The land trust is a very powerful tool for the savvy real estate investor. A land trust is a revocable, living trust used specifically for holding title to real estate. Each property is titled in a separate trust, affording maximum privacy and protection.
Here are seven reasons to use land trusts:
1. Privacy. In today's information age, anyone with an internet connection can look up your ownership of real estate. Privacy is extremely important to most people who don't want others knowing what they own. For example, if you own several properties within a city that has strict code enforcement, you could end up being hauled into court for too many violations, even minor ones. Having your real estate investments titled in land trusts makes it difficult for city code enforcement to find who the owner is, since the trust agreement is not public record for everyone to see.
2. Protection from Liens. Real estate titled in a trust name is not subject to liens against the beneficiary of the trust. For example, if you are dealing with a seller in foreclosure, a judgment holder or the IRS can file a claim against the property in the name of the seller. If the property is titled into a trust, the personal judgments or liens of the seller will not attach to the property. This effectively separates the owner or seller from the property.
3. Protection from Title Claims. If you sign a warranty deed in your own name, you are subject to potential title claims against you if there is a problem with title to the property. For example, a lien filed without your knowledge could result in liability against you, even if you purchased title insurance. A land trust in your place as seller will protect you personally against many types of title claims because the claim will be limited to the trust. If the trust already sold the property, it has no assets and thus limits your exposure to title claims.
4. Discouraging Litigation. Let's face it, people tend to only sue others who appear to have money. Attorneys who work on contingency are only likely to take cases which they can not only win, but collect, since their fee is based on collection. If your investment properties are hard to find, you will appear "broke" and less worth suing. Even if a potential plaintiff thinks you have assets, the difficult prospect of finding and attaching these assets will discourage litigation against you. This is a huge benefit!
5. Protection from HOA Claims. When you take title to a property in a homeowner's association (HOA), you become personally liable for all dues and assessments. This means if you buy a condo in your own name and the association assesses an amount due, they can place a lien on the property and/or sue you PERSONALLY for the obligation! Don't take title in your name in an HOA, but instead take title in a land trust so that the trust itself (and thus the property) will be the sole recourse for the homeowner's association's debts.
6. Making Contracts Assignable. The ownership of a land trust (called the "beneficial interest") is assignable, similar to the way stock in a corporation is assignable. Once property is titled in trust, the beneficiary of the trust can be changed without changing title to the property. This can be very advantageous in the case of a real estate contract that is non-assignable, such as in the case of a bank-owned or HUD property. Instead of making your offer in your own name, make the offer in the name of a land trust, then assign your interest in the land trust to a third party.
7. Making Loans "Assumable". A non-assumable loan can become effectively assumed by using a land trust. The seller transfers title into a land trust, with himself as a beneficiary. This transfer does not trigger the due-on-sale clause of the mortgage. After the fact, he transfers his beneficial interest to you. This latter transaction does trigger the due-on-sale, but such transfer does not come to the attention of the lender because it is not recorded anywhere in public records. This effectively makes a non-assumable loan "assumable".
As you can see there are many creative and effective uses for the land trust, limited only by your imagination! What has been your experience with land trusts?
So how do you put property in a land trust? Is is a simple form? Do you need an attorney?
Land Trusts can be very useful. Thing is, most title insurance companies will require the original grantor to the Trustee be deeded back the title before they will insure title. Defeats virtually all of the reasons to put the title into the land trust to begin with.
I have discussed this at length with title companies in Oregon and none will insure title unless we use the “business trust” – won’t go on land trust.
If you have information to the contrary, please advise.
Thanks!
I disagree with almost all 7 points as they are theory and I can tell you for legal practice a good litigator will get through a land trust like a white hot knife going through butter. It is useless for protection and if you want to throw someone else under the bus who wants to serve as the trustee you might escape. Check the laws in Arizona and you have to disclose all beneficiaries even so it is a public record and soon the puppeteer is discovered. It can be a decent tool in Illinois and Florida where they have specific statutes for it but as an asset protection tool it gets the snake oil stamp.
Land trusts are only recognized in a few states, although with good trust paperwork, you can construct an equivalent functionality elsewhere. Your points 2 and 5 seem to indicate that the beneficiary is exempt from liens and HOA proceedings. All of the attorneys that I work with do not agree. They encourage the use of an LLC as the beneficiary to “plug the hole” that a trust by itself opens up. Trusts are for privacy – not protection.
I’ve been using land trusts for over 20 years. The land trust is the only way an investor should hold title. Of course there is no fool proove system, but why would anyone want to subject themselves to personal liability when using a land trust will protect you.
The attorneys who do not agree also most likely don’t understand the workings of a land trust. LLC’s are great for business, but for real estate the land trust is it.
I disagree with most points of this article. Our company uses Land Trusts – aka Revokable Grantor Trusts, in our state – but the beneficiary of each trust is an LLC. That ownership gives us the best of both worlds and allows us to sell individual trusts to, in affect, assign contracts that would otherwise not be assignable.
Many good points above… Keep in mind that there is more to “asset protection” than simply using a land trust on its own. For example, it is good practice to make the beneficiary(ies) an LLC, as mentioned by Shirley. That adds an additional layer of protection should a ruthless attorney cut through your trust and expose who the beneficiary(ies) are, as pointed out by James.
