Some Reasons Why Real Estate Investors Should Consider the Use of Land Trusts

land trust, check boxPerform a simple Google search for "land trusts" and you will find hundreds of websites addressing this topic.  Some of these sites provide solid information while others make blatant misrepresentations in an attempt to dupe the unsuspecting real estate investor into buying a kit or other product.  Separating fact from fiction can be difficult, however if you look at the land trust in a historical context, it is a simple tool that has been around since King Henry VIII ruled England.  Its purpose then, to mask ownership of real property (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. 

Anonymity of Ownership
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 and held in the name of the trust;
  • Th purchaser seeking anonymity is not the trustee; and
  • The beneficiary is not a party to the mortgage 

The last two points are the most important and most difficult for real estate investors because many promoters will lead you to believe that a mere transfer of ownership into a land trust will provide anonymity. A transfer will 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 anonymity is desired, I suggest the following scenario:

  • Create a land trust with an attorney as the trustee and the investor as the beneficiary;
  • The investor will transfer ample purchase funds into the trust;
  • Attorney/trustee will negotiate the purchase 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 325 Street Trust Dated November 14, 2012;
  • After closing, investor/beneficiary will transfer his beneficial trust interest to a LLC he owns;
  • Attorney resigns and the investor, already listed in the trust as a successor trustee, becomes the acting 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)

When you are financing a purchase and desire anonymity, consider working with a local lender who apt to be more flexible in structuring a loan. Inquire as to the lender’s openness in allowing your acquisition to be taken 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., 325 Street Trust Dated November 14, 2012. (Note: this does not work in all states.) 

(If you are asking yourself why I recommend the use of an attorney as your nominee trustee, I do it for your protection.  Several years ago a client utilized his good friend as a trustee on multiple land trusts.  His friend resigned as indicated above any my client became the undisclosed successor trustee. Everything was fine in Mayberry until his friend decided New York state taxes were optional — New York disagreed.  New York levied tax liens on every piece of real estate where the friend’s name appeared regardless if he was listed as a trustee or grantee.  This was a costly mistake you do not want to make.)

Judgment Protection
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 attaches to the investor/debtor’s real property and is treated as a lien. This lien will be paid when the investor/debtor refinances or sells his encumbered property.

If a judgment is entered against an investor/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 and succeed to the property in this manner.

Acceleration Clause Protection
Most mortgages have clauses that allow acceleration of the note if the borrower sells or transfers the mortgaged property. This includes transfers to LLCs for asset protection. These clauses are intended to protect the lender’s security interest in the mortgaged 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. This clause may not be triggered if property ownership transfers because the borrower died and the property passed to his heirs, property is transferred to a spouse, or it is transferred to a Grantor Trust i.e., a Land Trust. Due-on-sale and due-on-transfer clauses are regulated by the federal Garn-St. Germain Depository Institutions Act of 1982.

Capitalizing on this Act’s provisions, an investor can transfer his real property into a land trust then assign his beneficial interest to a LLC for asset protection. From the lender’s perspective, the only visible transfer is to a grantor trust because the subsequent assignment is not recorded.

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 tipping point when the grouping of several properties in one LLC is unwise and additional LLCs are warranted to reduce overall exposure. 

To simplify solving this potential issue, the investor should hold each parcel of real property in a separate land trust. (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.)  To move one or more of the properties to a new LLC the investor need merely prepare 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.

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