Personal property trusts are effective tools for savvy real estate investors seeking privacy of their business affairs. A personal property trust (similar to a land trust) is simply a revocable, living trust. The primary purpose of a personal property trust is similar to a land trust â€“ to ensure privacy, to appear broke to the public, and to discourage meritless litigation.
A trust is simply an arrangement in which someone (â€œTrusteeâ€) holds something of value for the benefit of another party (â€œBeneficiaryâ€). The trustee actually has no duties except to sign documents at the direction of the beneficiaries. The trustee holds legal and equitable title while the beneficiary has the right to the proceeds of the trust. The beneficiary is considered the true owner for tax purposes.
Here are 5 ways savvy real estate investors can use personal property trusts to their advantage:
If you lend money secured by real estate, the mortgage is considered an asset. Since mortgages are recorded in public records, the information they contain is available for the world to see. Instead of holding a mortgage in your name (or your company name), hold it in the name of a personal property trust. You may even want to hold each mortgage in a different personal property trust.
Another great trick is to create and record mortgages against real estate you own. To the outside world, your real estate appears encumbered - which makes you a much less appealing financial target. In reality, itâ€™s just a smoke screen for anyone looking to size you up.
2) Purchase Options
If you record an option against a property, then you are again making this information available to the world. When you list the Optionee as a personal property trust instead of your name (or your company name), then you ensure your privacy. Real estate developers and builders often use this trick when seeking to control large tracts of land. This helps eliminate the chance that prices will begin to skyrocket on them if people find out who is buying up property.
3) Other Publicly Recorded Assets (cars, boats, etc.)
Any other assets (such as cars, boats, or other vehicles) that are titled and recorded in public records, are available for the world to see. Almost every state DMV allows you to use a personal property trust to hold title to these assets.
4) Non-Publicly Recorded Assets (bank accounts, securities, etc.)
Assets that are not recorded in public records (such as bank accounts and securities) can also be held in a personal property trust. If a judgment is ever entered against you, the creditor would be unable to attach the judgment to any personal property not in your name.
5) Trust Embedding
Land trusts are excellent tools to hold title to real estate. However, a handful of states may require public disclosure of the beneficiary. In other cases, some title companies or lenders may request the disclosure of the beneficiary before insuring title or funding your loan. In these cases, you can use the â€œtrust embeddingâ€ method to ensure that the beneficiaries are not revealed. You simply create a personal property trust (for which you are the grantor and beneficiary) for the sole purpose of being the beneficiary of the land trust. You are in essence "embedding" one trust into another trust. As a result, even when you do reveal the beneficiary, it's simply another trust which you created.
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