For years I have taught real estate investors to put their investment property into a Land Trust for a multitude of benefits. The next question always becomes, “who should be the beneficiary?” The answer depends on your individual situation and what you are trying to accomplish. You may choose an Individual, LLC, Corporation or even the Trustee of another Trust (perhaps a Personal Property Trust). The degree of your paranoia will dictate the number of entities that you want to “layer” as beneficiaries.
I am often asked whether a real estate investor should put his/her personal residence into a Land Trust and the short answer is generally yes. The investor will realize all the same benefits of a Land Trust whether the property is for investment for a personal residence. However, there can be a problem with qualifying for IRS Code Section 121 ($250,000 capital gains tax exclusion for individuals and $500,000 for married filers) if you make an entity the beneficiary of your Land Trust (instead of you personally).
In order to qualify for the capital gains exclusion on your principle residence, ownership must:
1. Be held directly in your name or in the name of a qualifying trust or certain single-owner entities;
2. You must have resided in the property for a cumulative 2 out of 5 years prior to selling
What is a “Qualifying Trust?” Under Treasury Regulation 1.121-1? Property held in a Land Trust can qualify for Section 121 exclusion if the trust is a Grantor Trust under IRS Sections 671-679 and is a Disregarded Entity under Treasury Regulation 301.7701-3. Since a Land Trust is a type of Living Trust and a typical traditional revocable living trust qualifies (the trust cannot be an Irrevocable Land Trust) under Section 672 you CAN use a Land Trust to hold title to your personal residence and still qualify for Section 121 treatment. For those of you out there that like reading dry IRS code sections, it is even possible to qualify for Section 121 without direct ownership of a property via “remainder interests.” See IRC 121 d 8.
Regarding making a single-member entity (i.e. an LLC) the beneficiary of a Land Trust, while this may still qualify under the exemption referred to above, I have not in the past recommended use of the single-member LLC because of its lack of asset protection benefits. Many recent court decisions have penetrated the single-member LLC to the benefit of creditors. HOWEVER, on June 6th, 2011 Nevada Senate Bill 405 passed and amended the Nevada Revised Statute 86.401 to specifically provide “single-member” limited liability companies charging order protection as the exclusive remedy for a judgment creditor. The bill became law on October 1st, 2011.
In part this new law reads, “On application to a court of competent jurisdiction by a judgment creditor of a member, the court may charge the member’s interest with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of the member’s interest.”
It goes on to say, “Provides the exclusive remedy by which a judgment creditor of a member or an assignee of a member may satisfy a judgment out of the member’s interest of the judgment debtor, whether the limited-liability company has one member or more than one member…”
You gotta love Nevada!
Maybe you should consider making the beneficiary of your Land Trust a Nevada Limited Liability Company. Just be careful as Nevada asks a lot of personal questions on their formation questionnaires and Franchise Tax annual renewal forms. You will have to think carefully and creatively to avoid giving the State of Nevada information you should not want them to have. Good Luck!