC makes sense or is even required (e.g. commercial lending).
In any case, you need to contact a knowledgeable attorney who will be the only person able to give you proper advice for your individual situation (and especially state).
@Andy D. your #2 is not accurate. Any transfer of ownership triggers DOS clause unless you are moving a property from your name into a trust that is in your name for estate planning purposes. It's called the Garn–St Germain Act. Banks are less likely to call the note because they do not see inside the trust to know what you are doing, but they can if they choose.
Thanks for your input everyone!
@Katherine Robbins I am NOT a lawyer so I will not give advice on this topic, but I will tell you that I have a Living Trust for may different reasons and my trust owns about 76% of my Corporation's stock. This is the way I feel comfortable with doing business. That way I know exactly where my assets are going if I were to die, or become incapacitated. My medical care is outlined in it and it specifically states who will speak for me when I am unconscious. The people that are listed as successor trustees all have copies of the trust paper work and can immediately act on my behalf without any outside interference. None of my assets including my business will go through a probate process. The successor trustees simply take the paper work to the bank and brokerages and submit all the required forms to take over the accounts and the Corporation. They are not expensive to set up and even if you do not have a lot of assets now you may in the future and you can put them in the name of the trust.
Thanks @Kristopher Hanks That was exactly what I was looking for. I appreciate your input!
#4 Marketing Your Property Contributor
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#4 Marketing Your Property Contributor
- Lender
- Greater LA/Orange County area, CA
Do you have a high net worth to protect?
If yes, then by all means spend the money with an experienced attorney with a known track record with asset protection plans.
If you do NOT have much equity in assets to protect, I'd start simple.
I deal with a lot of very complex litigation cases as well as been sued many times (due to my positioning and I presume my own net worth). Most lawsuits are initiated by attorneys who want to get the quick money for an allegedly aggrieved client with little money to fund a case.so, they are looking for quick resolution and settlement.
If you or your employee/contractor have truly stepped in the doo-doo and cannot manage to wipe your shoes clean early, opposing counsel will press to find the money trail. Insurance? Equity? Individual with money?
If you're just getting going, focus on doing deals and keep your systems as simple as possible so that they do not cripple your flexibility.
For more tips on how to operate efficiently within a relatively safe system check out the trust book by attorney Warda and the classes taught by Jack Shea. Another source is Dyches Boddiford's asset protection class, usually offered in Atlanta area.
Originally posted by @Bryan O.:
I agree with you and thanks for pointing this out. I shall say that this topic is of course very complex and should only be handled by an experienced attorney for the individual case at hand. One should never rely for such asset protection/structuring/etc matters on information obtained in a forum! That's what we have specialists for who will analyze the individual situation.
I had two baseline assumptions when I wrote my #2 above:
1) exactly what you describe. Typical situation is that someone buys a property in their own name and then later decides to "wrap" an LLC around it. That would, without a doubt, trigger the DOS clause, allowing banks to call the loan (whether they would do it is a totally different story as we know). If the LLC were held in a trust of which the current owner the the property (private person) is the settlor of the trust then this would - disclaimer: I am not such a lawyer - fall under the mentioned act. At least this is my understanding. Please correct if wrong.
2) Moving properties around within the trust, from one LLC to another, or changing ownership of such LLCs within the trusts,and the likes, where the LLC is of course owned by the trust. However, when I understand you correctly then you are saying that even for such a situation the DOS clause would be triggered because the legal ownership would change from LLC1 to LLC2, even though both LLCs are owned by the same trust (or an overlying LLC owned by the trust)? If that were the case - is it really? -, then at least this should not be triggered if the ownership of the LLC itself is changed, rather than the owner of the property (still remains the same, say, LLC1). This is getting technical now, and probably not what OP was looking for. ;-) Interesting topic, though. I now need to find a good attorney to have a chat about this!
Love the discussion! Great input :)
Hi @Andy D. this is from one of my loans (emphasis added):
"18. Transfer of the Property or a Beneficial Interest in Borrower. As used in this Section 18, "Interest in the Property" means any legal or beneficial interest in the Property, including, but not limited to, those beneficial interests transferred in a bond for deed, contract for deed, installment sales contract or escrow agreement, the intent of which is the transfer of title by Borrower at a future date to a purchaser. If all or any part of the Property or any Interest in the Property is sold or transferred (or if Borrower is not a natural person and a beneficial interest in Borrower is sold or transferred) without Lender's prior written consent, Lender may require immediate payment in full of all sums secured by this Security Instrument. However, this option shall not be exercised by Lender if such exercise is prohibited by Applicable Law."
