Proper Configuration for Series LLC with Land Trust

[Keith Meyer]

BP Nation,

I'm looking for some help on how to properly configure a Series LLC for asset protection with Land Trusts for anonymity. My understanding is that this is the best modern method for holding a portfolio of investment properties. You get great protection, only have to pay to manage/file taxes for one LLC, etc. This topic is touched upon in other BP forum posts, but the logic seems to often go in circles, so I'd like to see if we can get a clean rundown of the process.

I live in California and currently own a rental SFH in New Mexico. I am actively working to add additional properties.

My summary understanding of the Series LLC / Land Trust process is:

1. Buy property in your name in order to get the best loan terms
2. Create a Series LLC
3. Create a Land Trust for each individual property. Deed property from your name to that Trust. Assign a "child" of the parent Series LLC as the beneficiary of that Trust. (Not sure if you would then list the Trust as the member of the LLC?)
4. Repeat for each property you add to your portfolio

My questions are the following:

• Is this process correct? Trying to clarify top-level and property-level ownership structure
• What is the most cost effective way to create and file the Trust and LLC docs? Is this something relatively straightforward which can be done through Rocketlawyer, etc.?
• What is the best way to handle assignment of a Trustee for the Trust, and a Registered Agent for the LLC? I'm looking for advice in terms of cost effectiveness as well as preservation of anonymity
• Living in California, with out of state rental properties, which state would it make sense to file the Series LLC and Trust in? Can I file the parent Series LLC in Delaware, then file the individual Trusts/child LLC's in their respective states?

This article shows a few diagrams which help to clarify the process. https://royallegalsolutions.com/series-llc-structure-anonymous-trusts

However I'm still a little stuck on how to sequence this process as well as where and how to file. I know this is a confusing issue many RE investors have been running in to lately, so hopefully we can clarify together on this forum.

Thank you all very much in advance for the assistance!

[Peter M.]

You need a lawyer. I am not a lawyer but I will give my opinion anyway for what it is worth. (Some of this may apply only to Texas)

1) Do not do this through rocket lawyer or legal zoom. Use a real lawyer. You may be very smart but unless you are a lawyer you will miss things. I am going through the LLC process now, I think of myself as a smart guy. There is no way I would have been able to draw up these documents or trust a fill in the blank document from one of those websites. Plus if you use a lawyer, they will sometimes be your registered agent for free. Or you pay them yearly but it is still cheaper than one of those registered agent services.

2) Your theory seems expensive since you set up land Trusts each time. Are you doing this for asset protection? Unless you are paying people to do everything you will not get total anonymity. You will get title problems later if you are successful in maintaining full anonymity. You signature will have to be on things. Plus when you advertise, rent out units, and generally do business you will eventually have to do it face to face unless you are Howard Hughes. 

3) Set up one trust that you either trustor, trustee, or beneficiary. You will need one other person because the same person cannot be all 3. I think you could set up another LLC to be one of those for you but don't quote me. The Trust owns an LLC(let's call it RE King LLC). RE King owns a series LLC where you can put all your properties to hold them. One of the series is your management company(lets call it Series A) that does all business. The other series just hold properties silently. Series A pays RE King for doing all of its business (it could be a dollar a month if you wanted it to be but it should be most of the profits). This way Series A takes all the liability, your money sits in RE King and since it doesn't do anything besides collect money, it's virtually impenetrable. Same with the other series that actually own the property. The trust owns everything ie you. You get sued, they can only go after Series A which has no assets. If you personally get sued, they can only get the trust, which only has your exempt assets(this depends on your state). They can't touch RE King without piercing the veil.

You only have to set up 2 LLCs (or 3 if you dont trust another single soul on the planet) and one trust. Cheaper and just as if not more effective than doing a new trust every time. A lawyer who sees that set up would only take the case with a big ole fat retainer. 

As to your last question, I would set up the LLCs in a state that you don't have to pay a yearly fee like Texas. Or better yet 2 states without a fee to make a plaintiff cough up more dough ahead of time. 

My 2 cents

[Keith Meyer]

@Peter M.

Probably a good call on coughing up the money to do this right through a lawyer. I'm realizing that this is not at all an intuitive process, so experts will need to be involved.

I believe Land Trusts and child Series LLCs are free to file. I would only have to pay for the parent Series LLC as well as a Reg Agent and maybe a Trustee, I think.

If you have a good referral on a lawyer who's knowledgeable on this process I'd certainly appreciate it. Thanks!

[Peter M.]

You don't file trusts or series LLCs with the state so you are right, those are free and I guess once you make one, it is just a copy/paste to do others. 

The lawyer I use for this is a Texas asset protection and business lawyer not super specific to real estate but he has a lot of clients all over the country. If you send me a PM I will give you his contact info. 

