Do I Need a Land Trust?
I’m a lawyer, and even I think we are in a bit of a litigation happy society at the moment. Every time we read about a tragedy of some kind, following quickly on its heels is almost always a story about who hired which lawyer and in what district the lawsuit is going to be filed. Like it or not, that is where we are. People see the dollar signs and lawyers are more than happy to cut themselves in.
Germane to this article, if you own property for the purpose of generating income, you’ve effectively put yourself out there to be the subject target of a lawsuit. Whether it comes from someone tripping on your sidewalk, or a tenant suing you for something, as the owner of the property you are at risk. In Pennsylvania, generally it is easy to figure out who owns what property, some counties (like Philadelphia) have simple searchable databases, such as the one found here, that give you immediate access to this information. Even better, if you go down to the Records Room at City Hall, you can easily figure out if a property has an outstanding mortgage on it. And with some simple math you can ascertain what kind of equity the owner has built up so far on the property and make a determination about whether it is worth suing this person or not. Because if there is property, there is value that can be leveraged at the end of a “successful lawsuit.”
I’ve seen this happen to too many of my clients, and I’m writing this article today to offer some thoughts on a smart way to plan around the risk associated with the high probability that if you own multiple properties, you will one day get sued. Even if you get sued individually, for nothing to do with your properties, any properties in your own name will be “stuck” with that lawsuit, and lending institutions become unable to let you transfer property without first dealing with the judgment in your name. The best move is to diversify the ownership of your property by titling it in the names of different entities, to take advantage of the protections available to letting an entity own a piece of property instead of you individually. A judgment in Philadelphia County acts as a lien against all your properties in that county, and worse still, a judgment in Philadelphia County can be “domesticated” in any other county in Pennsylvania and even transferred to another state to act as a lien against your property there.
You have to be smarter than that, and here is one strategy that my clients have found helpful, and that is setting up a land trust. A land trust is a vehicle available to investors across the entire country, with a couple of states acting as exceptions. It is a type of trust set up with the sole purpose of taking possession of a piece of real estate. Like a family trust, there is a beneficiary (or perhaps multiple beneficiaries) for the land trust, that receive the income generated from the real estate asset. Also like a family trust, there is a trustee assigned to the land trust that is responsible for managing the asset and distributing the proceeds. Unlike a family trust, in a land trust you want to hire someone (such as your friendly neighborhood lawyer) to act as trustee, and this trustee is disallowed by law from disclosing to anyone whom the beneficiaries of the land trust are.
Land Trusts are relatively inexpensive to set up, and provide you with anonymity of ownership, as when someone searches for your properties deed, they will see it is titled in the name of the trustee, acting as trustee for your trust (which is typically called the “123 Main Street Trust”). This helps avoid liens tracking you down from other judgments, and provides peace of mind that someone isn’t going to have an easy time figuring out what all you own.
In Pennsylvania, an LLC costs money to set up, but your land trust does not. That is a minor advantage, and probably offset when you factor in that a land trust is taxed at a higher rate than an LLC or your individual ownership (which because an LLC is a pass-through organization, are the same thing). The big advantage, that might be worth the extra taxation, is that there are no documents that will be filed with the state, or related to the transfer of the property, that give away you as the owner of the property. This is completely true if you are purchasing the property with cash; however if you are using financing, there will likely be a requirement that you personally sign for the loan, and that then creates a paper trail connecting you to the property.
The fee for setting up a land trust in Pennsylvania is reasonable, and it offers a niche type of protection that is superior for a certain type of deal. If you think you might benefit from it, definitely give us a call.
As always, if you have any questions about real estate in Pennsylvania or New Jersey, especially in Philadelphia and surrounding counties, contact me at Joe@consolelegal.com. Console Legal is here for you!