Land Trusts Part 2

Land Trusts

Last week I wrote about two of the primary misconceptions regarding the use of land trusts in real estate investing.  I am amazed at the response my Blog generated.  My intent in raising this issue was to inform people on what to watch out for when considering this entity for real estate investments.  As a licensed and practicing real estate/ asset protection attorney for over 13 years I have heard several accounts from real estate investors regarding the information received from different speakers on the use of land trusts.  Much of what I have heard does not comport with my personal practice or understanding of the law.  In point of fact I have recently consulted with an investor who is embroiled in a multi-party lawsuit (he is the sole defendant the other 13 or so are Plaintiffs) and not one of his land trusts has provided him an ounce of protection.

I am trying to raise awareness in this post for all investors that much of what is discussed regarding this issue is disseminated from non-attorneys who know very little on the issue of grantor trust law.  Take for example the issue of personal property attachment.  Many promoters of land trusts will state that the land trust, or their special version thereof, can not be seized by a beneficiary’s personal creditor because the beneficial interest is personal property. Unfortunately for them the law views it differently.  My post on the Olmstead case in Florida is case in point.  In that case Mr. Olmstead lost his LLC interest because the court found it was “personal property” not protected by statue.

Although a members’ interest in a LLC is considered personal property, see § 608.431, Fla. Stat. (2008), and personal property is generally an asset that may be levied upon by a judgment creditor under Florida law, see § 56.061, Fla. Stat. (2008), there are statutory restrictions in the LLC context. Any rights that a judgment creditor has to the personal property of a judgment debtor are limited to those provided by the applicable creating statute.  Shaun Olmstead v. Federal Trade Commission No. SC08-1009 June 4, 2010.

Rather than continue to dismantle many of the misstatements that are often proffered regarding land trusts I will continue with where I left off last week – how they can be used in real estate investing.

Land Trust Benefits
I will begin by letting all my readers know that in 90% of the situations involving residential real estate encumbered by a note with an acceleration clause I recommend the use of a land trust. (Note: I do not advocate subject-to investing strategies as these tend to create liability for the investor if not structured properly through an attorney. So this post refers solely to investor owned property.)  This is probably shocking to some of those who took umbrage with previous post but I view the land trust as an essential tool for real estate investors who appreciate what it can and cannot provide.

In my practice the land trust is used as a title holding vehicle to minimize the risk of acceleration when real estate is transferred into a LLC for asset protection and there is no change in beneficial ownership.  As many of you know U.S. Code Title 12, Chapter 13, Section 1701j-3 limits a lender from accelerating a note when there is a transfer to an inter vivos trust in which the borrower is and remains a beneficiary…   A real estate investor who desires the asset protection benefits of the LLC is often faced with this dilemma – transfer the property into the LLC and risk the lender accelerating the note or keep the property in his own name and risk being liable.  Hence, the land trust provides the remedy. 

Asset Protection
To solve the dilemma an investor can establish a land trust to hold legal title to the property, wherein the investor is the trust beneficiary with rights of assignment.  After title is recorded in the name of the trust, the investor/beneficiary quietly assigns his beneficial interest to his LLC.  This transfer goes unnoticed by the lender because it is not recorded. Once the interest is held by a LLC, the LLC as the trust beneficiary becomes liable for the trust debts and obligations.  Similarly, the charging order protections will shield the land trust interest i.e., personal property, from the investor’s personal creditors.

Miimize Transfer Costs
Another beneficial use of the land trust will arise in situations where a state or county imposes a tax or fee on the transfer of real estate to a LLC.  With the exception of Pennsylvania, the use of the land trust can avoid transfer taxes, as these transfers are generally exempt provided the beneficial ownership remains the same.  (This is a common problem with the subject-to investor who fails to pay transfer taxes when a distressed homeowner assigns him a beneficial interest in a land trust.)

Mask Property Ownership
The land trust can also be beneficial when acquiring a property for cash or non traditional financing and you do not want to alert other individuals to your ownership.  Through the use of an attorney or trusted person as your trustee, title is taken in the trust name in care of your trustee.  After property is recorded into the trust, the trustee will typically resign and the investor/beneficiary will assume trusteeship as the undisclosed successor trustee.  In my post last week I addressed debt as impediment to full anonymity in this transaction because often times the debt instrument is recorded against the property showing the beneficiary’s information.

The land trust is an essential tool for every real estate investor and if properly understood can provide substantial benefits when it comes to asset protection, anonymity and transfer costs.  The key to using any entity is understanding its benefits and limitations.  All the best in your continued investing.

P.S.

For those of you who have stated that you have successfully litigated the use of a land trust and walked away without the property or yourself, as the beneficiary, having any liability, please send me the initial pleadings, findings of fact and conclusions of law and the order.  I do not profess to know everything about the use of land trusts and I do accept that some courts may have provided the protections espoused by several who commented on my last post.  I just haven’t seen it.  Investors will often tell me that a land trust promoter told them how his land trust has stood up in court to creditors and protected the property.  I always tell them to get me the case number, state, and county of the case to verify the claim.  I am still waiting.

If anyone who reads this would be kind of enough to provide me the information I will discuss it next week and post the supporting documents for all to view.

Posted by Clint Coons, asset protection attorney, Seattle, WA

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