Land trusts…still a good idea?
A question that I get frequently is “should I use a land trust? Are they still useful in today’s market?” My answer is always an unequivocal YES!! The land trust is a very powerful tool for the savvy real estate investor.
Let me explain.
A land trust is simply a revocable contract between two or more parties. It’s been in use for centuries.
The first party is the owner of the property; the grantor, in trust speak. He grants, or transfers title to the property to the trustee using a document called a Deed in Trust, or simply a Trust Deed. He then becomes the beneficiary, along with any co-owners.
The trust agreement designates the arrangement between the trustee, the grantor, and the beneficiary. As with any trust, the trustee holds legal title to all trust property. However, in a land trust, the named beneficiaries retain use of the property and any income it generates. In addition, the trustee can act only when it receives written instructions from the beneficiaries, who maintain complete control at all times. You can convey property you own in your name into the trust, but it is better to have the seller convey it directly to the trustee. This avoids having real estate records ever showing that you owned the property.
So, let’s look at the benefits of having the land trust as one of our investing strategies…
Preserves Privacy. Land trusts preserve the anonymity of the real property owner because the owners name never appears on the public records of the property. Only the trustee’s name will appear. The trustee cannot disclose the name of the beneficiary without a court order.
Makes contracts assignable. The ownership of a land trust (called the “beneficial interest”) is assignable, similar to the way stock in a corporation is assignable. Once property is title in trust, the beneficiary of the trust can be changed without changing title to the property. This can be very advantageous in the case of a real estate contract that is non-assignable, such as in the case of a bank-owned or HUD property. Instead of making your offer in your own name, make the offer in the name of a land trust, then assign your interest in the land trust to a third party.
Avoids the due-on-sale clause of a mortgage. Land trusts are not subject to the due-on-sale clause in mortgage contracts. Property transferred into a land trust is not considered to be “sold, transferred, traded, gifted or otherwise disposed of” under most state laws. Thus, the transfer of the property into a land trust will not trigger the due-on-sale clause.
Discourages Litigation. Let’s face it, people tend to only sue others who appear to have money. Attorneys who work on contingency are only likely to take cases which they can not only win, but collect, since their fee is based on collection. If your properties are hard to find, you will appear “broke” and less worth suing. Even if a potential plaintiff thinks you have assets, the difficult prospect of finding and attaching these assets will discourage litigation against you.
Protects from HOA Claims. When you take title to a property in a homeowner’s association (HOA), you become personally liable for all dues and assessments. This means if you buy a condo in your own name and the association assesses an amount due, they can place a lien on the property and/or sue you PERSONALLY for the obligation! Don’t take title in your name in an HOA, but instead take title in a land trust so that the trust itself (and thus the property) will be the sole recourse for the homeowner’s association’s debts.
Carries no tax implications. The land trust is a “disregarded” entity for tax purposes, which means that it is not recognized by the IRS as being separate from its owner for tax purposes. Therefore, no separate tax return needs to be completed for land trust. All transactions will flow through to the personal tax return of the grantor.
Are land trusts suitable or appropriate for every real estate transaction? Absolutely not.
But, as you can see, there are many creative and effective uses for the land trust, limited only by your imagination!
How have you used land trusts in your real estate investing strategies? I’d love to hear your experiences…
Be sure to leave your questions and comments below.
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