[Carl Fischer]

@Keith Meyer

You have good advice here but you need to determine how the cash flow and taxes work. “Follow the money” to find out who is in charge. Tax returns are subpoena all the time. Get a cpa involved upfront as well as the attorney or a firm That has both. If you leave the money in Trust’s you wil be paying high taxes. It has to be be comprehensive and thought through but once you have the system in place you feel great. 

[Alpesh Parmar]

Reach out to Mark Kohler or Clint Coons. I wouldn’t recommend doing something like this on your own.

[Ashish Acharya]

@Keith Meyer , 

Series LLCs are relatively new and it is not as easy to maintain as it sounds. To obtain the benefits of a series LLC, a number of requirements must be met. While the particular provisions depend upon the state's statute, in general, the following basic steps must be taken:

• a. The operating agreement of the master LLC must identify the series,
• b. The operating agreement of the master LLC must call for the limitation of liability,
• c. Separate records for each series must be maintained,
• d. Assets of each series and the master LLC must be held separately, and
• e. Notice of the limitation of the liability of the series must be provided in the master LLC's articles of organization.

Also, the first IRS ruling on the tax treatment of Series LLC indicated that a separate series in an LLC with more than one owner would be treated as a separate partnership so separate tax return is required.

Also, did some lawyer put in this your head about all these complicated structures to hold rentals? Sometimes, the cashflow might not support all the entity structure you want to maintain. 
Do you really have large equity in your investment that requires these structure? 

Have you done cost-benefit analysis? Depending on the situation, one simple insurance provides the same asset protection as complicated structure. 

Your situation might warrant these structures ( to avoid CA franchise tax on various LLC) but It would be beneficial to talk to someone who is not trying to sell you the setup fees of these structures.

Also, not all state have provision for Series LLC.

[Josh C.]

Why do you think all this is necessary?

[Katie L.]

@Keith Meyer

Series LLCs aren't recognized in CA the last time I checked. And the CA FTB takes a very broad view of what constitutes ‘doing business' in CA. If you're a CA resident and you're managing the LLCs... you're doing business in California. Which means $800 per LLC due to CA annually plus a possible gross receipts tax depending on how much income you're making. It's great that people from all over the country chime in with advice, but CA investors (and probably NY too) need to be wary that CA is sort of its own beast and doesn't play the same way as the rest of the country. Not sure what you so worried about from an anonymity or liability perspective to make you want to go such lengths with your entity structure but I second the other peoples opinions that this is definitely something you want to consult with an attorney for.

*none of this post creates an attorney-client or CPA-client relationship. The information is not to be relied upon. Readers are advised to seek professional advice. 

[Keith Meyer]

In response to why this approach appears to make sense, in simple terms I've heard multiple respected real estate educators corroborate that this is the only real way to properly defend yourself from frivolous expensive lawsuits. Insurance typically doesn't cover legal fees.

Initially I thought this type of asset holding structure would be scalable and relatively easy to maintain, but not so sure at this point. I've heard this approach recommended on at least three different recent podcasts, there definitely seems to be some momentum behind it. Has anyone had recent experience in attempting to set this up? 

[Ronald Rohde]

Originally posted by @Peter M.:

You don't file trusts or series LLCs with the state so you are right, those are free and I guess once you make one, it is just a copy/paste to do others. 

The lawyer I use for this is a Texas asset protection and business lawyer not super specific to real estate but he has a lot of clients all over the country. If you send me a PM I will give you his contact info. 

As a pedantic point, you can file a Statewide notice of DBA with Texas SOS, but primarily they are filed in the county doing business.

I advise clients on Asset Protection and Series LLC in Texas. I largely agree with Peter.

[Scott Smith]

Hey @Keith Meyer. I'm glad you are interested in creating a Series LLC. I personally believe it can be one of the best ways to protect your assets, while also providing anonymity to real estate investors.

In fact, my firm specializes in this exact area of law. Have you listened to any of my podcasts on Bigger Pockets? If not, I would definitely recommend listening to the podcast. It is full of valuable information that I think would help answer your questions. 

[Josane Cumandala]

Definitely retain your own asset protection attorney. California is very difficult and taxes LLCs aggressively. I read in Garret Sutton's book "How to Use LLCs and Limited Partnerships" that California will charge you *more* for series LLCs, not less. Additionally series LLCs are relatively new with not a lot of case law setting precedent for how to deal with them. You do not want to be one establishing the precedent in a law suit. I would read a few books on asset protection and the entities you're interested in so that you can better screen your attorneys and retain the best help. Good luck!

[Keith Meyer]

@Scott Smith

Thank you for the reach out. In fact your firm has one of the better articles I've found which visually diagrams the basics of setting up this structure. I'll take a listen to your podcast, and reach out to you if I have any follow up questions. 

