Last night I gave a webinar on my invisible investor technique for real estate ownership. A key component to this strategy is the use of land trusts and anonymity compliant limited liability companies.
The following is a recap of the strategies I discussed during this webinar.
Land Trust Benefits for Real Estate Investors
Allows for simpler assignability of contracts
- You sell your beneficial interest in the trust to the investor.
- The investor has the right to close on the contract as the owner of the trust.
- Creates income for your corporation
- Your corporation can be the beneficiary of your land trust. It will receive the income from the sale of the trust to an investor.
Best solution for wholesaling bank owned properties (REO or short sale) or HUD homes
- Similar to #1 above when dealing with HUD or banks these institutions typically prohibit the assignment of the purchase and sale agreement, “PSA”.
- Some investors have elected to use LLC to enter into a PSA then sell the LLC to an investor thereby giving him the ability to close on the property.
- This method definitely works; however, it has filing fees, change fees, and other unnecessary expenses.
Buy and Hold Investor
Encumbered Property – Avoids risking acceleration of the mortgage, i.e., “due on sale clause” because the trust is a grantor trust.
- Transfers of encumbered real-estate into a grantor trust is exempt from lender acceleration under the Garn-St Germain Act of 1982.
- Unlike a living trust (another grantor style trust but set up for estate planning purposes), the land trust provides for the assignment of trust ownership.
- A land trust does not offer asset protection from real estate liabilities. Thus, the investor does not want to be a beneficiary for very long.
- Once the property is deed to the trust, the investor should assign his beneficial interest to his LLC for asset protection.
Keeps ownership of real estate private
- No one knows who owns the property because the trust is not recorded. The only public information is the name of the trustee and the trust, e.g., Clint Coons Trustee of the 732 Broadway Trust dated September 24, 2105.
- An investor who does not want tenants or snoops from knowing what he owns has the perfect vehicle in a land trust. The investor deeds his property into his trust where he is a beneficiary, and another person serves as his nominee trustee.
- After recording title in the nominee trustee’s name, the nominee trustee resigns and appoints the investor as the new trustee. This information is not recorded.
Ease of transferability of interests
- With a land trust, you can transfer your trust ownership to an entity or person with a quick signature, rather than recording a deed because a land trust converts your real property into personal property.
- Personal property is transferred via an unrecorded assignment of ownership.
- With a regular lease/option a tenant can obtain a vested right to the property.
- A lease option through a land trust can be structured to keep the option from vesting until the tenant has built up substantial equity.
- No Federal or State Tax Returns Required
- All income or loss is passed through to the beneficiary, and the trust is ignored for federal tax purposes.
Protection from Home or Condo Owner Associations
- Some HOA or COA will not permit entities to own property thus, the investor is left without protection.
- A grantor trust, i.e., land trust, is a permitted title holder.
- To obtain protection, an investor can transfer his property into a land trust then assign the beneficial interest to an LLC with the association discovering the transfer.
Personal Residence Privacy
- Just like with rentals, keeping the ownership of your personal residence off the public record is accomplished with the use of a land trust and a nominee trustee.
Prevents Personal Judgments from Attaching to Real Estate You Own
- Personal judgments will attach to any property owned in your name.
- Personal judgements are recorded in the county where you own property.
- A personal judgement prevents you from selling or refinancing property without paying off your creditor.
- Property held in a land trust with a nominee trustee will keep your property safe from judgement attachment.
Avoids transfer taxes
- Some counties tax real property transfers into entities.
- A land trust, with the exception of Pennsylvania and Maryland, is exempt from transfer tax.
- Using a land trust to hold title to your real estate allows you the flexibility to move real estate in and out of entities without incurring a transfer tax.
Keeps your LLCs ownership of real estate private
- If your LLC owns several properties, anyone with a computer can discover this information.
- The more your LLC owns, the greater a target it becomes.
- Using land trusts to hold LLC real estate gives the appearance your LLC has no assets.
Perfect solution for owning out of state property
- If you want to hold out of state property in a NV or WY LLC you can put it in a land trust, then assign the beneficial interest to your LLC.
- The out of state LLC will not have to register in the state where the property is located because it does not own the property.
Avoiding seasoning problems
- Some lenders won’t loan on a property if it has not been owned a certain length of time, such as six months or a year.
- When a property is in a land trust it can be sold several times but the ownership on the public records remains the same, building up seasoning.
- Bank owned properties, and short sales often cannot be resold for several months.
- Buying in a land trust allows you to sell the trust without violating the prohibition on deed transfers.
Buy Property Subject to an Existing Mortgage
- A land trust allows a rehab investor to take control of someone’s property subject to an existing mortgage.
- The transfer of a land trust from the homeowner to the rehab investor does not alert the homeowner’s lender to the transfer.
Why You Need Professional Assistance
- Deeding property into a land trust without the property deed or wording can void your title insurance
- Deeding property into a land trust without the proper county exemption could trigger a transfer tax or property reassessment
- Choosing the wrong trustee could invalidate the transfer under the Merger Doctrine or result in problems down the road if your trustee has any judgments entered against him
- You must include specific powers in your trust document to satisfy the “Statute of Uses” of your transfer will be invalidated, and you will lose your asset protection
- Improper assignments to an LLC will not be respected, and you may not have any asset protection
- Most attorneys and other professionals are not used to using these trusts, so you need to know how to speak their language to garner acceptance if you are ever questioned.
Land Trust Misconceptions
Not valid in all states
FALSE: All states recognize the land trust. 6 States recognize it by statute and the remainder by case law. We have case law for all 50 states
Provides asset protection
FALSE: A land trust is a grantor trust, and the beneficiary of the trust is liable for the debts of the trust.
Beneficial interest is protected
FALSE: If a beneficiary is sued the creditor can take his land trust beneficial interest because it is personal property.
Trustee can steal my property
FALSE: In a well put together trust the Trustee does not have the power of sale, encumbrance or transfer. A Trustee’s powers are restricted to renting and collecting rents. Also, you can fire the trustee at any time