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Question on Property Holdings

Question: Do you recommend a different Trust for each individual property I own? K. Hoover

Answer: Holding properties in separate legal entities is a good idea for asset protection purposes. A misguided scenario I see too often is to hold them in various land trusts. It doesn’t matter who the beneficiaries of the land trusts are, if they are the standard revocable land trusts that everybody uses, they will not give you any asset protection.

There is the possibility that you can get some anonymity out of using the land trusts. That is a very small advantage, in my thinking. Your tenants, contractors, and everyone associated with the properties know who you are and what you own already. The only thing you accomplish is to hide your property from a general search for property ownership in the recorder’s office. The fact that you don’t show up as owning a bunch of properties might save you from a frivolous lawsuit, but most lawyers don’t check the county records before they file a suit.

The other option is to put the properties into separate entities: LLCs (Limited Liability Companies), S corporations, or even limited partnerships. You will probably want to use the LLC in preference to the other two options. There are a number of accounting advantages and their maintenance is much easier. Some states let you have “series” LLCs which will cut the cost, because you basically set up one LLC, and then it can establish separate legal divisions without incurring additional charges at the state offices. If you are in California or a state where the cost of the LLC is high, then just use one or two LLCs and divide the properties between them in some logical manner.

Finally I would recommend you use a management company to take care of the properties. The manager is usually the one most liable in a lawsuit. They are the ones who leave the hose out causing someone to trip. They are the ones who forget to fix the hole in the side walk etc. When you are sued, you can point your finger at the manager. If you elect to manage your own property, you should form your own “management company,” probably in an LLC. The management company as a separate entity, not you as an individual, will then be responsible for the lawsuit.

 

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