The Many of Flavors of Trusts for Real Estate Investors

When it comes to structuring investments or business activities, attorneys typically think in terms of Limited Liability Companies or Corporations.  Most never consider the benefits of using trusts to enhance protection, provide anonymity, or to craft a joint venture.   The reasoning for ignoring this tool most likely centers around the typical trust’s lack of asset protection benefits for its owners or lack of the drafters understanding of its potential uses as an ancillary tool.

Benefits of Using Trusts

  • A trust is not registered with the secretary of state or other governmental agency – PRIVACY
  • No filing fees, resident agent fees, or other costs – INEXPENSIVE TO MAINTAIN
  • Many do not require a tax return or EIN number – INEXPENSIVE TO MAINTAIN
  • The parties to the trust are not available to the general public – PRIVACY
  • Trusts can be created, dissolved, amended, or transferred via resolutions – SIMPLICITY
  • Enhanced control over select real estate transactions – OPERATIONAL EFFICIENCY

Personal Property Trust

As many of you already know, the majority of states require the LLC members or managers to disclose their information to the secretary of state when the company is established. This information is made public to anyone with access to the internet.  To combat this lack of privacy, experienced real estate investors will use a structure similar to the following:

NV Structure

The holding entity is established in a jurisdiction such as Nevada, Wyoming, Delaware or Alaska with a nominee manager to hide your control and to serve as the member of your real estate LLC formed in the state where the property is located.  As the single member of your real estate LLC, the holding LLC will keep your involvement private. (Keep in mind, some states, like New Mexico, do not ask for member or manager information so your involvement is protected by default)  Some potential drawbacks to this type of structuring are cost and complexity.  When an investor is creating his first LLC, should he incur the added expense to form a Nevada holding LLC?  In many instances the answer is no unless there is an overriding concern for outside liability protection.  Thus, the real estate investor is forced to settle for protection without privacy.  Once created in this manner the investor’s information is forever part of a public record regardless of future changes to the LLC.

If you ask a local attorney if there is any way around the aforementioned dilemma, he might ask why you care (this answer is obvious and the posed question should seriously make you reconsider your choice of legal counsel) or he will tell you no.  I am writing to tell you there is and the solution is a personal property trust.

Just like the name implies, a personal property trust is used to hold personal property.  The trust is a grantor trust set up by an individual to hold title to his personal property.  The trust does not offer asset protection nor is it a business for tax reporting purposes.  The trust is merely a title holding vehicle, if properly drafted, set up to hold assets for the benefit of a grantor without publicly disclosing this information.

Consider my recent client Glen who engaged me to create a California LLC to protect 2 rentals he recently acquired.  Glen expressed a desire for asset protection and privacy but he was unsure how to create such a structure in California.  His local attorney told Glen California requires each LLC to file a Statement of Information listing the managers or members of the LLC.  If Glen wanted to manage his LLC then his information must be made public.  This statement is correct in so far as the manager must be made public but Glen’s name does not need to be disclosed.  In other words, Glen can manage his LLC without providing his name on the Statement of Information.

In Glen’s situation, we created Pacific Ventures, LLC.  After waiting the usual 2 to 3 months for California to file his entity, we then established Blue Fin Trust.  Blue Fin Trust is a personal property trust wherein Glen is the Grantor, Beneficiary and Successor Trustee.  I was listed as the initial trustee.  Pacific Ventures, LLC was set up with Blue Fin Trust as its sole member.  When the Statement of Information was filed with California, I listed Blue Fin Trust as the member and I signed the form on behalf of the trust.  After the Statement is filed, I resign my position as trustee and Glen becomes the undisclosed successor trustee.

Property TrustThe personal property trust is a private document not filed with the state or the county.  When set up with an initial trustee who subsequently resigns, the trust offers the LLC owner privacy without a complicated multi-tiered structure.  When creating multiple LLCs, I recommend the use of a separate property trust for each LLC to avoid anyone discovering a common ownership link between your various companies.

Part 2 of this post will discuss the use of trusts in joint ventures.

4 comments On The Many of Flavors of Trusts for Real Estate Investors

  • All Good accurate info. here, please realize that in CA many many Title Companies are no longer willing to insure title when a PPT is being used for title holding purposes.

    Makes this strategy harder to employ these days, Probably spin off from the Short Sale A to B to C simultaneous close strategy that sooo many folks were teaching a few years ago.

    Thanks for a great blog with such good info.

    Best;
    Reggie Lal

    • Reggie,

      Thanks for pointing out this out. The market is constantly evolving and what works in one area may not work in another. Asset protection is not a one size fits all approach as many would lead people to believe. I typically recommend my clients’s take title in their own name then transfer the property to a land trust owned by a LLC. The LLC is in turn held by a PPT for anonymity. It is ridiculous we have to go to all this trouble to stay ahead of the litigation attorneys. Unfortunately, far to many attorneys are in the business of manufacturing claims forcing the rest of us to use extraordinary measures for protection.

  • Doesn’t the Pacific Ventures, LLC anonymity scheme fail eventually. When you file your annual report you would have to report the successor trustee or else the state does not have a valid agent/ manager to contact.

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