The Pros and Cons of Using a Trust for Real Estate Investment
When investors choose to acquire property in Florida, they often do so via a Limited Liability Company LLC. One alternative to the LLC is to hold the property in a trust.
There are distinct advantages to using a trust, though the disadvantages should carefully be weighed-in to determine if a trust is the right formation for a given real estate investment.
Trusts are by far the best choice for investments in which there is an overriding need for privacy. There is no legal requirement to publicly file your Declaration of Trust. This means that trustees, administrators and beneficiaries of a trust are not publicly listed. Alternatively, an LLC or corporation is required to be file Articles of Organization or Incorporation with the Florida Secretary of State. This means that as an LLC owner your name and address will be publicly published as the owner of the business holding the property. This makes a trust the clear winner over the LLC in terms of privacy.
When you “have asset held in trust” they are legally not your assets. This means that if you are the beneficiary of a trust, you may default personally on a loan and not have the assets in the trust subject to a lien. Likewise, financial and legal difficulties of the trust will not affect your personal assets. LLCs, though have “limited personal liability”. Limited personal liability is conditional on whether the owner of the business respects the separation of assets (ie does not commingle LLC funds with his own). The LLC must also remain compliant with Florida’s statutory regulations, annual filings and fees in order for the limited personal liability to remain in effect.
Some Tax Advantages
Similarly to S Corporations and LLCs, trusts can file taxes in a way in which they are “disregarded as an entity separate from its owner.” This means that the entity does not need to file a separate federal tax return to its owner, avoiding “double taxation” at the individual and entity levels. In Florida, LLCs are still required to file an income tax return even if they are disregarded entities for federal tax purposes. Trusts that file as partnerships, and that have only one partner benefit from not having to file separately at either the state nor the federal level.
Complexity and Cost
It is true that trusts do not require registered agents in Florida, have no registration requirement, filing fees or annual fees. However, the proper administration of a trust can be very complex and costly. Legal advisors, accountants and financial institutions (as well as any others used as third-party trustees) are required to manage the compliance hurdles and handle the administrative burden inherent with trusts. The fees paid for their services can diminish the profitability of the trust.
“Trusts are by far the best choice for investments in which there is an overriding need for privacy.”
You lose ownership of properties that are placed in trust. Legal ownership is transferred to trustees who administer all properties and assets in the trust and may have control over your access to significant portions of the assets in and income from the trust.
Access to Finance
Banks and other financial institutions may treat trust assets differently and make it difficult for them to be used as collateral. While it is possible to receive a mortgage secured against properties in a trust, the administrative procedures, fees and other processes involved may limit access to the funds or make it prohibitively costly.
It is important to sit with an experienced real estate attorney to weigh the pros and cons of holding real estate assets in a trust. Since trusts can be valuable as way to maintain privacy there are clear advantages under certain circumstances. However, there are significant pitfalls of which any decision maker needs to be aware.
Nima Ajabshir, Esq. is the Managing Partner at South Florida Law, with an emphasis in Real Estate Law. Mr. Ajabshir received his Bachelor’s Degree in Political Science from Florida State University, where he graduated Cum Laude. Mr. Ajabshir, Esq. attended and received his Juris Doctorate from St. Thomas University School of Law. In addition to being an attorney licensed to practice in the State of Florida, Mr. Ajabshir, Esq. has his real estate license, so he has experience in both the legal and transactional facets of Florida real estate.