Some time ago, I received a rash of calls from real estate investors, wanting to set up land trusts to protect their investments. Now, it’s not uncommon for me to get a FEW calls here and there on this topic…but eleven, within three days? That got my attention, to the point where I checked more than a few sources to see if the topic had suddenly started to “trend” somewhere!
It wasn’t, but that was small comfort considering the nature of the calls. As it turns out, my callers were confused about the proper use of land trusts in investing. This is because they’d bought two of the most popular land-trust myths:
- Land trusts offer asset protection.
- Land trusts hide your ownership of real estate.
Neither is true, and acting on them as if they are can be an expensive mistake. Let’s clarify.
1. A land trust is not the type of trust that offers asset protection.
In order for asset protection to be part of a trust, it must be irrevocable. In other words, once the trust is created, you can’t alter or change it. In addition, your asset interaction is severely limited — and you can’t be a beneficiary of said trust.
Land trusts DO NOT MEET these criteria (except in Florida).
Now, it seems like this would be common sense; it’s been foundational in terms of both English and U.S. law, for hundreds of years, that you can’t protect your assets from creditors by putting property into a trust that YOU control. That doesn’t stop misconceptions from slipping in, obviously.
To make matters worse, if a problem occurs with the trust itself, the owner is responsible. (That means you.) In other words, if the trust has creditors and something “goes south,” you’re not only not protected; you’re liable, except in the case of Florida. In Florida, the beneficiary of a land trust is protected from the trust’s creditors. This is great for Florida residents but keep in mind, your trust is not protected from your personal creditors. An interest in a land trust is personal property thus, if you are sued individually, your personal creditor could take your land trust interest from you in satisfaciton of a claim.
So in terms of protecting any of your assets…land trusts are not the ticket without something more.
2. A land trust also will not “hide” property ownership.
That’s not to say that there are no ways to keep property ownership private. You CAN do so if you fulfill BOTH of two conditions:
- You take title to the property in the name of the trust, using a nominee trustee.
- You purchase the property for cash.
What does this look like?
In these cases, the title to the assets is 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. It should also be fairly obvious that if I’m trying to mask my property ownership, I can’t also serve as the trustee of my own trust! That’s why a savvy investor uses a trusted friend or an attorney as an initial trustee.
I say “initial” because, when title is recorded, you are actually free to have your trustee resign, allowing you to assume the position. Yes, it’s one of those “paper loopholes.” The change in trusteeship does not get recorded, so anyone looking at your trust assumes the initial trustee is still serving.
But anonymity is a two-pronged animal, so using an initial nominee trustee covers only one of those “prongs.” The other, which also must be satisfied, is buying for cash.
And there’s the rub.
If you’re wealthy enough to purchase all your investments on a cash basis, then you certainly CAN achieve anonymity with a land trust. However, most of us will require financing for at least some of these purchases. At that point, the lender will seek a deed of trust or mortgage to be filed against the property. Either of these makes it clear to the world that you, as the purchaser, are liable on this note to the lender…and being “invisible” is out the window. You may not show up on the title search, but you’ll be right there in black and white on the financing documents; a competent attorney will know immediately that you have an interest in said property.
One last mistake made by uninformed investors is sending the tax statements to their home address. If you go through all of the steps to create an anonymity shield, you can easily blow it by using your personal address for the property’s tax statements. Best practice dictates having tax statements sent to a PO Box or suite mailbox.
So much for “hiding” anything via a land trust!
Don’t be fooled: despite what your real estate “guru” may try to tell you, a land trust doesn’t provide you with either of the supposed benefits listed above. However, this doesn’t mean that land trusts can’t be a key element in your investing “arsenal” — and in today’s economy, they may be even more important than you’ve come to believe. Next time, we’ll talk about why a land trust still BELONGS in your real estate investment plans. Stay tuned!