There are many websites devoted to the topic of land trusts. Some of these sites provide solid information while others make blatant misrepresentations. Unfortunately for the investor, separating fact from fiction is difficult. However, keep in mind that a land trust is a simple tool that has been around since King Henry VIII ruled England. Its purpose then, to hide ownership of land (this was done so a commoner would not have to serve in the military or lose the benefits of his land upon death), is the same today.
One of the benefits that a land trust confers is anonymity for the investor. However, anonymity is only available in the following situations:
- Title is taken in the name of the trust;
- Someone other than the beneficiary is named as a trustee; and
- The beneficiary is not a party to the mortgage
The last two points are the most important because real property can always be transferred into a land trust to remove an investors name from the chain of title but if his name appears as a trustee or he is listed on the mortgage, privacy is lost.
In those situations where privacy is desired, I will recommend the following scenario:
- Investor establishes a land trust with his attorney as the trustee and the investor as the beneficiary;
- Investor funds the land trust with sufficient cash for the purchase of the property;
- Attorney/trustee enters into purchase and sale agreement with the seller on behalf of the trust;
- Title is taken in the name of the trust care of the Attorney/trustee e.g., Clint Coons, Trustee of the Bad Stared Trust Dated July 1, 2012;
- After closing, investor transfers beneficial interest in his trust to a LLC;
- Attorney resigns and investor becomes the new trustee; and
- Don’t forget to pay your attorney and send him a nice bottle of wine for all of his hard work (I prefer pinot nior from Willamette)
If you do not have sufficient resources to make a cash purchase, then consider working with a local lender and ask if the lender will permit acquisition in the name of a trust (do not tell the lender this is a land trust – refer to it as a grantor trust). In this scenario the use of an Attorney/trustee is not an option because the lender will require the purchaser be listed as the trustee. The key to anonymity is not listing the trustee when taking title in the name of the trust e.g., Bad Stared Trust Dated July 1, 2012. (Note: this does not work in all states.)
FYI… If you are questioning why I recommend the use of an attorney as your nominee trustee, I do it for your protection. A few years ago an investor/client utilized his good friend as a trustee on multiple land trusts. Everything was fine until his friend decided New York state taxes were optional and New York disagreed. New York filed tax liens on each real property where the friend’s name appeared regardless if he was listed as a trustee or grantee. This was a costly mistake.
Protection from Judgments
If a creditor obtains a judgment against an investor who owns real property in his own name, the creditor will either apply for a Writ of Execution to force a sale of the investor’s real property, or file the judgment with the county. A filed judgment will attach to the debtor’s real property and be paid when the debtor attempts to refinance or sell the property.
If a judgment is entered against a trust beneficiary, the judgment will not attach to the real property held in his land trust. (Remember, the judgment only attaches to real property held in the debtor’s name.) Thus, the real property held in a land trust can be conveyed free and clear of the judgments against a beneficiary. However, an aggressive creditor can enforce a Writ of Execution against the beneficiary’s beneficial interest in the land trust.
Due On Sale Protection
The primary reason why most investors utilize a land trust is “due on sale” clause avoidance. In most mortgages the lender reserves the right to accelerate the note if the borrower transfers title to the encumbered property. This poses a problem for real estate investors looking for asset protection from a LLC. To move the real property into the LLC an investor risks his lender discovering the transfer then accelerating the note. The land trust solves this dilemma. The Garn–St. Germain Depository Institutions Act protects borrowers from acceleration if real property is transferred into a grantor trust. The land trust is a grantor trust and from the lender’s perspective, created for estate planning reasons. Once safely ensconced in the land trust, the borrower is free to assign his interest to an LLC for asset protection.
Facilitation of Property Transfers
Many investors will group several properties within one LLC when their overall equity exposure is minimal. However, their risk exposure will grow in proportion to the increase in the value of the real property and its debt reduction. There will come a point when the grouping of several properties in one LLC is unwise and additional LLCs are warranted to reduce overall exposure.
If the real property was in the name of the first LLC and the investor desired to transfer any of these to a new LLC, it would require the recording of two deeds – one from the first LLC to the investor and then from the investor to LLC #2. This is expensive and possibly fraught with errors. If each of these properties are held in a land trust, the process is simplified by merely preparing 2 assignments of beneficial interests – one to the investor and then from the investor to LLC #2.
The uses of land trusts cannot be overstated as they are considered an important tool in the investor’s arsenal. If wielded properly the trust can minimize title issues, limit liability exposure, facilitate future transfers, and shield ownership. The key is in understanding its benefits and limits.