When buying real estate, there are lots of options for how to take title, and it can be difficult to know what you should choose. Lots of people have heard of living trusts, land trusts, or LLCs but aren’t clear on how they work in practice or when they make sense to use. Here’s a basic overview of these three options, as well as a fourth option that’s less well-known.
LLC – Liability Protection
When it comes to real estate, the primary advantage of having an LLC is that it can provide liability protection for investment properties. If someone is injured due to the condition of a property, they can generally sue either the resident or the owner of the property. If they win their lawsuit, then almost any asset owned by the person/entity who lost the lawsuit is vulnerable. If you own the property in your own name, that can mean your own home, your car, and your life savings can all be vulnerable. On the other hand, if your LLC owns the property, then only assets owned by the LLC are vulnerable. If that one parcel of real estate is the only thing in the LLC, then it’s the only thing vulnerable to the lawsuit. Your other assets are safe from that lawsuit.
There are some caveats to be aware of. Putting your own home into an LLC is not effective for liability protection because they can still sue you directly as a resident of the property. Putting your home into an LLC can also increase your property taxes, as you’d lose eligibility for exemptions. This isn’t an issue for investment properties, as they’re not eligible for exemptions in the first place. Finally, there are some basic requirements for how you manage your LLC if you don’t want to lose the liability protection. You should also know that there are both up-front and annual costs associated with having an LLC.
LLCs do not provide much in the way of privacy, as their ownership information is readily available on a state website. They also do not provide a mechanism for avoiding probate.
For real estate purposes, a corporation has basically the same benefits and drawbacks as an LLC, though in typical situations an LLC is easier to deal with and less expensive.
Land Trusts – Privacy Protection
The single biggest benefit of a land trust is that it allows you to keep your name out of public records. Even though you control the property, it’s the land trustee’s name that shows up in public records. For most folks, it’s the only practical way to keep your name from being associated with the property while still maintaining control of it.
The single biggest drawback of a land trust is its cost. There are fees to set it up, annual fees to maintain it, and additional fees any time you need the land trustee to do something for you. Do you want the land trustee to sign your mortgage to keep your name off it? They’ll generally be happy to do so and to charge you for the service. Do you want to sell the property? No problem—once you’ve paid the trustee’s deed preparation fee. Fees often vary based on the value of the property, and some land trustees give discounts to seniors or other specific groups.
Land trusts are also one of several ways to keep real estate out of probate after you pass away. They do not provide any kind of liability protection.
Living Trusts – Estate Planning
When most people talk about trusts, they mean a living (aka revocable) trust, generally used for estate planning purposes. For many folks, the primary purpose of such a trust is to avoid probate. Such trusts are not typically set up solely to own real estate—they’re normally part of a plan to manage a person’s entire estate, and as such require more consideration and decision-making to put into place.
If you already have a living trust and are wondering if your new real estate should be put into it, your best bet is to consult with the lawyer who put together your estate plan. If you don’t have a living trust yet and are wondering if you should set one up, it depends on whether you’re looking just to manage the one piece of real estate (in which case, it’s probably not your best option) or to put into place a more comprehensive estate plan (in which case, you should consult with an estate planning attorney).
Living trusts do not provide privacy or liability protections. They can be expensive to setup initially, but they typically have few, if any, ongoing costs.
TODIs – Probate Avoidance
If none of these options sounds right for you, but you’re looking to avoid probate, a TODI (Transfer On Death Instrument) could be worth exploring. Instead of being a different way to hold title, it’s a method that someone who owns property in their own name (rather than in an LLC, trust, etc.) can use to effectively add a beneficiary designation to their real estate. It’s a separate document that has to be recorded with the county after you take title to the property, but once it’s been recorded, it’s effective to transfer the property to your designated beneficiary if you die while still owning the property.
TODIs are very limited in that they’re only effective for a single piece of real estate, but they’re also comparatively inexpensive to put into place and have no ongoing costs. They do not provide liability or privacy protections.
While we’ve provided a quick overview of these options and when they’re appropriate, there’s no way to address all the particulars in a short article like this. To avoid the metaphorical devil in the details, feel free to contact us to discuss your specific situation.