Why Use a Business Trust Over an LLC | Asset Protection for Real Estate Investors : Royal Legal Solutions

Why Use a Business Trust Over an LLC

Your individual retirement account (IRA) is a carefully crafted nest egg. If you have a self-directed IRA (SDIRA), you assume complete control over every aspect of your account. Each contribution, whether you made it pre- or post-taxes, is an investment you make in your future. Every buy or sale is a carefully crafted trade that took time, effort and money. Although you may take risks related to your investments, did you know there were other dangers that may end up depleting your funds and impacting your future financial security? At Royal Legal Solutions, we understand how devastating it can be to lose your assets regardless of the reason. Below, we look at how setting up a business trust may be the best way for you to protect your investments.

Why Would My Assets Be At Risk if I Invest?

There are certain professions that are considered to be litigation-prone. Doctors, corporate executives and other such professions fall into this category. However, that is not the only way in which your assets, personal or IRA-related, can be put at risk. Claiming bankruptcy, going through a divorce, or being the defendant in a civil lawsuit can all result in the loss of your assets. As a parent, if your child causes another’s injury – you are liable. In the case of a car accident, injury on your property, or wound aboard your boat, the resulting lawsuit could financially ruin your net worth.

Asset Protection: Inherent Defenses

While your assets can be put at risk through any of the above, state and federal laws do exist that provide some level of protection. For IRAs, both contributions and gains up to $1 million are protected from bankruptcy proceedings. Qualified employer-sponsor plans, such as SEP and SIMPLE IRAs, are also protected from bankruptcy. For plans that are subject to the Employee Retirement Income Security Act (ERISA), your assets are protected from bankruptcy and all other forms of litigation.

Business Trust vs The LLC

Most experts, however, recommend you consider further protecting your assets through the establishment of a business trust or a limited-liability company (LLC). Creating a legal entity that acts on your behalf for investments is a protective trading strategy. (Yes, the Internal Revenue Service (IRS) allows for this type of strategy.)

There are many benefits related to using a business trust or LLC. Business trusts, however, go beyond the protections afforded by a LLC.

The Protection of Privacy

There is no legal requirement that forces you to publically file your business trust. Your Declaration of Trust, which is your trust agreement, is also private. Trustee names, addresses, and other personal information related to your business trust are all considered private and protected from automatic publications as well. This is not true for LLCs. In fact, when an LLC is formed, not only does the Articles of Organization have to be filed with the Secretary of State where you are located, but your name and address must be as well as the manager of the business itself.

The Reduction of Personal Liability

When you use a business trust to invest, all investments and gains acquired under that entity are legally separated from your personal assets. This is beneficial for two reasons. If you use your business trust to invest in a property and default on the loan, this separation will protect your personal assets from any sort of legal ramifications. On the other hand, if you file for personal bankruptcy, your business trust assets are protected from the proceedings. LLCs, on the other hand, have limited personal liability. Furthermore, these protections are only active for as long as your LLC remains in compliance with regulations. All annual filings, fees, and requirements must be made or you lose this protection and invalidate the separation of assets.

A Simple Establishment

A business trust is relatively simple to set up. They have no set up fees or annual feels related to their formation. Because they do not require public filing, they are not subjected to approvals, registrations or other things that can cause set up to take time. By comparison, setting up a LLC is a bit more complex. LLCs require name reservations, application approvals, and waiting periods. They also have somewhat costly government filing fees that are required during start up and annually (or biennially). LLCs are also required to file reports with the Secretary of State per their state’s statute. When all is said and done, an LLC can take one to three months to officially complete the approval process and become a legal entity you can use for investments.

Filing Taxes and a Disregarded Entity

Both business trusts and LLCs allow you to file taxes as a partnership or corporation. However, a business trust also allows you to file as a trust. A LLC will permit personal filing. When your business trust or LLC is filed as a partnership, they are required to file federal and state income tax returns. However, when a partnership consists of only one owner, they can be “disregarded as an entity separate from its owner.” When this occurs, the entity will not need to file certain income tax returns. For business trusts, being a “disregarded entity” means you will not have to file a federal nor a state tax return. For LLCs, however, most states will still require you to filed income tax returns.

Foreign Jurisdictions

One of the most common SDIRA strategies is to invest in real estate. For LLCs, if you invest in properties that are outside your state, you will need to file your company with that state and go through the establishment requirements before you can proceed. You will likely need to hire an agent in that state to act as the manager on their behalf as well. Business trust investments are exempt for this process and any related fees.

Make Business Trusts Work for You

Royal Legal Solutions knows every penny counts when it comes to your future. As experts who specialize in SDIRAs, we can help you with setting up a business trust that works for you. We know the regulations and how to make sure they foster your financial growth instead of taking from it.

Discuss The Legal Safety Of Your Real Estate Investment Portfolio With Our Team? Give Our REI Legal Team A Call Now!512-757-3994

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