First, what is a land trust? Under a land trust agreement, a Trustee holds title to a property for the benefit of the beneficiary. The beneficiary has the power to direct the Trustee under the terms of the trust. Therefore, the Trustee manages and deals with the property directly under the direction of the beneficiaries.
A land trust is commonly referred to as an Illinois land trust because Illinois was the first state to legally acknowledge land trusts; although, land trusts are legal in all fifty states.
Land Trusts Vs Living Trusts
Most people are familiar with or have heard of a living trust. It is an inter vivos trust which means it is created while you are alive and it is used for the purpose of handling personal or real property.
When you create a living trust, you usually transfer all of the property that you own to yourself “as Trustee” of your living trust. The name of a living trust usually sounds something like… “John Smith, as Trustee of the John Smith Revocable Living Trust Dated January 1st, 2017.” You are Trustee of your property for yourself while you are alive and you appoint a Trustee to take over the trust when you die. The main purpose of this is to avoid estate transfer taxes. It works because you don’t own any property when you die, your trust owns the property and the trust automatically transfers to another party upon your death. This new Trustee is usually one of your heirs.
Now, that is just a basic overview of what a Living Trust is and what we will be covering is a Land Trust.
A land trust is also an inter vivos trust because it is created while you are alive and it is a revocable trust because you can cancel it at any time you wish; however it is not the same as a living trust because a land trust is designed specifically for real estate and not for your personal property. Another difference is that land trusts are mainly used as an asset protection tool where as living trusts are mainly used as an estate planning tool to avoid estate taxes; although, both types of trusts do offer estate planning and asset protection benefits.
Furthermore, instead of being your own Trustee (as with a living trust), you usually appoint someone else to be the Trustee of your property so that your name does not show on public record as being associated with the property that is in the trust. This is one of the main benefits of using land trusts.
Purpose Of Using Land Trusts
The overall purpose of a land trust is so that one person can hold the title to a property for the benefit of another.
Land trusts have several different uses and numerous benefits. As we said, the primary use is for asset protection. When a property is in a land trust it is shielded from judgments and liens that are against the beneficiaries or may come against the beneficiaries.
Many investors use land trusts for the ease of transferring the property, because the beneficial interest in a trust can easily be transferred with only a signature and the assignment does not even have to be notarized to be legal.
Benefits Of Using Land Trusts
There are a lot of other benefits to using land trusts beyond just asset protection, ease of transfer and saving a few bucks on insurance premiums.
Circumvent Due-On-Sale Clauses Many investors also use land trusts to hide a due-on-sale clause violation. This is one of the biggest reasons why land trusts are so popular among real estate investors today.
A property owner can transfer their property into a trust without triggering the due-on-sale clause. This is done under the federal law called the Garn-St. Germain Act.
It states that a lender cannot call a loan due when it is a transfer into an inter-vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property.
Many investors use this act to avoid the due-on-sale clause when taking over someone’s property “Subject To”. The basic idea is that a seller of a property would put their property in a land trust with them remaining as the beneficiary. Under the Garn-St. Germain act this is a legal transfer and the lender cannot call the loan due because the transfer is into an inter-vivos trust in which the borrower is and remains a beneficiary. The transfer itself does not relate to any rights of occupancy in the property either.
Once the property is in the trust, the seller of the property then transfers their beneficial interest to the investor. This transfer in beneficial interest does trigger the due-on-sale clause and is not covered under the Garn-St. Germain act. However, such a transfer is only known between the Trustee and the beneficiaries, and is not recorded of record. This means it can be easily hidden from a bank or lending institution.
Many investors use land trusts for this reason which is to conceal from the lender the fact that the property has transferred. The investors know (and so should you) that banks are not in the business of taking back properties in which the loan is being paid on time; and no, there are not any “Due-On-Sale Clause Police” out looking for people who transfer a property without properly assuming the loan. Simply put, the banks make money by making loans & collecting payments, not by taking properties back.
