What is a Land Trust and why should you use one if you are purchasing real estate?

 

A land trust is a contractual instrument for transferring the title of a property to a nominated trustee. The original property owner does not lose their claim of ownership on the property, but the trustee becomes the titleholder for legal purposes. There are many reasons why setting up a land trust can be beneficial, but here we will briefly go over just a few.

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1. Lessens Your Tax Burden

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While you cannot get out of paying taxes entirely using a land trust, holding title to investment property in a land trust is considered to be a pass-thru entity for IRS purposes. This means that your trustee and beneficiary do not file a separate tax return for the specific land trust. Only the beneficiary of the land trust reports the income and expenses from the property on their individual tax return. And the beneficiary could be a LLC, another trust, or some other entity. Seek counsel to determine whether your area has higher personal property tax or business income tax before deciding on how to choose a beneficiary type.

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  2.  Allows for personal privacy in ownership

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Probably one of the most appealing reasons a person would purchase property using a land trust is to maintain privacy of ownership. As soon as your real estate is placed into a land trust you have effectively turned your real property interest into a personal property interest. Because your trust now “owns” the real estate, your beneficiary interest is in the trust itself, which is a personal property interest. Only the Trustee name will show up on land records and your privacy will remain intact.

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  3.  Protects You from Liability

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Judgments against a beneficiary will not attach to the property because the Trust owns property and not the beneficiary. Additionally, a trustee is not personably liable for actions against the trust unless they have violated their duties as trustee, committed self-dealing, fraud or blatantly disregarded the law.

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  4.  Prevents the Due-on-Sale Clause

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The due-on-sale clause is often worrisome to purchasers/owners when deciding to transfer a mortgage. Most mortgages have a due-on-sale clause that states something like “transfer of the Property or a Beneficial Interest in Borrower. If all or any part of the Property or any interest in it is sold or transferred (or if a beneficial interest in Borrower is sold or transferred and Borrower is not a natural person) without Lender's prior written consent, Lender may, at its option, require immediate payment in full of all sums secured by this Security Instrument. However, this option shall not be exercised by Lender if exercise is prohibited by federal law as of the date of this Security Instrument.” The Garn St. Germain Depository Institutions Act of 1982, enacted by congress states that “a lender may not exercise its option pursuant to a due-on-sale clause upon . . . a transfer into an inter vivos (living) 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.” Using the land trust allows a property owner to deed the property to the trust, record the transaction with the county recorder and assign the beneficial interest back to the buyer/owner.

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  5.  Keeps the Sale Price a Secret

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When you sell your interest in a trust, the sale is not recorded anywhere because you are not selling the property itself. You are only selling your beneficial personal property interest. And because it is not recorded, only the parties involved are made aware of the transaction or sell. Hence, only the trustee, beneficiary, and the assignee (person receiving the interest) are made aware of the transaction. This is a great way to keep your personal financial portfolio out of the public eye and off record. Not only does this keep the sale price secret, but it also keeps those otherwise looking for an easy payday from knowing your financial information. This can also be a great way to negotiate other deals since your net worth can be a little more ambiguous.

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  6.  Prevents Property Liens and Judgments

Because the trustee, and not the beneficiary, owns the legal title to the property in a land trust, any judgment against a beneficiary will not attach to the property itself, but rather, to only the beneficiary.  Therefore, if several investors are partial owners of the land trust, each investor will have the same protections as the other. Judgments or liens against a beneficiary will not have any affect on the property because it will fail to attach to it. But the beneficiary may be liable in their individual capacity if it is a legitimate lien or judgment.

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  7.  Helps to avoid Probate

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Probate is a potentially costly endeavor for your heirs in court after your passing. A lot of the time, probate costs can be as much as ten percent of your gross estate. When your property is in a land trust it passes by way of contract to your intended beneficiary of your personal property trust interest. No attorneys or courts are involved in this process, which keeps creditors or disgruntled family members or other heirs from dragging their claims through the courts as well. Many people will tell you that a will is good enough, but you should consider a land trust for your real property holdings if you want to avoid these potential issues from arising. Having your property in a land trust will help you sleep well at night knowing that you and your intended beneficiary are protected.

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  8.  Makes It Easy to Transfer Property

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As soon as you transfer a deed into a land trust you have funded the land trust. Once this is done, beneficiaries can be assigned, and you can appoint a trustee or fire one that is not doing your (the beneficiary) bidding as it relates to managing the trust. This process does not take anything other than a little time and signing of documents to make these changes or transfer the property. It is all done privately, and the changes made are only recorded at your own office or personal files. No subsequent transfers need be recorded anywhere other than in your private files. Doing this also helps to avoid paying transfer taxes that are typically associated with property transfers. 

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  9.  Easier to manage with more than one owner

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Every land trust is managed by the terms of its trust agreement. This agreement can be drafted in such a way that a property manager is responsible for managing the property. Not every beneficiary has to have a decision in the management if that would make more sense in your situation. Also, the property manager does not need to be one of the beneficiaries of the land trust. 

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