LAND TRUST
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The History of a Land Trusts: The Land Trust is not a new or novel idea. The history of Land Trusts can be traced back four hundred years to the times of Feudal England.
WHAT IS A Land Trust:: Essentially, is a revocable, intervivos trust similar to a “living trust”). A Land Trust is a simple, inexpensive method for handling the ownership of real estate. It is an arrangement by which a trustee holds the recorded title to the real estate, but all the rights and conveniences of ownership are exercised by the beneficial owner (beneficiary) whose interest is not disclosed and where the beneficiaries of the trust retain management, control and the right to receive profits from the property. This method of owning real estate eliminates many of the difficulties that otherwise may be encountered in acquiring, owning, or selling real estate.
The beneficiary of a Land Trust changes his or her interest in the property from real estate (title to the property) to personal property (ownership of the beneficial interest). Even though the beneficiary retains complete management and control over the property itself, he or she is not burdened with the legal characteristics of real estate when he or she deals with the property.
Since the beneficial interest is considered to be personal property, it is treated in much the same manner as a car, a savings account, or other tangible property. Consequently, the beneficial interest can be sold, pledged, or assigned in a simpler fashion than a conveyance of realty.
How Does a LAND TRUST Operate? A Land Trust may be created by anyone capable of entering into a contract--an individual; a group of persons, a partnership, corporation, family limited partnership, living trust, limited liability company (LLC) or any other group who desires to purchase and own real estate as a joint venture.
Under a Land Trust agreement, the beneficiary retains complete control of the real estate in the same manner as if the recorded title were in his or her name. He or she may terminate the trust whenever desired and may add additional property to the trust at any time. At all times the beneficiary deals with the property as though he or she were the owner, for, as a matter of fact, the beneficiaries are the owners. The trustee executes deeds and mortgages and deals with the property only if directed in writing by the beneficiary.
When title to real estate is held in Land trust, the interest of the beneficiary, under terms of the trust agreement, is personal property. Since the beneficiary's interest is personal property, he or she may transfer it by assigning that interest without the formality of executing and acknowledging a deed, going through an escrow or even notifying the lender.
What Are The Benefits of a Land Trust? There are many benefits derived from the use of a Land Trust.
1. Privacy of Ownership. Under a Land Trust, the identity of the real owner is never disclosed to the public. This feature can be important for many reasons. Whatever the reason may be for not disclosing the identity of the real owner, a Land Trust provides the answer.
Another purpose for keeping ownership private is preventing lawsuits. You wouldn’t walk around with your financial statement taped to your forehead, would you? Then why would you want the details of your most valuable assets open to public scrutiny? Owning real estate in your own name is like walking around with a giant “kick me” sign taped to your back. In every county in the United States, copies of all deeds to real estate are recorded in the public records.
Anyone can go down to the recorder of deeds’ office and look up the owner of any property in that county. In addition, the mortgages you have on your property are recorded in the public records as well.
2. Protection for the Owner. A Land Trust offers particular benefits in those cases where two or more persons hold the real estate. If two or more persons own the property, the title to the property might become faulty and un-merchantable because of death, legal disability, divorce, judgments, and many other types of litigation affecting one of the co-owners. When the property is held in a Land Trust, a judgment against one of the beneficiaries does not constitute a lien upon the real estate held in trust; neither do the ordinary legal proceedings against any of the beneficiaries muddle the title.
3. Succession and Ownership. It has been a common practice to create joint tenancy in real estate holdings solely for the purpose of providing a succession of ownership upon death without the expense and delay of probate proceedings. Under joint ownership, however, either of the joint tenants is given an immediate interest in the ownership and management of that property, and in many cases, it handicaps the real owner as he or she cannot deal with the property without the written consent of the joint owner and the other spouse. Under a Land Trust agreement, the party creating the trust can retain sole control over the property during his or her lifetime, with the desired succession in ownership becoming effective upon death without, the expense of going through probate. This can be especially helpful to those who live in a state other than the state in which the real estate is situated. They will not need to institute separate probate proceedings and can have the Land Trust property administered from their home states.
4. Ease of Conveyance. Since the beneficial interest is considered to have the legal characteristics of personal property, it can be pledged for a loan according to the same standards as stocks, bonds, automobiles, or other personal property without the restrictions and formalities of mortgages and title reports etc.
5. Disposing of Part Interest. ALand Trust simplifies the practical problem of disposing of a part interest in a property since the beneficial interest under a Land Trust can be transferred by assignment; (no deed is needed). This avoids a deed's formal requirements concerning acknowledgment and recording.
6. Avoidance of Probate: Probate is the process by which a will is officially proved and recognized by a court. This process is time consuming and costly.
