Irrevocable Trust & Grantor & Trustee

[larryolsen]

What is the name of your state (only U.S. law)? FL

Can the same person be a Grantor and Trustee in an irrevocable trust?
Thanks. Larr.

 

[tranquility]

Hello. A question: Is it legal for an irrevocable trust to become a shareholder in an LLC? To limit its liability in a real estate investment? Thanks, Larr.

Yes.

Can the same person be a Grantor and Trustee in an irrevocable trust?

Yes.

Do you have any facts regarding your goals? Rather than shotgun brainstorms you got over coffee/beer with buddies, you might give some facts to guide us.

 

[TrustUser]

hi tq,

do you think that one is apt to run into lots of problems if he is the grantor/trustee of an irrevocable trust ?

 

[tranquility]

Absolutely. I tried to make that clear.

I answered the OPs questions. They were not good questions, in part, because of what you are pointing out.

That's why it is better to give the facts and state your goals rather than ask legal questions in the abstract. While I gave the correct answer(s), they really don't help the OP in any way.

 

[LdiJ]

hi tq,

do you think that one is apt to run into lots of problems if he is the grantor/trustee of an irrevocable trust ?

No one can answer that question without knowing a lot more detail than you are providing.

 

[larryolsen]

Irrevocable Trust, LLC,

Thank you for the input,

regarding the question:
Is it legal for an irrevocable trust to become a shareholder in an LLC? To limit its liability in a real estate investment?

I'm the trustee of the irrevocable trust which consists of a portfolio of stocks, bonds and cash. An opportunity came up to invest in real estate, with the risks associated with it. My idea is to open up an S-corp or LLC for that particular investment, make the irrevocable trust the shareholder, and not expose the irrevocable trust to the potential liabilities. Is this line of reasoning logical? Can it be accomplished with an LLC? S-corp? I know I'll need a lawyer for this project. Just getting my feet wet. Thank you.

 

[curb1]

What is the origin of assets in this irrevocable trust? Was it previously revocable?

 

[tranquility]

Is it legal for an irrevocable trust to become a shareholder in an LLC?

The LLC depends on state law, but it will probably be OK. For an S-corp, there are more rules on who can hold stock. Certain trusts are allowed. There are not enough facts to tell if yours is one of them. See a tax professional.

As to the rest, I have no idea. Why do you feel a real estate investment will further the needs of the trust? Are you a beneficiary too?

 

[larryolsen]

Irrevocable Trust, LLC, sCorp

Thank you for the input. The irrevocable trust was not previously revocable. It is the legacy of a step-dad, the grantor, to a step-son, the beneficiary, and myself in the middle as trustee. The traditional stocks & bonds portfolio locked into the trust is doing +-OK., but the beneficiary wishes to move cash into real estate for better returns. I have found some good opportunities, but the idea of the trust being on the title of property makes me nervous. The real estate investment involves the purchasing of property and the management of tenants, and I see a lot of risk and liability in that as compared to stocks and bonds. Therefore the idea of creating an LLC/Scorp with the trust as the sole shareholder. Thanks.

 

[curb1]

Why not dissolve the trust and handle it personally? Trust income is generally taxed at a higher rate than personal tax. Plus there would not be the accounting costs and troubles. What is the language of the trust regarding termination and distribution of assets?

 

[TrustUser]

i have done research in the past on llcs. and the bottom line from what i had found is that they dont hold up legally if the only/main reason is liability.

you need a real business reason to have an llc, if you want it to stand up.

it is very common amongst real estate investors, rehabbers, etc. to have these single owner llcs. just do some research on the net on how many times judges have not allowed them when their basic purpose was simply to keep from being liable.

and the worse thing you can have is a false sense of security.

if the trust allows, the trustee can set up a separate trust for a piece of property.

i hope you realize that there is no way to protect the individual piece of real estate. but what you want to accomplish is to separate the real estate from the rest of the assets, so that coming after the real estate does not give a creditor the ability to come after the rest of the assets.

 

[tranquility]

How do we reconcile a question of:

Can the same person be a Grantor and Trustee in an irrevocable trust?

and the fact of:

The irrevocable trust was not previously revocable. It is the legacy of a step-dad, the grantor, to a step-son, the beneficiary, and myself in the middle as trustee.

Oh well, it is of no matter. What screams for attention:

but the beneficiary wishes to move cash into real estate for better returns. I have found some good opportunities, but the idea of the trust being on the title of property makes me nervous. The real estate investment involves the purchasing of property and the management of tenants, and I see a lot of risk and liability in that as compared to stocks and bonds.

Let me get this straight. The OP, as fiduciary, is contemplating an investment where he sees "a lot of risk and liability" because "the beneficiary wishes to move cash into real estate for better returns".

Smartest beneficiary ever.

The trust was set up so the beneficiary did not control the assets the grantor wanted to give. I don't know, maybe the grantor thought the beneficiary always took the whole piece rather than what is prudent or something and the grantor wanted to make sure the beneficiary had an easier life overall rather than a spectacular life which burned through all the money in a year. But, for whatever reason, the beneficiary was not given the money directly.

Since beneficiary consent is not required for action, his permission is meaningless. The cool thing is, if the investment gains, he benefits. If the investment loses, he sues the OP and benefits. Sue the OP? How so?

Well, WHY does the trust need to make this investment? What trust purpose is accomplished?

Making risky investments is going to bite the OP in the nether regions. Follow the trust and the goals of that trust, not some beneficiary who wants more.

 

[anteater]

Add a REIT or two to the portfolio so that the REIT value is maybe 5% - 10% of the total portfolio. Historically, REIT's have had low correlation to equities and fixed income securities. Most observers consider REIT's to be a separate asset class. Good evidence to show that you are a prudent trustee, following modern portfolio theory.

 

[tranquility]

I am of the opinion (Not a legal fact, an opinion.) that a REIT is not an appropriate investment for anyone who is not highly knowledgeable in such things and, even if knowledgeable, presents a much greater risk than appropriate for a fiduciary situation of the size we're probably talking about. (South of a million.)

Three clients this year and two last year had large investments in REITs crash last year causing large tax consequences IN ADDITION to losing their investment. Now, their facts may be odd, but five in two years. While they seem simple, REITs can be complex and difficult to assess. Best left for professionals and large buckets of money and not for small trust administration.

 

[anteater]

Trouble usually ensues when you have one thing in mind (and it is early) and don't make it explicit.

I was thinking along the lines of a REIT mutual fund or two - such as Vanguard REIT Index fund, CGM Realty, Cohen & Steers Realty, etc.

I agree that private REITS are for the adventurous and probably would not be appropriate for a smaller trust. Even one or two individual publicly-traded REITS would be unlikley to provide sufficient diversification.