[Rob K.]

Originally posted by @Keith Meyer:

In response to why this approach appears to make sense, in simple terms I've heard multiple respected real estate educators corroborate that this is the only real way to properly defend yourself from frivolous expensive lawsuits. Insurance typically doesn't cover legal fees.

I think you are operating on a misconception. Be careful of taking asset protection advice from folks who don't really know what happens inside a courtroom.

One of the major advantages of insurance is that if you are covered on a claim, they will generally provide the attorney for you at the insurance company's expense even if they reserve their rights on coverage.

With a complicated entity setup, your legal expense will probably be higher if defending your setup becomes an issue. Once you are a target in a legal suit, there will be no real privacy as the other side can use court discovery processes to discover the details of how you set it up your entity if they allege that as a legal issue. 

Before deciding on a method for asset protection, it behooves you to first evaluate 1) what is my risk tolerance? and 2) evaluate what are your likely risks that merit protection based on your activities and relationships.  Partners? ex-spouses? employees? tenants? etc. If it is "frivolous lawsuits" you want protection from, they can be beat without resorting to the cost of complicated entity structures. For example, If you are a landlord with comprehensive insurance where your biggest uninsured risk is tenant security deposit claims, a complicated entity setup is hardly warranted.

Whether you have a complicated entity structure or not, you still need to hire and pay for a lawyer if a frivolous suit is filed, unless you are going to allow the claimant to take a default against you or your entity.

Be very careful of those who use fear of lawsuits to sell you complicated (and costly to maintain) entity setups. There is no single "best" solution for everyone. Asset protection and entity selection is best viewed as an adjunct to a larger estate and tax plan. Not as a substitute.

[L M.]

Compartmentalization is the term I believe is used to keep your properties separate as much as possible. To have an LLC for each property can be cost prohibitive and a administration nightmare. A more practical approach may be to use what is referred to as the Roman Shield approach for asset protection.

You may do this by employing layers of barriers and tool. No one tactic gives you total asset protection and privacy in regards to real property. A modification of the "series" LLC is to sort your properties in various categories of potential risk or loss.

Have an LLC for commercial property, one for multifamily, and another for Single Family. Another way to batch them is by value...ie, low income, high value and equity ect. No more than three series at the most which could be manageable as far as cost and paper work.

The best thing you can do is use the Roman Shield approach where you use insurance, landtrust, LLC and the most importan tool in my opinion, equity stripping the properties. This may serve as an effective deterrent to lawsuits for anyone looking to make a quick buck by easily finding your assets via asset search.

There is some information out there going into detail and you have a few people who have perfected this tactic. I just cringe when I hear/see people saying you need an LLC for each property. That's just too much for me. If you live in one of these highcost LLC set up states you're going to take a beating. My dollars worth. Good luck everyone!

[Jason Bilbrey]

I'm seeing lots of different options here...  Want to recap a little to see if I understand and determine what's best.

Seems like @Peter M is advocating something like this:

And @Scott Smith is advocating something like this:

What's the benefit of either approach though, seems confusing. Land Trusts don't trigger due on sale clause (but it seems like pretty much everyone says that no bank ever really invokes that). Land Trusts are apparently free to create, but are there lawyer fees for these? Can I just pay a lawyer for the first one and then use that template to setup additional land trusts myself at no cost? Certainly having to setup a land trust AND series child LLC for each property is more time consuming that just setting up a series child LLC for each property, but is one better than the other?

Looking for some clarification. Thanks in advance!

[Jason Bilbrey]

@Keith Meyer What did you ever end up deciding for how to structure your trusts/LLCs?

[Jason Bilbrey]

@Scott Smith Are there pros and cons to your approach versus Peters?

[Scott Smith]

@Jason Bilbrey, the pros cons are sort'a endless when I don't have the facts.

First, the discussion was about someone living in California, and that state taxes each LLC whether CA or foriegn a minimum of $800/year. I reviewed a case last week where a person was paying $3,200 annually just to have limited liability separation between sizeable assets. In California, it is better to hold assets with a DST which is untaxed and can operate in series.  The operations like property management need to be in an LLC to protect the property assets and personal assets from the rental or what ever business operations are being performed that create value for the business - but that LLC is not a series and does not own land trusts.

As an LLC builds credit worthiness and financial resources, it gains the opportunity for anonymity to use nominee trustees on titles, so the personal buy is not required but the land trust is used to help with anonymity

That said, I really liked @Peter M. advice to use a real lawyer and agree he is an informed investor.  I am sorry I didn't have time to review all items in this blog, but if you have something specific I would love to give my opinion!  Here is a graphic that shows what an asset protection plan "looks" like and it will be as complicated as the amount of assets it protects.