Expert Insights Land Trusts: The Smart Investor’s Secret Weapon by Scott Royal Smith April 11, 2021November 24, 2021 by Scott Royal Smith April 11, 2021November 24, 2021 Lawsuits put a huge target on a real estate investor’s back. What’s the best way to remove that target? The Land Trust. Land Trusts can be the rock stars of the real estate investing world, but most investors don’t know much about them. That’s because most financial advisors aren’t up to speed on what these trusts have to offer. You can use them to: Hold title to a property and related assets Share ownership interest with multiple beneficiaries Hide your identity as the property owner Avoid probate when your estate is settled Establish a clear legal division between multiple owners Easily transfer ownership to someone else Reap tax advantages That’s not all. Land Trusts can be used to bolster your estate planning strategy. They can be used like savings accounts backed by appreciating properties. They can be used to execute transfers around the pesky due-on-sale clause. Married couples can use them to protect assets via a legal ownership method known as tenancy-by-the-entireties. That’s just the tip of the iceberg. The Land Trust also gives you anonymity. Here’s the most important feature you should know about. That means the land title office will no longer let prying eyes see that you own a particular piece of real estate. And if nobody can find out that you own the property, they won’t go to the trouble and expense of suing you. Investors use Land Trusts to control assets rather than owning them outright. The Land Trust is also called a “title holding trust” because it holds title to a real estate property (or related assets) for you. You keep control of the property; and of course, you get to keep the profits your investments generate. Wealthy investors never forget this guiding principle: You’re better off controlling an asset indirectly than you are having your name on the deed. Let’s take a closer look at the Land Trust’s most-loved features: asset protection through anonymity and compartmentalization. How Anonymity & Compartmentalization Protect Investors Land Trusts accomplish the fundamental requirement of asset protection: they strip your name from the property title. This makes it hard for lawyers to figure out whether you are worth pursuing in court. Trust me: My background is in this kind of litigation, and any attorney worth his or her salt won’t waste time hunting someone down unless we’re convinced they have assets worth going after. Even if a vindictive person wins a judgement against you, it won’t be possible to collect anything when your property is tucked away in the Land Trust. When you set up a Land Trust, you should name the trust so that no personal connections can be made to you. A fictional name unrelated to anything in your personal or professional life can shut any lawsuit down. Finding out who really owns a mysterious trust can be a hassle most lawyers aren’t willing to undertake. So be creative when it comes to naming your trust. Another way to ensure anonymity is by compartmentalizing your assets. If all your investments are in a single entity, a lawsuit threatens all the properties in the LLC or trust. By contrast, when each property goes into an individual Land Trust, the liability is spread out over the multiple trusts. You can reduce your chances of a lawsuit against you even more by using the Land Trust with liability-limiting entities. This is a manageable, cost-effective asset protection strategy that works for my clients all across the U.S. A Traditional LLC can protect a single property (by serving as a holding company). If you have more than one investment, you can use the LLC as a shell company to assume operations for a Series LLC. With the Series LLC an investor can have as many liability-protected companies as you like – one for each “series.” This gives you perfect compartmentalization, with a bulletproof wall of protection between each of your assets. Remember, a Land Trust won’t be your entire asset protection plan. It is simply the first layer. Using an LLC or a series within a Series LLC gives you additional layers. Beyond that, even more layers (such as a shell corporation) can fortify your approach. Leveraging this approach, Land Trusts can defend a portfolio of any size and any value. Would-be-litigants can rack up the attorney fees only to hit a road block trying to recover a judgement against you. Additional Benefits of Land Trusts Below are a few additional ways real estate investors use Land Trusts. To pay for college. To use specific investment properties to fund future college expenses, make sure that the title to each property is held in a separate Land Trust. If you have more than one child, each child will serve as the beneficiary of his or her trust. After ensuring that each child is named beneficiary of his or her respective trust, have each property appraised at its current market value. Then you’ll sell an option on each investment property. Each child’s Land Trust will hold these options and accumulate the appreciation value of their respective properties. Whenever your kids are ready to head to college, you’ll have two options. First, the kids can exercise their contractual right to sell the property in their Land Trust, using the money earned for tuition. Alternatively, you can buy the options back and use the profits for college expenses. Protect yourself from liens. If judgements are made against you (as the beneficiary of the Land Trust), they will not also be made against the property in the trust. As long as you are using a separate Land Trust and an LLC as sole beneficiary of the trust, the properties are insulated against each other. This reduces your exposure to only one property should it be liened. Prevent identity theft. Your investments leave a paper trail (even if that trail is mostly digital these days). Property deeds are