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, 2000.? 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, which was covered in Module 2 of this course.

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
We spoke in Module 2 about “seasoning of title?issues, where banks like to see that an owner of a property has owned that property for awhile before selling or trying to get a loan.

You can get around this quite often 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 think they are one and the same. We’re 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 we 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.

Avoid Litigation
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. A beneficiary’s agreement is included in this module as Exhibit 3.61 and it spells out what steps should be taken in the event of a problem.

Avoid Probate And Estate Taxes
And, as we 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 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
• Trust Agreement
• Beneficiaries Agreement
• Assignment of Beneficial Interest
• Letter Of Direction To Trustee
• Resignation Of Trustee
• Notice Of Termination Of Trustee
• Affidavit Of Resignation & Appointment Of Successor Trustee
• Trustee’s Affidavit

This how to article is an excerpt from the Real Estate Investing Quadrant Success System course.

 

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