Land Trust Traps for the Unwary Investor – Part 2

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Last week I wrote about two of the primary misconceptions regarding the use of land trusts in real estate investing.  I am amazed at the response my Blog generated.  My intent in raising this issue was to inform people on what to watch out for when considering this entity for real estate investments.  As a licensed and practicing real estate/ asset protection attorney for over 13 years I have heard several accounts from real estate investors regarding the information received from different speakers on the use of land trusts.  Much of what I have heard does not comport with my personal practice or understanding of the law.  In point of fact I have recently consulted with an investor who is embroiled in a multi-party lawsuit (he is the sole defendant the other 13 or so are Plaintiffs) and not one of his land trusts has provided him an ounce of protection.

I am trying to raise awareness in this post for all investors that much of what is discussed regarding this issue is disseminated from non-attorneys who know very little on the issue of grantor trust law.  Take for example the issue of personal property attachment.  Many promoters of land trusts will state that the land trust, or their special version thereof, can not be seized by a beneficiary’s personal creditor because the beneficial interest is personal property. Unfortunately for them the law views it differently.  My post on the Olmstead case in Florida is case in point.  In that case Mr. Olmstead lost his LLC interest because the court found it was “personal property” not protected by statue.

Although a members’ interest in a LLC is considered personal property, see § 608.431, Fla. Stat. (2008), and personal property is generally an asset that may be levied upon by a judgment creditor under Florida law, see § 56.061, Fla. Stat. (2008), there are statutory restrictions in the LLC context. Any rights that a judgment creditor has to the personal property of a judgment debtor are limited to those provided by the applicable creating statute.  Shaun Olmstead v. Federal Trade Commission No. SC08-1009 June 4, 2010.

Rather than continue to dismantle many of the misstatements that are often proffered regarding land trusts I will continue with where I left off last week – how they can be used in real estate investing.

Land Trust Benefits

I will begin by letting all my readers know that in 90% of the situations involving residential real estate encumbered by a note with an acceleration clause I recommend the use of a land trust. (Note: I do not advocate subject-to investing strategies as these tend to create liability for the investor if not structured properly through an attorney. So this post refers solely to investor owned property.)  This is probably shocking to some of those who took umbrage with previous post but I view the land trust as an essential tool for real estate investors who appreciate what it can and cannot provide.

In my practice the land trust is used as a title holding vehicle to minimize the risk of acceleration when real estate is transferred into a LLC for asset protection and there is no change in beneficial ownership.  As many of you know U.S. Code Title 12, Chapter 13, Section 1701j-3 limits a lender from accelerating a note when there is a transfer to an inter vivos trust in which the borrower is and remains a beneficiary…   A real estate investor who desires the asset protection benefits of the LLC is often faced with this dilemma – transfer the property into the LLC and risk the lender accelerating the note or keep the property in his own name and risk being liable.  Hence, the land trust provides the remedy. 

Asset Protection

To solve the dilemma an investor can establish a land trust to hold legal title to the property, wherein the investor is the trust beneficiary with rights of assignment.  After title is recorded in the name of the trust, the investor/beneficiary quietly assigns his beneficial interest to his LLC.  This transfer goes unnoticed by the lender because it is not recorded. Once the interest is held by a LLC, the LLC as the trust beneficiary becomes liable for the trust debts and obligations.  Similarly, the charging order protections will shield the land trust interest i.e., personal property, from the investor’s personal creditors.

Minimize Transfer Costs

Another beneficial use of the land trust will arise in situations where a state or county imposes a tax or fee on the transfer of real estate to a LLC.  With the exception of Pennsylvania, the use of the land trust can avoid transfer taxes, as these transfers are generally exempt provided the beneficial ownership remains the same.  (This is a common problem with the subject-to investor who fails to pay transfer taxes when a distressed homeowner assigns him a beneficial interest in a land trust.)

Mask Property Ownership

The land trust can also be beneficial when acquiring a property for cash or non traditional financing and you do not want to alert other individuals to your ownership.  Through the use of an attorney or trusted person as your trustee, title is taken in the trust name in care of your trustee.  After property is recorded into the trust, the trustee will typically resign and the investor/beneficiary will assume trusteeship as the undisclosed successor trustee.  In my post last week I addressed debt as impediment to full anonymity in this transaction because often times the debt instrument is recorded against the property showing the beneficiary’s information.