Helps Avoid Chain Of Title And Seasoning Issues In Some Cases
“Seasoning of title” is the time length someone has held title. Only owning a property for a short period can cause issues when selling because many lenders require an owner to have held title for a certain minimum period before they will give a loan to the new buyer who is buying from that owner.
You can sometimes get around the issue of looking like you only owned a property for a short period by simply naming your trust after the original seller. For example; “Joe Investor as Trustee of the Sam Seller Land Trust”. The bank sees the trust name and sees the original owner you bought from and will many times think they are one and the same. I am not saying that you should lie to the bank, but there is nothing wrong with letting the bank draw their own conclusion if that is what they want to do.
Keep A Low Profile On Public Records
Land trusts hide who the true owners of a property are. This is great for maintaining a low profile on public records.
Some types of trusts are recorded; however, a land trust is a private agreement, so it does not need to be recorded on public record and almost always isn’t. Only the trust name appears on the deed in public record, which allows for privacy for the beneficiaries.
To help hide yourself further, you will want to use a Trustee other than yourself and who has a different last name. (In other words, a Trustee that is not a relative with the same last name.) This is because the Trustee’s name does appear on the deed as the Trustee for the trust itself.
The Trustee cannot disclose the names or identities of the beneficiaries under the terms of the trust agreement unless the Trustee is served with a court order.
No Tax Consequences
There are no tax consequences to using a land trust because the IRS considers a land trust as a “disregarded entity”. There aren’t any tax consequences for transferring your property into a land trust either.
For the purposes of investing in real estate as discussed in this course, your land trust will not be required to file a tax return. On your tax return you simply report the property as if you still own it in your own name personally.
Easily Transfer Beneficial Interests
Earlier I spoke about it being easy to transfer the interest in a trust and it is important to understand exactly why the interest is so easily transferable.
While the Trustee takes title to the property in the name of the trust, you receive what is called a beneficial interest in the trust, which is considered to be personal property and not real property.
Because the beneficial interests in a land trust are considered to be personal property and can be transferred with only a signature, the transfer does not need to be witnessed or notarized, nor does the assignment get recorded. Therefore, your beneficial interest can be easily transferred to another party similar to transferring any other valuable piece of personal property.
Keep Sales Price Secret
Another side benefit to the assignment of beneficial interest not getting recorded is that you can keep your sales price a secret.
Recorded deeds have a documentary stamp tax on the sale and this is recorded in public record; however, with the sale of the beneficial interest in a land trust, there is no public record of the documentary stamp tax paid.
Save Title Insurance Premiums
Land trusts can even help save on title insurance premiums. When a property is bought by a trust, the title insurance will ensure the title going into the trust. Later, if the beneficiaries sell their interest, the title insurance will still remain in effect as long as the trust is in effect. This is because the actual title to the property does not transfer, only the beneficial interests in the trust transfers.
One of the asset protection aspects of a land trust is that it can help you avoid litigation all together if someone is thinking of suing you.
If you were to cause a car accident, or in any way cause harm to another person and that person wanted to sue you, the first thing their attorney is going to do is look for your assets. The more assets you have that can be sued for, the more likely you are to be the target of a large lawsuit.
On the other hand, if it looks like you have no assets, it may be difficult for the suing party to find a lawyer to even take the case on a contingency fee basis because the attorney must see a way to get paid. As the old saying goes… “You can’t get blood out of a turnip”. Furthermore, most attorneys are not going to spend a lot of time doing extensive research about what properties you own, just so they can decide whether or not to take a case against you.
Avoid Liens And Judgments Against The Property
If you own a property and you have (or get) a lien or judgment against you, that lien will attach to your property. In the situation with a land trust, if a beneficiary gets a judgment or lien against them it will not attach to the property held in the land trust. Even if a beneficiary has numerous certified judgments against them filed on public records, they can still sell their interest in the trust without interference. Normally if you bought a property, the judgment would immediately attach to the property.
If you are buying a property under a Lease Option or Agreement For Deed, this is how you can protect the property from liens and judgments against the seller until the title to the property is transferred to you.
Limits Liability For Debts
There are situations where a land trust can protect you from the liability of the debt against the trust property as well.
