Keith W. Michon, P.C. – Corporations
Investment Property – Nominee Trust V. LLC
Many people who own rental property or other commercial property in Massachusetts often place the property into either a Nominee Trust (sometimes called a "Realty Trust") or a Limited Liability Company ("LLC"). This is done for several reasons including: 1) attempting to hide the identity of the owner of the property from the public, 2) attempting to limit the liability of the owner of the property, and 3) avoiding tax implications which would arise from using other more cumbersome forms of corporate ownership. Both the Nominee Trust and the LLC can be set up to be "pass-through" for income tax purposes.
The Nominee Trust
When a property is held by a Nominee Trust, the Nominee Trust is the legal owner of the property. The Trustee is the person appointed to act on behalf of the Trust. The Beneficiary is the equitable owner of the property. Unlike other trusts, it is the Beneficiary of the Nominee Trust who decides how the Trust will be administered. The Trustee is not authorized to act without first obtaining direction of the Beneficiary. A principal/agent relationship is created between the Beneficiary and the Trustee.
There can be more than one Trustee and there can be more than one Beneficiary. The Trustees and the Beneficiaries can be the same people as long as a sole Trustee is not the sole Beneficiary. In this special case the Trust would legally cease to exist and the beneficiary would be considered the owner of the property individually.
While the Trustee has limited personal liability in certain cases, a Nominee Trust does not offer any liability protection to the Beneficiary of the trust. However, a Nominee Trust can be an effective mechanism for shielding the Beneficiary from public records and from the other parties dealing with the Trust. Without knowing the identity of the Beneficiary, and how "deep his pockets" are, the decision of whether to pursue expensive and time consuming litigation becomes more difficult for a plaintiff-to-be.
Once set up, Nominee Trusts do not require regular legal upkeep and are not required to file any yearly statements or reports with the Commonwealth of Massachusetts. Nominee Trusts can be set up to exist for up to 90 years in Massachusetts.
Limited Liability Companies
When a property is held by a LLC, the LLC is the legal owner of the property. The Managers are the people appointed to act on behalf of the LLC. The Members are the equitable owners of the property. The Managers run the business of the LLC per the operating agreement and can be authorized to sign documents on behalf of the LLC in the Certificate of Organization.
There can be as many Managers and Members as are required. Members are provided limited personal liability protection by statute.
An LLC can be more expensive to set up than a Nominee Trust. It requires the filing of Annual Reports with the Commonwealth of Massachusetts and a filing fee of $500.00 a year. There is also an initial filing fee of $500.00. An LLC can be set up to exist in perpetuity.