GA RE attorney says land trusts not legal; use living trust + LLC

[Mike Percy]

Hi BPers (and, I hope, helpful lawyers),

I have read online that one can secure traditional financing while getting asset protection by getting a traditional residential mortgage in one's own name, putting the title in a land trust at closing time and then, after closing, assigning an LLC as the sole beneficiary of that land trust. This is a strategy recommended by some people, especially Chris Coons from Anderson Advisors (see here and here) for reasons explained in those links and at the bottom of this post.

I spoke to a Georgia real estate attorney (closing attorney) earlier today about this and he told me that land trusts are illegal in Georgia. He also suggested that I may be able to achieve the same benefits and protections by following the same strategy using a revocable living trust instead of a land trust.

Is he right?

1. Are land trusts illegal (or effectively unusable) in Georgia? More to the point, will it be impossible for me to get title insurance with the title held in a land trust (as he says)?
2. Would a revocable living trust be an acceptable substitute for a land trust if I want to follow this strategy?
3. Are there drawbacks to this approach (vs. quit-claiming or closing in an LLC and using commercial financing) that I would be wise to consider?

As many investors know, while doing a quit-claim deed to assign ownership from an individual to an LLC is fairly common practice, it comes with the risk of a traditional loan being called due when a routine title audit discovers the reported change in ownership. That financial risk is what I want to avoid by using a trust, while also achieving inside liability protection via the LLC.

Thanks in advance for any input / non-advice. I know you are not my lawyer!

Note: I intend to check with another GA attorney on this but it would be very nice to get a sanity-check from the experienced folks on this forum.

[Chris K.]

@Mike Percy

To answer your questions: 

1. Unsure and probably depends on state law. Do note that when lenders make Fannie/Freddie loans, they more or less use the same forms that Fannie and Freddie approved. Unless you are such an important client (i.e. a lot of money in your savings account), most banks won't negotiate the terms with you on these kinds of issues. 

2. As I mentioned before, revocable living trusts do not really offer any meaningful asset protection in Pennsylvania. Maybe that's the case in Georgia as well. But let's say you go nuclear and create an irrevocable trust (DON'T DO THIS UNLESS YOU HAVE A GOOD REASON TO). The trust documents name the LLC as the beneficiary.

With that in mind, here are some interesting questions to consider. The answer will depend somewhat on state law, but it would be good questions to think about when considering this arrangement. 

• When investors use LLCs, they mainly use it to protect the personal assets from the creditors of the LLCs. The irrevocable trust --- as a practical matter --- instead protects the assets of the LLC from the creditors of the LLCs. Does that help you?

• What kind of liability will you face as an average investor of a buy-and-hold property? For example, let's say there is a fire, the property burns down, and a tenant dies. Let's also assume that the fire started in a way where a reasonable jury may find that the tenant's family should recover some amount money from the "property owner." In the trust scenario, who is the "property owner"? And assuming the tenant's family wins the lawsuit, what happens to the assets in the trust? 

• Who is going to be the trustee? You? Is that advisable under your state law? And if you do get held liable as the trustee, what happens to the protection of your personal assets and the trust assets? If you can't serve as the trustee, who will serve as your trustee? 

• Perhaps the lawyer will suggest that he, she, or the law firm itself should serve as the trustee since they are experts? Fine, but how much do you need to pay them to do that? 

• You jumped through all these hoops and decided that you still like the idea of creating an irrevocable trust with the LLC named as the beneficiary. You pay your lawyers a lot of money to get this done. How much asset protection does all that offer you versus other simpler steps you can take? Some examples include: (1) finding a good insurance agent and getting comprehensive policies; (2) placing your money into accounts that creditors will struggle to touch no matter what (e.g. 401k accounts); (3) utilizing other asset-protection strategies for your loved ones.

Those are some the questions I would ask your attorney when making these decisions. But then again, the real starting question is whether a "revocable living trust" offers any level of asset protection in Georgia. And again, let's say you place the property in a "revocable living trust" with the LLC as a beneficiary. Again consider the above scenario: a fire occurs, a tenant dies, and the facts are such that the fire could be the fault of the "property owner." If so, who does the tenant sue and what happens if the "property owner" is held liable?

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it as legal advice. Always consult with your attorney before you rely on the above information.