For instance, an individual becomes personally liable for a deficiency judgment (due to foreclosure) when they have signed on a note or have formally assumed an existing mortgage.
To avoid personal liability on a note, a property can be purchased by a trust and the transaction structured so that the Trustee executes the mortgage documents. A mortgage signed by a Trustee limits the lenders security to being only against the property and the trust. Therefore, unless the beneficiary has personally guaranteed the note, no deficiency judgment can be issued against the beneficiary personally.
Helps Property Management
If you plan to own rental properties, using land trusts can have extra benefits.
When one of your properties is in a land trust, all agreements related to the property must be signed in the name of the Trustee for the trust. This includes leases, which means that even though you are the true owner, your name does not show on the lease and you can act like you are only the property manager.
If a tenant cannot pay their rent due to personal problems, you can sympathize with the tenant to an extent and let them know that it is out of your control as the property manager and that an eviction will be filed by the Trustee. This helps to eliminate a personal confrontation between you and the tenant.
This strategy can even come in handy when there are rent increases. For example, you can tell the tenant that the Trustee will be raising rents $50 a month and that you as the property manager thought the tenant would raise a fuss. Then ask the tenant, if you got a $20 increase approved instead, would they be happier. A couple of days later, you can call the tenant back to congratulate them on their $20 rent increase. Rather than being the greedy landlord who raised rents, you are now their hero for saving them $30 a month!
Avoiding Problems Between Multiple Owners/Beneficiaries
Land trusts have many benefits when there will be multiple owners. The death, financial problems, or divorce of a partner in real estate can be devastating to an investment.
However, when property is owned in a land trust, these problems would have no effect. The problem would only have an effect on that particular beneficiary’s interest.
To further eliminate any problems, a beneficiary’s agreement should always be filled out.
Avoid Probate And Estate Taxes
And, as I said earlier, not only can land trusts avoid probate on your real estate but it can help you avoid estate taxes, if set up properly.
Disadvantages Of Using Land Trusts
There are basically no disadvantages to using land trusts that I know of other than you might run into a title company here or there who isn’t well enough versed on what they are.
Land trusts can also become a small stumbling block when refinancing the property that is in the trust. Many banks don’t like to do loans where the borrower is not directly named as the personal owner on the title. This is easily solved though by taking the property into your own name at the closing when you refinance. Then, simply transfer the property back into the trust after closing. Because you can do this under the Garn St Germain act for estate planning purposes, you don’t need the permission of the lender.
The Documents Involved
The following is a list of the trust documents include in this course. As we cover the topic of land trusts we will try to touch base on each of them.
Warrantee Deed To Trustee
Assignment of Beneficial Interest
Letter Of Direction To Trustee
Resignation Of Trustee
Notice Of Termination Of Trustee
Affidavit Of Resignation & Appointment Of Successor Trustee
There are no laws requiring that a trust agreement be notarized or witnessed; however, you should always get your land trust fully notarized and witnessed just in case you need to prove in the future that the trust is a valid land trust.
Naming The Trust
A trust can be given any name or number; however, most investors find it easiest to name the trust after the street number of the property. That way when you look at the trust number, you know exactly what property is in the trust.
When taking a property “subject to” an existing loan, you should put the seller’s last name within the name of the trust. This does not in any way diminish your ownership of the property. Remember, it’s only the name of the trust. By having the seller’s name on the trust, most banks would automatically assume that the seller is still a beneficiary of that trust. This acts like a cloaking devise, hiding the fact that the seller no longer owns the property.
You can even add the street number of the property in front of the seller’s name. This will help you associate which trust goes to which property and from whom you acquired the property.
For example, the name of the trust would read something like this…
Joe Investor, as Trustee of the 2345 Smith Family Trust, Dated 1-1-17
One Property Per Trust
It is important to never put more than one of your properties into any particular land trust. As the saying goes… “Don’t put all your eggs in one basket”.
If you had several properties in one trust and there were to be a Judgment against the trust, the lien would go against all the properties it owns. In addition, having several properties in one trust would make it difficult to transfer the beneficial interest if you wanted to transfer just one property that was in the trust. Note that the same Trustee can be used for each of the trusts you set up, as long as each trust has a different trust name.
