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October 12th, 2013 by Clint Coons, Esq.
This article is Part 2 of a four-part series on Land Trusts. You can find Part 1 here: Understanding Land Trusts
Investors, attorneys, or CPAs unfamiliar with the use of land trusts often ask me “why would someone consider using a land trust?” My general response is “why not.” When it comes to entity structuring many people prefer to being with the complex rather than the simple. The land trust, contrary to the multiple internet gurus or guest REIA speakers that sing the vestibule of virtues offered by this rudimentary of tools, is simply and nothing more than a title holding vehicle with some interesting attributes. From a legal standpoint, the land trust is a type of “grantor trust” (this is the phrase you should use in states that don’t formally recognize land trusts via statute).
There are many types of grantor trusts, including living trusts and personal property trusts, all with generally the same purpose: to shift the title of property out of your name and into the care of a trustee.
How does a land trust work? There are three basic parties involved:
From a practical standpoint, think of the land trust like a box with its sole purpose to hold real estate. The box comes with a set of instructions for the trustee and the beneficiary. These instructions detail who has the power to lease, sell, or encumber the property. The instructions can also specify how distributions of income will be managed. In short, the land trust’s appeal is in its simplicity and functionality.
Here is an example of how a trust can be structured for a joint venture:
Kevin and James’s problem is not knowing how to structure this deal to address each parties concerns. Most attorneys would likely recommend an LLC but this would not address James’s issue with the due on sale clause because a transfer of encumbered property into a LLC is not exempt from a lender accelerating the note. The solution for Kevin and James is a properly drafted land trust wherein Kevin and James will each own 50% of the trust i.e., trust beneficial interests. The trust could be drafted so the first $35,000 received from the sale of the house will be allocated to James and all remaining proceeds will be split equally between the parties. The bank will not discover James transferred 50% of his ownership to Kevin via the trust because only the deed transferring the property into the trust is recorded. Thus, both Kevin and James are able to move forward with their investing having solved their initial impediments to making money in real estate.
Kevin and James is just one possible benefit from using land trusts. I have found the use of land trusts are only limited by the real estate investor’s creativity. A land trust can be used in just about any real estate transaction; but for most real estate investors, it is commonly used for the following purposes:
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In part 3 of this series on Understanding Land Trusts I’ll address the “Due-on-Sale Clause“ and explain in detail how the land trust will help you. We will also complete the discussion explaining the privacy of ownership, avoiding county transfer taxes, and wholesaling property or purchasing property subject to an existing loan.
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