The land trust is an essential tool for every real estate investor and if properly understood can provide substantial benefits when it comes to asset protection, anonymity and transfer costs.  The key to using any entity is understanding its benefits and limitations.  All the best in your continued investing.

P.S.

For those of you who have stated that you have successfully litigated the use of a land trust and walked away without the property or yourself, as the beneficiary, having any liability, please send me the initial pleadings, findings of fact and conclusions of law and the order.  I do not profess to know everything about the use of land trusts and I do accept that some courts may have provided the protections espoused by several who commented on my last post.  I just haven’t seen it.  Investors will often tell me that a land trust promoter told them how his land trust has stood up in court to creditors and protected the property.  I always tell them to get me the case number, state, and county of the case to verify the claim.  I am still waiting.

If anyone who reads this would be kind of enough to provide me the information I will discuss it next week and post the supporting documents for all to view.

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17 Comments

  1. Clint — You’ve saved many people some serious grief with this excellent post. I probably talk with at least an investor a month who insists these trusts are bullet proof. You’ve clearly shown otherwise. They’re a tool to be used appropriately, nothing more.

    • Jeff — Thanks for the comment. Most of the people who sell land trusts are non attorneys and thus, are free to make any claims because they do not have a law license to protect.

  2. GREAT follow up article Clint. Especially where you point out that the land trust must be combined with an LLC (or corporation) in order to achieve asset protection. I continue to be amazed at the number of investors who think all their asset protection problems are solved with the land trust alone. There is precedent upon precedent where the courts have allowed judgments against property and/or the beneficary of a revocable trust. The fact that you have not had a problem for a “ba-jillion” years doesn’t mean that you won’t lose it all once you’re challenged in court.

  3. Great article Clint !

    I agree that many of these investors will say anything to sell a course.Half-truths and misinformation won’t save your butt in court !

    One of the better courses for my continuing real estate credits for my license years ago said it best.

    Before they even started the training class they asked about what to do with what you learn.

    One person said “knowledge is power” to which the instructor said is incorrect.

    Another said “applied knowledge is power” and again the instructor said that was incorrect.

    Instead the instructor responded that you must FIRST assess the information you are taking in to verify the source and it’s accuracy as being credible and then apply the CORRECT information.

    If you apply incorrect information you will get dismal results and if you have correct information but don’t apply it the info is wasted.

    So “Accurate,credible,applied knowledge is power”.

    I like that you asked for court cases to back up what these other posters are saying.Some investors just like to play with fire. I don’t worship money and at night don’t have to look over my shoulder waiting for the other shoe to drop.

    Investors do stupid stuff everyday and if they don’t get caught or called out on it doesn’t mean they should keep doing it.

  4. I stopped using Land Trusts when Oregon title insurance companies refused to insure title until the title to a property held in land trust was transferred from the trustee back to the grantor of the trust.

    I loved using the land trust -to form the means of easily creating interests for two or more individuals/entities in a deal- until the title companies decided at a state convention to simply stop insuring title until the trust was “unraveled” and titled exactly as it was prior to transferring to the trustee. The other option was to set up a statutory “business trust” which essentially is a Massachusetts type trust. Way too expensive, requires far too much state reporting and compliance, and defeated the purpose and flexibility provided by the land trust.

    If you know of any Title companies in Oregon that will insure title held by a land trust (which was titled within 90 days+- prior to the subsequent sale date), please advise.

    Bill McKee

    • I have excellent credit in my name. I also have a couple llcs but am finding it difficult to get loans in the llc name for homes we own. Would a land trust be a good option for us if I buy the homes in my personal name and then use the land trust to switch it to an llc under the trust? Also is there anything else I need to be aware of, title insurance issues etc? We’re in PA. Thanks.

  5. you wrote, “After property is recorded into the trust, the trustee will typically resign and the investor/beneficiary will assume trusteeship as the undisclosed successor trustee.”

    Maybe I’m wrong, but I understood that a beneficiary of a land trust should not also become the trustee- neither at inception, or subsequently. The “doctrine of merger” might apply and fail the requirements for a “land Trust” to exist. The result- is to convert the personal property interest (beneficial interest) to that of a real property interest (and different laws would apply).

    Am I wrong about that, or is that something an investor should disregard?

