Do you use Land Trust, or do you put your investment properties in your own name, allowing all the predators and creditors to find your assets? I hope not!
In the early 90’s we had a rental property in Minneapolis, MN. It was the middle of January, and we had an ice/rain storm. Someone that was just visiting one of our tenants walked out into the rain, and there was about 1/2—1 inch of ice on the sidewalk, and they fell backward. That person cracked their head open and had to be rushed to the hospital.
We thought we had our assets covered. We had a landlord’s insurance policy on the house. Even if that didn’t cover it, we were protected because the rental property was actually owned by the corporation, not us personally. Boy, were we in for a surprise when we found out we were being sued because the insurance only covered so much, they were coming after us for the rest.
To make a long story short, they settled with the insurance company after all. But their attorney told us if we had more rental properties, they would have come after us for everything because we were negligent. Negligent??? It was still raining when this happened, were we supposed to be at the rental property chopping ice, while it was still raining? I guess so…
That was back in our beginning days, and we only had two rentals at the time. I was renting myself, and my partner’s house was mortgaged to the hilt, so the plaintiff’s attorney found very little to go after. I guess that was a good thing at the time. But what about later down the road, when we had a bunch of properties, what was going to stop something like this from happening again???
It was shortly after that that we heard about Land Trusts. We went to Atlanta to see Louis Brown do a seminar about Land Trusts and Asset Protection. That was back in 1994, ever since then, everything I owned is titled to a Land Trust.
Land Trusts Do Not Give You Complete Liability Protection
Now a Land Trust does not give you complete Liability Protection, you still need corporations, LLC’s, LP’s or any other form of liability protection. But a Land Trust is the first step of protection. I am not going to get into asset protection and liability protection through corporations, LLC’s or LP’s at this time.
A Land Trust keeps your name or your company’s name off public records. It gives you a certain level of privacy. If a sharp attorney finds out that you are the beneficiary of the land trust, they can still come after you or your corporation. But first the attorney would have to find that out and that is not easy to do. Most importantly though most attorneys will not even bother to look far enough to even figure out that your property is in a Land Trust, and even if they did, they would not do anything about it, unless their client gave them a big fat retainer before they did more research into the ownership of the property.
Let me give you an example of what I am talking about:
Let’s say someone wants to sue you. They contact an attorney. The attorney does a name and asset search on you, but they don’t find anything in your name. But they do discover that the property that their client told them that you own is titled to a Land Trust. The attorney will then most likely tell the client this and say that they think they have a case; however, it is going to be a little more difficult to get to you because of the land trusts. If they give them a (let’s say) $5,000 retainer, they will get started on it right away, but there is no guaranty they will win or ever collect any sums of money from you.
You see, once the attorney sees that this is going to be a little more difficult of a case, they usually will not work on a contingent fee base anymore. They want cash, upfront. This usually deters most potential lawsuits before they ever happen.
I am now a Trustee for several clients. I could tell you many stories of how some tenant or any other person thought they hit the lottery with one of my clients, only to end up walking away with a frown on their faces once they found out how expensive it was going to be just to find out what you really own.
And let’s say that you came across a sharp attorney that knew how to get through the Land Trust and get to you. And let’s say they were successful and won a judgment. That judgment would not go on you personally, it would go against the Land Trust. The only thing the Land Trust owns is the one property. It will not affect all your other properties, because they are all owned in their own Land Trusts.
And let’s say you got into trouble with another business, a car accident or anything else that has nothing to do with your investment business, and you did get a judgment against you personally. If you owned all your rental property in your own name, you would have to pay off that judgment the next time you sold a property. But if you bought and sold all your investment properties through Land Trusts, then you would be able to conduct normal real estate business and never have to pay off that judgment until you felt like dealing with it.
Benefits of Land Trusts
There are sooo many benefits to using Land Trusts, and I don’t know of any negatives related to using them. There is very minimal paperwork involved; that takes maybe 5 extra minutes to prepare. There are no separate tax reporting issues to deal with because the IRS considers a Land Trust to be a Flow-through-Entity, which means that you report the property on your own (or your corporation’s) tax return.
Written by Mike Jacka of Minnesota REIA (published with his permission).
If you are interested in learning more about land trusts, please contact us, or check out your local Real Estate Investors Association. Here in Oregon, it’s located in Eugene at www.ORREIA.net