conveniently catalogued for anyone to find on “.gov” websites. From these public records, an identity thief can figure out a lot about you. The first step to preventing identity theft is making sure nothing is in your name. Thanks to the Land Trust, your name isn’t on the mortgage or your payments. Your trustee’s name is the one listed. And if you use a service (like the one my firm provides), we’re listed as your trustee. And trust me, we can handle whatever the identity thieves can throw our way. Get financing. Smart investors use entities like LLCs for asset protection. Smart creditors, however, don’t usually make loans to LLCs. The Land Trust once again comes to the rescue. Using a trust, you can get financing and protect your property at the same time. Many of my clients have good credit. They can use funds from their HELOC to acquire investment properties in their own name. They’ll then transfer the property to the Land Trust and deed the property to their LLC. Tying everything together is a solid operating and property management agreement that allows the LLC to manage the trust property. It really is that simple. Avoid the due-on-sale clause. When a property is sold, the mortgage usually has to be paid in full. That’s the due-on-sale clause. However, transferring property to a Land Trust gives you a handy loophole to avoid coughing up the balance of your loan. Easy transfer of beneficial interest. Beneficial interest allows individuals and entities to receive benefits associated with assets held by another party. The properties in a Land Trust are personal property. Referred to as interests, the transfer of these assets can be done with relative ease. There is no need for a notary, witness, public record, or any other documentation. The beneficiary of a Land Trust doesn’t hold title; however, he or she possesses a beneficial interest. This beneficial interest is “assignable” to other parties. You may sell the beneficial interest in a Land Trust without selling or transferring the deed itself). Owners can easily divide these interests to designate who is responsible for what – or to create structures that will minimize tax liability. Transferring property owned by a Land Trust can save your buyer real estate taxes (since a reassessment is normally required when the sale takes place). It can also prevent the disclosure of your sale’s value. This means that your net worth is obscured from the public. Remember: The buyer is purchasing the property from the Land Trust – not directly from you. How Do I Sell Land Trust Property? When selling an asset from a Land Trust, let the trust agreement (which we talk about in the next section) be your guide. This agreement will designate the person who will have the power to alienate, sell, or dispose of a trust asset. Typically, the beneficiary will instruct the trustee to sell the asset – the trustee can’t make the decision alone if the agreement states that the nominee trustee doesn’t have those powers. After the sale, the money remains in the trust. However, the funds are converted into a personal property trust. The personal property trust keeps those funds for the beneficiary. All parties named in the trust agreement will continue their roles, and any profits earned from the sale remains in the trust. Let me say it again: A well-crafted trust agreement is key to a smooth sale that will withstand any legal challenge. Remember, real estate contracts are the domain of attorneys, so get help from a professional! Setting Up Your Land Trust If there’s one thing I want you to take away from this article it’s this: If you are not holding all of your investment property in separate Land Trusts, you risk them all. Setting up a trust for each investment property is a non-negotiable element of this strategy! Designate either a private trustee or an institutional trustee immediately before you close on the sale. The property will be in your name at first, but after you transfer the property’s title over to a trustee, your name will vanish. When you establish a Land Trust, you’re using its trustee-beneficiary structure. This is how you maintain control and enjoy the benefits of owning a property while avoiding the liabilities. It’s the reason the Land Trust is such a rock star in the world of asset protection and estate planning. A Land Trust designates three key roles: the grantor, the trustee, and the beneficiary. You will be the trust’s grantor. The beneficiary (as you can guess) is the person or entity who receives all the income and other benefits of the trust. Typically, that’s you as well (or a limited liability company you create). You will designate a trustee. A trustee has control over the property and manages the trust itself. The trust document gives the trustee specific powers to file tax returns for the trust. If you don’t want to disclose who the trustee is, you can use a nominee trustee (an attorney, for example). Lawyers make great trustees, by the way (and we offer this service at my firm, Royal Legal Solutions). Your communications with your lawyer are confidential (because of attorney-client privilege), giving you even more protection. Once you designate your trustee, your attorney will create the necessary documents: A Deed to Trustee A Trust Agreement Both you and the trustee should review the documents, sign them, and record the trustee deed. After you’re done, your name won’t appear anywhere – the trustee’s name will be what shows up. Beware… Improperly established trusts won’t give you the protection you need. It takes a knowledgeable and competent attorney to make sure you’re dotting every “i” and crossing every “t.” Who Should Be the Beneficiary? With most Land Trusts, the property owner is the beneficiary. This person maintains absolute control over the property. The beneficiary has ultimate control and can revoke the trust at any time. However, LLCs, corporations, the trustee, and other trusts can also be listed as