  6. Clint, thank you for writing this article, I found this to be very helpful. So the best way to protect multiple parcels of real estate, and please correct me if I am wrong, is to hold title to each parcel in a separate Land Trust and then assign the beneficial interest to a corporation weather it be an LLC, LLP, C, or S Corp. Depending on what tax strategies the investor is using.

    @ Bill and Brad,

    It is my understanding that the trustee and the beneficiary cannot be the same person. You can get a loan in your name and then title the property to a land trust and prevent the due on sale clause under protection of the Garmin St Germain Act, but, you’ll still be liable for the repayment of the loan. The bill states “… a lender may not exercise its option pursuant to a due-on-sale clause upon … a transfer into an inter vivos 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[.]” (The Garn St. Germain Depository Institutions Act of 1982, (U.S.C.) 1701j-3(d)(8).[5]

    I invest here in Raleigh, NC and most property holders title several pieces of real estate into one LLC (sometimes 20 properties or more) and expect that to be adequate protection. This is obviously better than taking title in your own name but exposes all of the LLC’s assets to risk should something occur on one property or to the individual investor.

    I look forward to hearing more about this topic,
    Michael Otranto

  7. Michael,

    Your instincts are correct. Holding 20 properties in one LLC will only protect the investor from the liabilities associated with the property. To adequately protect the properties the investor should break these assets up into multiple LLCs.

  8. Clint,

    Great information! Could my personal name be linked to any of my homes that I recently paid if I weree to place each one in a seperate Land Trust then create one or more LLCs as the beneficiary? Does what you stated above only work for cash deals?

  9. Gerry,

    Your personal name can be linked because you are in the chain of title. However, when you transfer into a trust you are no longer listed as the the owner thus, one could assume you sold the property. You could accomplish something similar with LLCs and forgo the land trust (email me to discuss an alternative strategy). Yes, cash deals should be held directly in an entity.

    • What is your email. Here is what I am trying to accomplish.

      I own RE in NY,NJ,SC,NC,IN and WV….some are lower income housing areas like in Syracuse and some are in nice areas for higher income earners like in NC or SC. I want to protect my personal assets by moving my homes that are paid in full (5) into an LLC(s) and the RE that has mortgages would remain in my name but move into LLCs as I pay them off. I was told that single member LLCs do not offer me 100% personal asset protection and to name another of my LLCs as a member. So each LLC would have me as a member and one of my property mgt LLC perhaps as the other.

      Then I read your articles about LTs and it sounds like this is a great addition to my plan. But based on your response maybe not.

      lets talk!!!!!!!

  10. What would be the tax consequences of transferring beneficial interest of a Florida land trust?
    Do we have to report such transaction to the Florida dept of revenue and/or the IRS and/ or the appraisers office. If yes, is it treated as a personal property gain / sale and subkect to the FL sales tax? what about the new law (2008/2009) regarding the deed tax implication on transfer of beneficial interest of a land trust in Florida?
    I am thinking to acquire a commercial real property under a land trust and flipping it within 30 days for profit.
    I Would certainly appreciate your input on these matters,

  11. Clint, as you suggest, I made a beginner’s mistake two years ago and took a house subject-to under a Florida Land Trust. I’m trying to refi but it looks like a purchase because the title is in a land trust. In your 13 years of doing deals, how many times has the lender called the loan when the buyer did not try to mask ownership and kept paying the existing mortgage? I can’t refi this house to save my life despite canceled checks and I don’t want to appear as if I’m defrauding the lender. I’m thinking it might be best to re-title in my personal name and wait six months for seasoned title. What have your clients done in similar situations?

  12. Clint coons is another clever attorney who mastered the selling of land trust because you will also need him for the LLC that will flow to yet another entity and so on,
    I looked him up and his firm also does the taxes and sells Reos and so one.
    Another jack of all trades and master of none except of course on going endless billing and confusion to keep you strung along
    Land trusts are not easy to use with title companies, insurance companies, bank loans etc. And using Clint coons recommendation just adds to the confusion of the LLC and other entities

  13. Marissa Tayo on

    Clint,
    This is very helpful. We just had the closing yesterday and our attorney convinced us to transfer the properties to land trust which we never heard to protect our assets. Upon reviewing articles online it turned out that it does not offer asset protection. We have already signed the documents but have not mailed the exempt stamps and a copy of one of the deeds. Would we still be able to cancel the transfer and proceed with the regular transfer to us not land trust? How do we go from here? Thanks, Marissa

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