In my non-attorney head, this means that changing anything, even the beneficiary of the trust, triggers this DOS clause, though Garn-St Germain speaks to one aspect of trusts. Does that mean they will? Probably not. Many regulars on here get hot and heavy about DOS one way or the other so I don't want to get into that discussion necessarily.
@Bryan O. Agreed, we are talking about whether DOS can be triggered or not from a legal point of view (acceleration of note).
Re par. 18: Wow, that is very strict wording! However, I initially stopped at "...the intent of which is the transfer of title by Borrower at a future date to a purchaser.". Breaking this down, I think I am deriving at the following:
1) If Trust
a) sells an LLC (which the trust owns) to a third party (a person or legal entity that has nothing to do with the trust; this could, however, also be the Settlor of the trust!) with this LLC holding a property or
b) makes the LLC sell the property which the LLC owns to such a party as just described
then we are, in my opinion, without a doubt in the realm of "DOS issues"/note acceleration and within your quoted par. 18.
2) Let's assume that Trust is the (direct) owner of the property (i.e. property is, at that point, not held by an LLC which in turn is owned by the trust). Trust now wants to transfer ownership of property to LLC1 (for whichever reason, maybe because of commercial financing or asset protection) which is wholly owned by Trust.
From my point of view (I very well might be wrong here!) with #2 there would not be a change of ownership in this case. Why? Because even though the owner is LLC1 now, this LLC is owned by Trust. Therefore it's still "the Trust" who ultimately owns the property. In addition there was no sale: one cannot sell within a trust. Therefore there is no purchaser as described in par. 18. This might be stretching it a bit, but that's the result when sticking to the wording used, wouldn't you agree?
3) There are proposals to approach this whole topic of avoiding DOS with a trust while at the same time using a legal entity for asset protection. This is proposed to be achieved by having the beneficiary of the trust assign his/her beneficial interest to an LLC (outside of the trust). While this is all great, I see no point in doing this as I see no asset protection happening here, at least not when it comes to the trust assets (Trust is still the owner of the property and therefore liable; and such a trust does not offer protection). It would, however, achieve the goal of avoiding DOS. This simply because there was no change in ownership and/or change in borrower: it's still the trust and therefore the settlor as borrower who initially was vetted by the lender who is responsible for the loan. I might be missing something here, and probably are, but to me this does not seem to be a solution in achieving asset protection and is therefore a pointless move. But maybe not.
One should also not forget the idea behind the DOS clause. Because what's the goal of this clause? That's easy: lender has vetted borrower and agreed to lend to this specific borrower using a very specific object as collateral. If borrower relinquishes ownership in the collateral (= property), the parameters under which lender agreed to lend have fundamentaly changed. Lender has no interest in dealing with a new owner who now controls the collateral with the lender not knowing anything about this new owner.
Having said that, this is why - I guess - in praxi the DOS is not enforced when a person transfers ownership from his/her own name into a single-member LLC which he/she is the sole shareholder. This because the LLC's asset is the property and therefore a) the collateral hasn't really changed and b) the controlling person of the LLC (aka shareholder) is the same as before. This would, however, be different if there were other people involved and/or if the LLC were to assign interest to other parties etc. This, at least, is my personal opinion. This last paragraph is not what this discussion is about, it was just a closing remark deriving out of the logic behind the DOS clause the way I understand it.
Disclaimer again: the above is a theorization and my personal analysis/opinion. No one should take this as advice, nor is it in any way intended to be advice. Not to mention that it's probably wrong LOL. Use lawyers to get advice on this topic. We are just brainstorming.
@Andy D. I think one day when I'm very, very bored I'll have to find an attorney that does this, or a lender. Regarding your comment "...in praxi the DOS is not enforced when a person transfers ownership from his/her own name into a single-member LLC which he/she is the sole shareholder. This because the LLC's asset is the property and therefore a) the collateral hasn't really changed and b) the controlling person of the LLC (aka shareholder) is the same as before..." I met an investor here in Denver that has his note called due from transferring to a SMLLC 3 years after without ever missing a payment. He is the only one I've met that had something like that happen, but it can be enforced.
@Andy D. and @Bryan O., interesting discussion. With regard to scenario 2) above, the DOS would be triggered by the transfer from the trust to the LLC, even if the trust has 100% membership interest in the LLC, just as it would be triggered if I transferred my mortgaged property in my own name to my own LLC in which I own 100% of the membership interests. Darn DOS clause.
*NOT LEGAL ADVICE*