beneficiary. Remember, if the LLC (for example) is sued, then a judgement against it would not affect the title to each property since the LLC doesn’t hold title to the property. Before designating the beneficiary, consider the tax implications. Here’s where your CPA’s expertise will come in handy. Should you form a Land Trust with more than one beneficiary? The answer is simply “no.” Why? Because in the eyes of the law, this is the same as forming a partnership in which each partner assumes liability for the others. In my opinion, you shouldn’t even form a Land Trust with your husband or wife. Who Should Be the Trustee? When you establish a Land Trust, you must designate a trustee – the person who will hold your property’s title. This individual or company can only act according to your instructions. It’s not wise to serve as your own trustee. Doing so will strip the anonymity (and therefore the asset protection) from the Land Trust. Immediate family members shouldn’t serve as trustee, either, especially if they have the same last name as you. Make sure your trustee is someone you can trust, because they are the ones who control the assets. You don’t want someone who may embezzle funds from the trust or do anything else that could get you in legal or financial trouble. Although the trustee holds the legal title to a property, the beneficiary retains all rights to the ownership, possession, and management of the property. In other words, the trustee would not incur liability. Legal rulings in several states dictate that no one can be held liable for merely being a “title holder.” To be on the safe side, a trustee will want the trust agreement to specifically exempt him or her from personal liabilities related to the trust’s debts and obligations. What About Taxes? For the most part, Land Trusts are structured as grantor trusts (revocable trusts), which are disregarded entities. These are “pass-through entities” in the eyes of the IRS. Any income from the trust is treated as personal income and thus reported only on your personal tax return. The good news is you don’t need to file an additional tax return for the trust, which of course would cost more money. What about when you are using entities such as an LLC or Series LLC? These structures bring their own tax implications, especially if you’re managing more than one entity. When you incorporate your Land Trust within a Series LLC, the tax filing process not only remains simple because it’s a pass-through entity, but you also enjoy maximum asset protection. Your attorney can help you get the best tax treatment, but we won’t get you out of paying taxes. Remember: That’s the felony that finally put Al Capone in the big house. Tax evasion is a very serious matter, and the last thing you need is a fight with the IRS. Downsides to Land Trusts The most obvious limitation of Land Trusts is the fact that they aren’t particularly useful beyond the realm of real estate law. The Land Trust, often simply called the title holding trust, can’t hold just any asset – it must be a real estate asset. Loss of redemption rights is another reason not to use a Land Trust. Homeowners use redemption rights to reclaim their property in the event of foreclosure. To do this, they must pay off the total debt plus additional costs. Loss of homestead exemptions is another reason not to use a Land Trust. When it comes to assessing property value for taxes, a hefty deduction is lost with disqualification of homestead exemptions. Homestead exemptions can reduce home property assessment values by tens of thousands of dollars in some state, so they’re nothing to sneeze at. Finally, a Land Trust may be ineligible for secondary market loans. The secondary mortgage market is where loans are grouped and resold to investors, allowing the primary lender to recoup the initial loan amount. Are Land Trusts Valid in My State? Regardless of where you live, you (as an investor or a business owner) can enjoy the benefits of the Land Trust. If your state doesn’t have statutory Land Trusts, your state will likely default to the laws of the Illinois Land Trust, which set the tone for Land Trust legislation and regulation nationwide. I always tell my clients: If you don’t like your jurisdiction’s rules, change jurisdictions. It really is that easy. Many of our investors around the country decide to form Texas Series LLCs because they find Texas’ costs and laws more amenable to their business. You can do the same when setting up your Land Trust. This post has been contributed by Royal Legal Solutions. Royal Legal Solutions offers real estate investors the most advanced litigation protection via anonymous asset-holding structures. While we focus on asset protection and real estate law, our other practice areas include estate planning, retirement planning, and general practice areas that affect real estate investors in the United States and Canada. Start Your Investment Property Search! START FREE TRIAL 0 FacebookTwitterGoogle +PinterestLinkedin Scott Royal Smith Scott Royal Smith is an asset protection attorney, real estate investor, and the founder of Royal Legal Solutions. Scott’s background in litigation means he knows how to best use the law for your maximum advantage to streamline your operations, reduce taxes, and stay in compliance. Previous Post The 6 Best Real Estate Investment Loans in 2021 Next Post What Is a Good Cash on Cash Return in 2021?: A Complete Guide Related Posts Properties & Passports: Pursuing Financial Independence While Traveling the World House Hacking: How I Got Started in Real Estate at 23 3 Lessons I Learned the Hard Way When Starting to Invest in Real Estate 4 Things I Wish I Knew Before Buying My First Rental Property How I Bought My First Rental After the 2008 Housing Crash How to Win a Real Estate Bidding War: 13 Tips Should Real Estate Investors Buy a Fixer-Upper or Move-In Ready Property? 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