This article is based on the assumption that the LLC or Trust is created and maintained in Florida with respect to Florida real property.  If the creation is outside of Florida, the requirements of creation, maintenance, taxation and asset protection will likely vary.  If the LLC or Trust is used to invest in properties outside of Florida, the jurisdiction and rules of taxation for that other state will apply. 

Florida is a beneficial location for the creation of an LLC or Trust for investment in real property.  This is because the state of Florida has favorable asset protection laws and does not have a state income tax.

While this article is intended to provide an understanding of the differences between creating an LLC and a Trust for real estate investment, it is important to talk with the client about their specific goals.  It is also recommended to consult with an attorney on the best form for the real property investment and the specific tax consequences of the investment whether at sale or transfer at death.

     I. Creation

A Limited Liability Company (“LLC”) is formed by filing Articles of Organization with the state and paying the filing fee.  The Article of Organization must include the name of the company, the address of the company’s office and the name, address in the state, and written acceptance of the initial registered agent. The LLC must maintain a registered office and a registered agent in Florida. The registered agent must reside in Florida and is responsible for forwarding any process, notice, or demand pertaining to the LLC that is served on or received by the agent.

A trust is created by a written document that includes the beneficiary of the trust and the trustee of the trust.  The sole beneficiary of a trust cannot be the sole trustee of the same trust.  The trust document does not need to be filed with the state.  However, the property must be transferred into the trust for the trust to be valid, it is not sufficient for the owner of the property to just be the trustee of the trust.

Between the two options, the trust requires more work in the creation.  The language of a trust document should be drafted by an attentive attorney who understands the implications of the provisions.

     II. Taxation

Limited Liability Companies are appealing to many foreign (non-US) investors because the LLC is subject to different tax rules than owning real property outright.  LLCs are taxed on a pass-through taxation regime.  The gains and losses of the LLC are transferred to the members (owners) and those individuals are taxed on the proceeds as ordinary income.  This is a beneficial taxation regime because the proceeds are only taxed once to the individual instead of being taxed to the company and again to the individual. 

This becomes slightly more complicated for a foreign LLC owner.  Since 2017, all foreign owners of an LLC are required to disclose the income from the LLC in a 5472 US tax return even if no tax is owed in the United States.  A number of countries have taxation agreements with the United States that allows for the payment of taxes in the country where the LLC owner resides.

Overall, Florida is a favorable state for the creation of a trust because of the Florida state tax laws.  However, it will be important to discuss with the client who they intend to appoint as trustee.  The residency of the trustee can have implications for whether a trust is deemed a “foreign trust” and the trust therefore would be subject to different tax rules. 

However, where the grantor has not resided in the U.S. or had any presence in the last three years, they should not be subject to the general federal income tax.  Additionally, by creating and administering the trust in Florida and meeting the Florida requirements, the trust would not be subject to state income or estate taxes. Florida also does not impose a fiduciary income tax.

     III. Liability & Asset Protection

As may be evident from the name of the business structure, an LLC is designed to limit liability.  This means that by using an LLC to invest in real estate, the investor will not be personally responsible for the LLC’s debts and lawsuits.  This is of course assuming no illegal or fraudulent behavior on the part of the owner.  The registered agent provides any legal process, notice or demand served on the agent to the LLC members, but the owners are not personally responsible for the debts or lawsuits.

Because of the limitation on liability, the LLC is a useful vehicle for asset protection.  Because the members of the LLC are not personally responsible for the debts or lawsuits against the company, the assets of the owners cannot be reached to satisfy the debts or judgment. 

The structure of a trust influences the ability for creditors to reach the property of the trust to satisfy any claims.  Generally, irrevocable trusts provide for protection from creditors whereas revocable trusts do not.  

An irrevocable trust protects the assets because once the trust is established and the property is transferred into the trust, the grantor no longer has legal title to the property. However, in a revocable trust arrangement, the grantor can amend or even terminate the trust at any time.  Because the owner still has access to the property, creditors could reach the property of the trust to fulfill debts or judgments.

     IV. Transfer at Death & Avoiding Probate

Another concern for investors in real property is what will happen to their property after they pass away.  Both LLCs and trusts can be structured so that the family will not have to open a probate case in Florida.  However, if the correct provisions are not in place, a probate may need to be opened.

A Limited Liability Company is either a single member LLC or a multiple member LLC.  Where the LLC is a single member LLC, it is essential to create an Operating Agreement that provides for what happens at the death of the single owner.  Because there is only one owner of the LLC, when that individual dies without an Operating Agreement the transfer of ownership would require a probate case.  However, by providing for succession of ownership in the Operating Agreement, the single member LLC would be protected from probate. 

Regardless of whether the intended beneficiaries are owners or separate individuals, a multiple member LLC would also benefit from an Operating Agreement.  The Operating Agreement would provide that upon the death of an owner, that owner’s share would transfer to the individual they named in the Operating Agreement.

Generally, a trust is less complicated than an LLC for the transfer of property after death.  At its inception, a trust provides for what happens if the grantor-beneficiary passes away.  A trust allows the grantor to designate the intended beneficiary of the property.

     V. Privacy

Both an LLC and a trust will allow for privacy of the owner.  To form an LLC, there is no requirement for the disclosure of the name of the members.  Similarly, trust documents remain private except to the trustee and eventually the beneficiaries. 

     VI. Conclusion

Overall, a balancing of the interest of the client should be used to decide whether an LLC will be established or a Trust will be used.  In the advisement of a client investing in real estate who wishes to create an LLC or a trust, you should also consult an attorney who can provide insight into the tax implications and best structure for the client’s goals.

Please feel free to reach out to our team at The Probate Law Firm at 305-456-3255.  If we are unable to answer your questions, we are happy to help you find an experienced attorney to assist you with the matter.