This Article will examine Single Member LLCs and why they are good for asset protection purposes of your personal residence. Today, I had a client that came in with his girlfriend/domestic partner. In society, same sex relationship and domestic partners (boyfriend/girlfriend) is become increasingly popular.
Asset protection is difficult for domestic partners because tenancy by entirety (way of owning a home) is not available. Tenancy by Entirety is a method of titling your home, which gives husband and wife the benefit of judgments against one partner not attaching to their personal residence. For example, Husband and Wife own 123 Madison Street, Chicago, Illinois as their personal residence and own their property jointly as tenancy by entirety and not as tenants in common or joint tenancy. John Smith sues Husband and wins his lawsuit and a judgment of $100,000 against Husband. In this example, John Smith's $100,000 lawsuit does not attach as a lien or judgment against Husband and Wife's personal residence. If Husband and Wife owned by the property as Joint Tenants as most married couples, the Husband's judgment could force Husband and Wife into auctioning their home to satisfy Husband's Judgment. In Illinois, Husband and Wife have a $15,000 per person homestead exemption. A homestead exemption is the amount of equity that cannot be touched by a creditor. For instance, in a typical situation, the Husband and Wife's mortgage company is first in line to get their mortgage paid first in case of an sale or auction, then Husband and Wife get a homestead exemption of $15,000 per person ($30,000 as married couple) and then the creditor gets the amount of money to satisfy their judgment. Hence, owning one's property as joint tenants or tenants in common is very risky.
In every state except Louisana and Tennessee, private land trust are a powerful way of owning real estate. A private land trust is a strategy where a Trust company appears as though they own the legal title of a property. Thus, a private land trust serves the purpose of shielding the identity of the owners of the real estate property. Secrecy is an important tool and is used often. With a private land trust, the owners of the property enjoy the "beneficial interest", which means they get the proceeds upon sale and have the ability to direct the legal title holder (trustee) to do certain actions such as transfer/assign title to another party. Additionally, a private land trust converts a real estate property interest from real estate to personal property. This enables real estate owners to avoid judgments and liens being attached to their property. With a lien or judgment, one cannot sell their property without paying all the lien holders such as the mortgage company or a creditor (such as a credit card company).
Owning real estate in a private land trust as two individuals is problematic. It is problematic because a creditor could force two individuals to undo their land trust and transfer the property back into their individual names. Thus, a creditor is using the "beneficial interest" component of a private land trust. With a single member Limited Liability Corporation (LLC), each individually is creating a different business entity which is seperate from them personally. Technically, the business entity is a seperate creation distinct from the individual.
For instance, Girlfriend and Boyfriend own their property jointly and quit claim their property interest from their names to their private land trust with Girlfriend's single member LLC as 1/2 owner and Boyfriend's single member LLC as 1/2 owner. Thus, this title arrangement arguably makes it more difficult for a creditor to force each individual to transfer their beneficial interest in the property back to themselves. Why? The boyfriend and girlfriend technically have set up a seperate business entity, which has a different federal tax identification number (similar to social security number), which is not them. Again, this is not a perfect arrangement because a court could disregard the single member LLC from a liability standpoint and decide that a single member LLC is the same as the individual. This is not perfect but the only one hundred percent protection for a boyfriend and girlfriend is to get married. Federal and state law treats a married couple better than a domestic partner or same sex couple. Therefore, the single member LLC is a good asset protection plan, but it is not perfect.
For tax purposes, the single person LLC is disregarded, which means the IRS treats boyfriend and girlfriend as though they own their primary residence as individuals and not as business owners.
Sean Robertson is a Wealth Preservation Attorney and Founder of Robertson Law Group, LLC. Sean concentrates in Wills and Trusts, Asset Protection, Elder law, and Commercial Litigation. Sean can be reached at 312-498-6080 or RobertsonLawGroup@gmail.com.
Robertson Law Group, LLC
312-498-6080 or RobertsonLawGroup@gmail.com
Wills Trusts Phyician Legal Planning and Elder law