Preparing The Deed
What is important about this deed is that it contains special wording stating that the property is being put into a trust. It further notes that the Trustee is not taking title personally and lists the powers the Trustee has been given under the trust agreement.
It is important to note that you should avoid putting a property into a trust using a general warrantee deed. If the title company you are using wants to use a regular deed, at least have them amend that deed to include the special language contained within the deed in this course.
About The Trustee
One important issue when setting up a land trust, is the person who will be the Trustee of the trust.
Who Can Be Trustee?
Any person or corporation can be your Trustee and you can use the same Trustee for all your land trusts. However, your Trustee should always be someone you can “Trust”.
Being Your Own Trustee
Some people do act as their own Trustee of their land trust. However, this can cause several problems.
First, your name is recorded on record as the Trustee. Therefore, anyone who wants to sue you can pull up your name at the courthouse. This draws attention to each property you own as a potential asset to go after in a lawsuit.
Also, if you are the Trustee and the sole beneficiary, you have created what is called a “merger of interests”. Because you are the Trustee and the only beneficiary, the beneficiary and the Trustee are one and the same. You have not entrusted your property to anyone else, which is an important component required in a land trust to make it valid.
If you were to be your own Trustee, not only could the attorney of someone suing you find the property on public records, but they could easily have the trust set aside by a judge as if it was never created.
The Trustee of a trust has very limited liability if any and this should be expressed every time the Trustee signs something. For instance, the deeds, mortgages and notes should all state that the Trustee has no personal liability.
If for some reason there is a lawsuit, the Trustee will be named in the lawsuit as Trustee for the trust involved, and not personally.
There are some circumstances when a Trustee does become personally liable. These include when he or she contracts for attorney services, the Trustee fails to disclose his or her position as Trustee and identify the trust, or the Trustee signs documents providing for personal liability.
About Being A Beneficiary
There are important aspects about being a beneficiary of a trust that you must clearly understand.
First, you do not even have an interest in the property. Your interest is limited to being an interest in the trust. The trust is the entity that owns the property and you have a personal property interest as the beneficiary, not a real property interest.
Powers Of The Beneficiaries
The beneficiaries of the trust have a power of direction, where they direct the Trustee on how to deal with the property. This includes directing the Trustee to sign leases, mortgages, or even to deed the property out of the trust to a buyer. Because title to the property is in the name of the Trustee, the beneficiaries do not have the legal right to sign such documents.
The Beneficiaries Agreement
If there will be multiple beneficiaries, you should always set up a Beneficiaries Agreement. This will help to eliminate any possible conflicts and can be drawn up as a partnership agreement or a joint venture agreement.
The Beneficiaries Agreement should outline the duties of each beneficiary, what should happen in the event of a death, distribution of capital, and outline each beneficiary’s responsibilities along with any other terms regarding their relationship. It should also provide for the right of first refusal to buy each other’s beneficial interest. What this means is that, in the event that one beneficiary should die or withdraw from the trust, the other beneficiaries would have the right to buy their beneficial interest.
The main difference is that the Beneficiaries Agreement version has an extra paragraph inserted as paragraph 10 which specifically addresses the interests of each beneficiary.
As a side note regarding estate planning; the trust agreement can name contingent beneficiaries that become the owners of the trust upon the initial beneficiary’s death, without any court proceedings being required.
Operating A Land Trust
Once you’ve set your land trust up, you must then operate that land trust properly.
Operating A Trust As A Business
One thing you should never do is operate a land trust as if it were a business. Otherwise, the IRS could tax it as a corporation. This means that you if you plan to operate a business, then set up a corporation and have the corporation be the beneficiary under the trust if needed.
The trust should be used to deal solely with the trust property and the trust property only. It shouldn’t be renting office space for you to work in, buying office supplies, and so on.
As long as you operate the trust appropriately, the trust will not have to file a tax return and the IRS will not try to tax the trust as if it were a corporation. As for filing statements regarding the trust property, you can simply file them as part of your personal tax return as a beneficiary.
