How to Protect Your Interest in Real Property
UPDATED: February 20, 2013
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Imagine a creditor trying to find out how much money you have at your disposal. Copies of deeds and the taxes paid on real property are public records that anyone can look up at the county courthouse. Sometimes property appraisers keep records, which include the layout of your property and the value of your fixtures, also fairly accessible. Many of these records are available on the Internet, absolutely free. There are ways, however, to keep this information out of the public view.
A land trust is a device that allows you to put your property in the name of another person, company or bank, keeping your name out of the public records. No one looking at the records will know who actually owns the property, how much it sold for, or how many times it sold. A land trust, in essence, shields your identity. Once the trust is closed, the trustee has no duty to keep the records, so there may be no way to find the owner. Land trusts can be used in most states, but in some it is more difficult than others because the laws don’t specifically authorize them. Check with a real estate attorney in your state to determine whether setting up such a trust is feasible where you live.
If it is difficult or impossible to use a land trust in your state, a living trust may suffice. Someone other than yourself should be the trustee. Be aware, however, that sometimes living trusts are recorded, so they are not as private as land trusts.
Often times if a corporation owns a piece of property, stock in the corporation could be sold with no record of the price paid or who the purchaser is. In most states, corporations must disclose their officers and directors, but not the names of their stockholders. If you are buying a piece of property, you could arrange for the seller to convey it to a corporation and then transfer the stock to you. There may be tax considerations involved, so be sure to discuss this with your accountant. If you use an out of state corporation, that could make it even harder to find you.
Limited Liability Companies (LLC) and Limited Partnerships (LP)
These are two of the best ways to hold real property because they have strong asset protection benefits. As the owner of an LLC, you are not liable for the debts of the business or the acts of employees. And if you do something wrong personally, your LLC cannot be taken away from you as long as it is set up correctly. Be sure to obtain advice from a real estate or business attorney, or an accountant. These days it is very simple to start an LLC in most states. In some cases you can even do it online.
If you own your property as a Limited Partnership, your property will be protected from the claims against one partner (if the claim is unrelated to the business). The underlying reason is that it would be unfair to the other partners to have the partnership dissolved or property seized for acts over which they had no control. When it is used for asset protection purposes, an LP is usually called a family limited partnership, or FLP. An LP or an FLP is a partnership agreement between two or more persons in which at least one of them (the limited partner) has no right to control the business and no liability for debts of the partnership. The general partner (or partners) controls the business or assets and is liable for the partnership debts. The limited partners own a share, but have no say in the operation. They can share in the profits according to their percentage ownership if the general partner decides to distribute profits.
All a creditor can do against a limited partnership is obtain what is called a “charging order” which is a lien against the limited partnership interest. It only entitles the creditor to any profits distributed to the partner, but in a FLP, the general partner can decide not to distribute any profits. And, with the lien, the creditor may have to pay a share of the taxes on the profits of the LP even if no profits are distributed!
Setting up a trust overseas has fallen out of favor in recent years because such trusts have often been viewed by the courts as being formed with an illegal intent to defeat creditors’ claims. Although they look shady, there are some benefits. For a more detailed discussion of the benefits and drawbacks to foreign trusts, see “Foreign Trusts and Offshore Entities To Protect Your Assets”.