Remember that a Land Trust is one form of a “living trust.” Thus, the Land Trust, if properly used with an estate plan, will be an effective tool for the orderly transfer of real estate upon the death of the beneficiary. A Land Trust agreement can specify that upon the death of a beneficiary, his interest will automatically be transferred to another individual. This transfer is still subject to normal estate taxes (if any), but it bypasses the probate process.
Finally, the Land Trust helps avoid what is known as “ancillary probate.” Ancillary probate is required if the decedent owns property in another state. Partial administration of the estate is granted in the foreign state to collect the assets and settle all debts in the foreign state. The balance is then brought into the state in which the decedent’s estate is being administered. Since a beneficial interest in a Land Trust is considered “personality”, the “personalty” goes where the decedent goes. Thus, his/her interest would remain in the state in which he/she dies, not the state in which the real estate lies.
7. Asset Protection: The Land Trust, if utilized as part of a carefully planned asset protection strategy, can be very effective. If you own real estate in your own name and a judgment is obtained against you and filed in the county in which you own real estate, all real estate in that county will have a lien attached to it. You cannot sell or refinance any property in your name in that county, since no title insurance company will guarantee clean title. Without title insurance, no bank will approve a loan. No bank, no buyer. You’re stuck until you pay off the lien.
Will using a Land Trust create liability from the property or bind the beneficiaries and/or the trustee:
Generally, the trustee is not liable to third parties for any acts he commits at the direction of the beneficiaries. There is one caveat: the trustee must make it abundantly clear to all third parties that he is acting as trustee for the trust and not as the individual owner of the property. If a trustee signs checks, notes, contracts, etc in his/her individual name without revealing his/her representative capacity, he/she may be held personally liable.
The Land Trust will make your real estate ownership your private business. The Land Trust agreement is not recorded. Only the deed is recorded. Since the property is not titled in your name, only you and the trustee know that you own it. The trust contains a provision explicitly preventing the trustee from disclosing your ownership.
Why is privacy important?
The answer is based on this logic: if a person who wants to sue you cannot find any assets, he probably isn't going to sue. His attorney will not take a contingency case unless the attorney is going to get paid. The attorney doesn't get paid if he wins. The attorney only gets paid if he collects money from you. Attorneys don't line up to sue poor people. They fight for the right to sue people with assets, especially easily accessible assets like real estate. If you own real estate in your own name, you are almost begging to be sued.
Taxability
The Land Trust does not require a separate tax return or a separate tax identification number. The trust is "transparent" to the taxing authorities. The beneficiary of the Land Trust reports the income and expenses on his tax return just as if the trust did not exist. If a corporation or LLC were the beneficiary of the Land Trust, the corporation or LLC would report the property's income and expenses on its tax return. If you transfer your currently owned property to a Land Trust, no tax event occurs. Your basis and tax reporting remain the same. Your ownership of real estate in a Land Trust does not affect your ability to accomplish tax deferred exchanges or, in most states, to get your homestead exemption.
You can transfer your currently owned real estate into Land Trusts and immediately gain protection and privacy. In most states, no transfer taxes are due on the transfer of a property from you into a trust owned by you. As soon as you record the deed, the property is owned by the trust. Your protection begins immediately. Any judgment entered after the recording date can't become a lien unless it is against the trust, which owns the property.
"beat" the due-on-sale clause:
Since a person has the right under federal law to transfer his real estate into a Land Trust without violating the due on sale clause and he can transfer his beneficial interest to a purchaser without recording anything, that person can sell his property subject to the mortgage without the bank finding out about the sale.
This transfer does violate the due-on-sale clause, but the bank rarely discovers the sale because the bank isn't diligently checking to see if the property was sold. The bank simply keeps track of the mortgage payments coming in. The seller is still personally liable for the mortgage. In the event any payments are missed, the seller's credit will suffer. If the bank foreclosed on the property, the buyer wouldn’t be named in the lawsuit and wouldn’t be personally liable for the loan.
The lender’s power to call the loan due upon transfer is not absolute. A federal law called the Garn-St. Germain Depositary Institutions Act of 1982 governs the due-on-sale clause and provides for several exceptions where a lender may not call a loan due. These exceptions can be found in 12 U.S.C. Sec. 1701(d) (I will paraphrase the most noteworthy exception (Exception #8) for simplification:
Exception (8): A transfer into an intervivos trust in which the borrower is, and remains a beneficiary and which does not relate to a transfer of occupancy rights in the property. Exception “8” gives the borrower the right to transfer title into a Land Trust without triggering the due-on-sale clause. So long as you are and remain a beneficiary of the Land Trust, the lender does not have the authority to call the loan due. Keep in mind, however that the Garn-St. Germain Act does not apply to all loans just one to four family residential properties.
Lastly, remember that Land Trust transfers are done by assignment not through an escrow and the Land Trust itself does not require annual renewal fees to any state or even to the company/person that created the trust for you, saving you hundreds of dollars annually.
