Land Trust Traps for the Unwary Investor

TrapI received eleven calls this week from real estate investors who wanted to set up land trusts to protect their real estate investments.  Understand that it not uncommon for me to receive a few calls each week on this topic but 11 within three days.  Did this topic hit PR-Newswire? To make these calls even worse, each and every caller was confused as to why and how to properly use a land trust in investing.   So here is my land trust lesson beginning with the two most common myths.

Land trusts do not offer asset protection
Land trusts hide your ownership of real estate

A land trust does not provide asset protection.  To obtain asset protection from a trust the trust must be irrevocable i.e., you can not modify or cancel the trust after it is created, your interaction with the trust assets are severely restricted, and you cannot be a trust beneficiary.  A land trust does not fall into the irrevocable category.  The land trust is in fact just the opposite – revocable.  It has been a fundamental fact of English and U.S. common law for hundreds of years that a person cannot protect his assets from his creditors by putting property into a trust that the person fully controls.  Further, the person is not protected from the trust’s creditors i.e., if harm occurs with the trust the trust owner is responsible.  Face it, a land trust by itself will not protect the investor.

Land trusts do not always hide property ownership.  To keep your ownership of real estate private two things must occur – you take title to the property in the name of the trust using a nominee trustee and you purchase the property for cash. 

Title to assets held in trust are typically held by a trustee in the name of the trust e.g., Clint Coons as Trustee of the Bigger Pockets Trust Dated 9.23.10.  As you can read, if I am trying to mask my property ownership I should avoid serving as the trustee of my own trust.  Therefore, the sophisticated investor will use a trusted friend or attorney as his initial trustee.  I write initial trustee because when title is recorded in the trust you may want your trustee to resign and you assume the position.  (This change is trusteeship does not get recorded so anyone looking at your trust would assume the initial trustee is still serving.)  Unfortunately anonymity is a two-prong test and using a nominee trustee only satisfies the first prong; the more difficult is buying for cash. 

If you are fortunate to have sufficient wealth to purchase all of your investments for cash then you can achieve anonymity with a land trust; however, if you are like the vast majority of investors and require financing then all bets are off.  When you purchase real estate using financing the lender will seek a deed of trust or mortgage to be filed against the property.  Either of these documents will let the world know that you, as the purchaser, is liable on a note to the lender and the lender has secured its interest against your property.  This is where the anonymity begins to unravel.  If a competent attorney performs a thorough asset search you may not show up on title (you nominee trustee appears) but you will show up on the financing documents leaving one to reasonably assume that as the party responsible for the debt you most likely have an interest in the property.

As you can see the land trust will not provide the two oft touted benefits quoted by many real estate gurus.  This does not imply that the land trust does not have its place in the investor’s arsenal for in fact it does and in the current investing climate it is more important than ever.  Next week I will cover why and how you should use a land trust for real estate investing.

 

Posted by Clint Coons, asset protection attorney, Seattle, WA
Anderson Business Advisors and Law Group

0 comments On Land Trust Traps for the Unwary Investor

  • Hi Clint,
    I have a question about a land trust.
    My father placed his home in an inter vivas trust, irrevocable. My father made my brother the sole beneficiary and one of the two trustees. My father was the other trustee. My brother had zero involvement in managing the trust only my father lived in the home and managed the trust. My father never gave up any control f the asset.
    My father never transferred the land title and the will makes mention in a codicil for the home. Can the trust be challenged seeing my father held title and he should have transferred the land title? The title never was registered to a trust or trustee.
    My father passed on September 20 2015 and the property was never transferred two months later. I went to the land title office and my father is still the owner of the home. Never has the title changed in 51 years.
    How can the trust be valid?
    Any thing you can suggest? Do I have a claim?
    Thanks,
    Scott

    Sent from my iPad

    Sent from my iPad

    • Scott,

      You will need to consult local counsel. The trust can be valid even if it did not hold title to the house. Based on your comments it would appear the property is part of your father’s estate and will pass via his will or intestacy if he did not create a will. In order for the property to be part of the trust your father should have deeded the property into the trust. Thus, as a descendant you have a potential claim absent a will.

  • A client pointed these articles out to me and I had to explain that this does not apply in Florida. The Florida land trust statute says the beneficiary is not liable for the property, and you can’t replace a trustee unless you file a new deed, and the lender doesn’t always require the borrower’s name be on record, he can sign an unrecorded personal guaranty. When writing for national audience, you should make clear that land trust law is different in each state and could be completely different from what you are explaining.

    • Mark,

      Thank you for your comments. I have read all of your materials and found them very informative and beneficial. Your point is well taken. Sometimes I assume this is implied and the reader understands nothing is a one size fits all approach.

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