Land trusts are powerful tools within an investor’s toolbox, but it is not the only tool, and should be used properly in conjunction with other tools.
I don’t know too much about Land Trust. I would like to know more about;Do you have any samples of the land trust that you could send me. I will be appreciated if you could.
thank you
joe
I appreciate your article and Land Trusts are the only way to buy, being an investor over bad times, incurring judgments, but now making money like crazy with this tool.
I have done just about all of the above with landtrusts. In Arizona just the beneficiary of the Landtrust has to be disclosed. We have always used a second trust as the beneficiary (in AZ), the beneficiary of the second trust does not have to be disclosed because the second trust is not the holder of the property itself, but only the holder of the beneficial interest of the first trust. In most cases the trustee does not have to divulge the beneficiary unless there is a court order; ok easy enough, if the trust is correctly drafted the trustee has a very limited liability, but if there are concerns, use an FLP or LLC as the trustee, and it’s a good idea to use an FLP or LLC as the beneficiary. In the case of assumable loan (subject to) the seller can be kept on as a 1% interest beneficiary if necessary, and as long as the mortgagee has an (any) interest in the property, the due on sale clause cannot be lawfully triggered. As we all should know, a trust in and of itself is not asset protection, but used correctly it keeps names off the public record (even in AZ) and adds a lot of power to your other tools.
To Nick Capra,
As long as the mortgagor, not the mortgagee. That’s why we use a second trust, least protective, or LLC, LP, LLP, FLP, Corp., or PA as the beneficiary. We also use one entity to hold multiple land trusts. We just have to remember to strip the equity to avoid looking too wealthy,
can you send me more info on land trust or some samples thanks’s carlos
The most knowledgeble person I know on the subject of trust is Lou Brown.
I would see some good examples of Trust that work in North Carolina as well more information
RVCA the balance of opposites
Great info that provoked major insight to the use of land trust. I too would be much obliged to the proper use of the FLP along with the L/Trust. I looking to buy properties all over this country and Iwant and protection so if those in the KNOW Holla back.
I am looking at using Trusts to get around the 30 day seasoning rule with BOA in short sales. Have the seller put the property into trust 4-8 weeks before the bank will accept your offer. The seller is the Trustee and has Beneficial Interest. At closing #1 I (or my co) are buying the beneficial interest only of the Trust (personal property – not real property) and send the short sale bank their discounted price. No transfer of title. As beneficial interest I can resell the property. The HUD-1 that sells the property has the Trust selling it to Bob Buyer. Only one transfer of deed. This is how REO’s are not assigning their contract and reselling too.
I think ‘Deb’ has it wrong. I have property in a land trust which I set up after reading Mark Warda’s book on the subject. I used if for privacy AND to get around community property laws. I was in the process of getting divorced and buying a new residence for myself. As I was still married would either have to deal with the ‘ex’ to sign paperwork giving me sole ownership (TMI and trouble) or she would have been a 50% owner in anything purchased in my name. The Land Trust solved that problem.
Where I believe Deb is wrong is that the same person CANNOT be both the Trustee and have a beneficial interest. However, a trusted friend, arms length relative or a Trust Company can be established as the Trustee and the potential seller can hold 100% beneficial interest. The Trustee name is likely public record, best to have a company be the Trustee (if contemplating a sale) and sell the beneficial interest to a new beneficiary thus transferring the ownership of the Trust (personal property) without public scrutiny.
The biggest problem I am finding is getting ‘homeowners’ insurance for properties in a Land Trust. Many insurance companies want the property recorded in the owner (beneficiary’s) name before they will consider insuring the property. Of course that’s the last thing I would consider doing.
There is some amount of asset protection from a Land Trust. Also, if your Trustee is in a different state it can be a deterrent to litigation as well. That is because it complicates the legal steps to determine the beneficiary(ies) of the Trust.
I understand the beneficiary can change Trustee’s quickly so if you live in CA and have a Trustee in NY who is notified they are to provide the court with beneficiary information, the beneficiary can replace the Trustee with one in another state (NJ for instance) and cause massive delays in the legal attempts to reveal his/her identity.
Having another Trust be the beneficiary sound like a terrific idea. Couple that with replaceable Trustee’s and it could (IMO) take years for anyone to discover the identity of the true beneficiary. The goal is to make the return on investment of resources (of an attorney or litigious individual) minimal so they are discouraged from pursuing legal action.
I am not an attorney and my statements are only my opinions, not legal advice. Please check with an attorney in your state before acting on any ideas I’ve presented.
If a trust is created along with an LLC, is there a capital gain tax when the property is sold????
Donna: There is always a capital gains tax when you sell real estate. Your exact tax situation may vary from others, but a trust does not eliminate the capital gains tax. You can defer it if you change the beneficial interests in your trust to others wince the trust is not selling the property. Check with a good tax adviser for more specifics.
Land Trusts do not legally provide asset protection at all. They are revocable trusts in general. Revocable trusts are only good for avoiding probate and DO NOT provide asset protection what-so-ever. A judge, aka a creditor, can force you to revoke the trust in the favor of a creditor.