REAL ESTATE INVESTMENT: LLC vs. Land Trust
In order to stay within a client’s comfort zone, we attorneys sometimes end up going with a second-best option. The purpose of this article is to provide a better understanding of land trusts, so real estate investors do not miss out on an optimal strategy.
I find that clients who are unfamiliar with trusts will almost invariably decide in favor of an LLC. When it comes down to it, clients would rather go with an inferior solution they understand than something that sounds exotic or too good to be true.
That’s understandable. So, let’s increase awareness.
When viewed side-by-side with an LLC, I think you will find a Florida land trust is not such an exotic creature after all. Part of the problem may simply be vocabulary. Juxtaposing equivalent terms may provide real estate investors with a better understanding of, and greater comfort level with, land trusts.
Limited Liability Company (LLC) vs. Land Trust
LLC – OWNER/MEMBER
The person who puts in the time and start up capital to launch a limited liability company is usually referred to as the “member” or “manager.” Owners will often use additional titles such as “president” or “CEO” because they are more commonly recognizable. There is a technical difference, which we will get into a bit below. For now, the point is that limited liability companies have “owners.”
Land Trust – GRANTOR
In simple terms, we can say the “grantor” of a trust is equivalent to the owner of an LLC. There is such a thing as a “non-grantor trust,” but, for a simple land trust, the grantor is the one who sets up the trust, just as an owner sets up an LLC.
There is one difference worth mentioning. Trusts were originally designed for estate planning. So, the trust will have a “beneficiary(s),” such as the grantor’s children or wife, for example. One common set up is where the grantor takes the profit/proceeds generated by the trust during the grantor’s lifetime and, after the grantor dies, the assets of the trust go to the beneficiaries.
This simple set up adds an estate planning feature to the land trust that you do not get with an LLC.
LLC – OPERATING AGREEMENT
The Operating Agreement contains the company’s bylaws. Along with the Articles of Organization, the Operating Agreement provides the key terms that govern the company. For example, that is where you will find provisions about decision-making authority, election of officers, dissolution of the company, etc.
It is possible to do a bit of succession planning with an operating agreement, such as naming a successor president. There is a limit to how far you can plan succession with an operating agreement, though, because it just gets weird. You soon run into family scenarios that seem out of place in a business document.
Judge’s do not expect to see a bunch of estate planning provisions in a company’s operating agreement — i.e. healthcare, custodial duties, rights of heirs, etc. So, it is uncertain whether those provisions would be enforced by a court.
Trust – TRUST AGREEMENT
The equivalent of an operating agreement is the “declaration of trust” or “trust agreement.” (same thing) The trust agreement has provisions similar to those of an operating agreement about management of the trust’s business affairs. The difference is that trusts are typically used for estate planning, so you can readily include provisions regarding heirs, healthcare, funeral arrangements, guardianship, and other things you would normally expect to see in a will. There is nothing weird about estate planning through a trust, so you can be sure a judge would indeed enforce those provisions.
If you are using land trusts strictly for real estate investment, you will probably use a straight-forward business trust, which will not likely have much estate planning to it. But, should you so choose, you can get double-duty out of a trust agreement in a way you cannot with an operating agreement.
LLC – PRESIDENT/CEO
Entities cannot speak for themselves or sign documents, so they have to be represented by one or more human beings. For this reason, a president and/or other corporate officers are named to act on the company’s behalf.
Often, the president is the owner of the company, but that is not necessarily the case. The president could simply be an employee who has no ownership interest.
Trust – TRUSTEE
Like the president of a company, the “trustee” acts as the representative of the trust. Many times the grantor will act as the trustee. In that case, the trustee is for all practical purposes the “owner” of the trust. There is some flexibility here, though. There can be situations where the grantor would not want to be the trustee, just as an owner of a company may not want to be president.
If asset protection is a concern (when is it not?), then the grantor should appoint someone else to be the trustee. Or, if it is not convenient for the grantor to run the operations, it may greatly simplify things to have a local person act as trustee. Likewise, if the grantor wants a smooth transition when he/she dies, then using someone else as trustee — or naming a successor trustee — is an excellent solution.
You can name anyone you want as a trustee, though there are some good reasons to make it an attorney, accountant, or trust company, rather than a friend or family member. That is a topic for a different article, though.
LLC – EMPLOYEES & CONTRACTORS
Obviously, these are the workers who carry out the company’s business activities.
Trust – EMPLOYEES & CONTRACTORS
A trust can also employ workers, though that would not be common for a land trust. Usually, a trust will hire outside companies or contractors to manage properties, provide maintenance and repairs, invest trust funds, etc.
LLC – PARTNERS
Naturally, you can have more than one owner (i.e. partners) and divide the ownership interests however you decide.
While it is common for partners of the LLC to have different percentages of interest in the company, or to have different voting rights, it would not be common to stipulate to much more than that.
Trust – BENEFICIARIES
The beneficial interest given to the beneficiaries of a trust is similar to ownership interest divided among partners in an LLC. You do, however, have much more control over beneficial interest. You can name as many beneficiaries — and their successors — as you want, and you have complete control over _
- how much they receive
- how they receive it
- when they receive it
- what conditions must be met
- who you want to act as custodian, if a beneficiary is a minor
- skipping generations
That is probably far enough for now. You can read about cost savings and flexibility of land trusts here.
For now, the purpose is to understand some of the inner workings of a land trust and realize it is not so entirely different from an LLC . There is nothing particularly exotic about a land trust. Just the terminology is different.
And, where there are differences, the land trust has the advantage.