If there are multiple beneficiaries, you can divide up the profits (or losses) and file them on each of your tax returns, and profits (or losses) should not be filed on the Trustee’s personal tax return as they do not have a personal interest in the property.
Have Your Trustee Sign All Documents
When signing agreements, always have your Trustee sign all the documents. As we said a minute ago, if the property is in a land trust, the property is owned by the trust and the person who should legally be signing for the leases or sales agreement would be the Trustee for that trust. Furthermore, the Trustee must put the words “as Trustee” after their name identifying that they are not signing personally.
Instructing Your Trustee
As a beneficiary, any time you want the Trustee to do something in connection to the trust or trust property, you can send them the Letter Of Direction in Exhibit 3.63 telling them what you need them to do.
Insuring The Trust Property When buying hazard insurance on the trust property, your insurance should be in the name of the Trustee of the trust. The beneficiaries under the trust can be added as additionally insured, but it is not necessary or recommended.
Land Trusts & IRAs
It is important to know that an IRA account can buy real estate and put it into a land trust.
You do not lose any control over your deals in the process either. You own and control your IRA, your IRA owns the beneficial interest in the trust and the trust owns the property. In the end, you control everything including the property.
While you should never be your own Trustee, you especially shouldn’t be your own Trustee when your IRA is the beneficiary. This is considered “self dealing” and the tax consequences can be harsh.
A revocable trust can be changed, altered or otherwise amended. A land trust is a revocable trust because you can cancel it at any time, usually when you sell the trust property.
There are any number of reasons why you might want to make changes to the trust agreement after it has already been created. Many times, when the beneficial interest is assigned to a new beneficiary, the new beneficiary may want to make changes to the trust agreement.
To amend a trust agreement, simply draft an amendment to the trust, have it signed by all the beneficiaries and have it lodged with the Trustee. No witnesses or notary are required, but they are recommended.
At some point, the Trustee may want to resign or you may want to change who the Trustee is.
If the Trustee wishes to resign, they can send notice to the beneficiaries using a Resignation Of Trustee letter. At that point, the beneficiaries have 30 days to assign a new Trustee.
If the beneficiaries want to fire the current Trustee or otherwise change Trustees, they can send a Trustee the Notification Of Termination Of Trustee form.
In either case, to change Trustees on public record, you have the resigning Trustee and the successor Trustee execute an Affidavit Of Resignation & Appointment Of Successor Trustee.
Selling The Trust Property
When selling a property that is in a land trust it can be done one of two ways. Either by assigning the beneficial interest in the trust or by deeding the property out of the trust.
Assigning Beneficial Interest
Selling a property by assigning the beneficial interest in a land trust is done by many real estate investors for several reasons.
First, the assignment of beneficial interest is not recorded of record and does not require paying deed stamps since there is only a transfer in beneficial interest and not actual title to the property.
In addition, because the title is in the land trust, the title insurance remains effective saving the investor costly title insurance premiums and a transfer in beneficial interests does not require a formal closing and does not require witnesses or a notary; however, they are highly recommended.
A copy of the Assignment of Beneficial Interest should be signed by the assignor and assignee, then lodged with the Trustee so the Trustee knows from whom to take directions. At that point, the Trustee should sign their acknowledgement that they received a copy of the assignment.
Deeding The Property Out Of The Trust
If you plan to deed the property out of the trust as a normal sale, the sales agreement for the property should be signed by the Trustee. The Trustee will also be the one who signs the closing statements and who executes the deed. The funds coming from the closing will be given to the Trustee, who will disburse the monies according to the trust agreement or by a letter of direction that is signed by all the beneficiaries.
Sometimes, the closing agent will want to see the trust so they can verify its validity. Technically, the Trustee is not obligated under any circumstance to disclose the terms of the trust, except when served with a court order.
Whether the Trustee hands over a copy of the trust to the closing agent or not, the Trustee will most likely be asked to sign a Trustee’s Affidavit. It basically states that the trust is still in “full force and effect” and that the Trustee has the powers under the trust to sign the necessary documents.