Land Trusts For Rental Properties? Do you Use them?
Rental Property Investor · Indianapolis, IN · Member since 2020 · 562 posts · 554 votes
So recently closed on my first buy and hold rental property. I have seen a bunch of conflicting information on what to do with regards to protecting myself. A couple resources suggest putting the house into a "trust". Then doing a quick claim deed to transfer the property to my LLC. This supposedly protects me from the due on sale clause in the mortgage and provides a level of anonymity. But there are costs with setting up and maintaining the trust that will be a drain on cash flow.
Others have suggested to just transfer into my LLC and skip the trust as the due on sale clause is rarely enforced and my insurance policy will protect me from most issues. Also, since I am using a property manager, I will not deal with the tenants directly, so they likely won't even know that I exist.
Curious what the thoughts are from the BP community? The property is located in Illinois in the Quad City area.
We use land trusts. We also have an LLC. Each provides a different concept of protection. I use the word concept because until you get sued and win or lose everything is just an academic exercise up to that point. Always seek competent legal advice from a qualified attorney who specializes in the area of law you need help with.
1. Land trusts provide privacy. Use a seperate Land Trust for every property, each with different names.
2. Land Trusts avoid Probate.
3. Land Trusts CAN BE pass through entities that do NOT file a tax return.
4. Land Trusts do NOT provide liability protection.
5. Your first LLC should collect all rents but OWN nothing. If you choose to set up a second LLC, It should own the beneficial interests in the Land Trusts but never manage the properties.
6. Insurance is very affordable. Get a rental dwelling policy for the rental unit(s) with a minimum of $500,000 in liability protection, a liability policy for the LLC with the same minimum and an umbrella policy over everything else of 1 million or more.
7. Your lease and sublease should be written to protect the Land Trust LLC and shift all burden onto the Management LLC.
8. Never lie under oath! Be as vague as their attorney will let you, but never lie. Never volunteer information you have not been asked. One of the worst problems people create for themselves is not knowing when to shut up. A good attorney will tell you when to shut your mouth. A good rule of thumb however is never attempt to fill in the blanks for opposing counsel. Be prepared to say "I don't Know" in a loud clear voice EVERY time they ask you a question you don't know the answer to.
9. The correct term is "Quit Claim" not quick claim.
10. Illinois is not a COPE entity state. LLCs can be attacked based upon your personal issues like auto accidents and such. Carry the highest auto liability insurance protection you can afford.
11. The Garn St Germain Act impacts the home you live in when placing a property in trust for estate planning purposes.
12. Be careful of some of the advice on moving title. It borders on mortgage fraud. Do you want to be a test case?
I am not an attorney and do not play one on television. If you need help finding a competent attorney let me know and I will point you in a few directions.
Good Luck and Good Investing
A land trust gives you anonymity but no protection. A LLC gives you protection if used properly.
A mortgage and insurance give you 2 levels of protection. This will likely be all you need unless your doing something shady.
@John Underwood. Lol. Nothing shady! I have 4 basic requirements for a rental: safe, clean, durable, and looks nice.
Just a bit concerned with the lawsuit happy world we live in. Tenant trips on a crack in the sidewalk, gets a lawyer and sue everyone on the face of the planet.
@John Underwood
With all due respect I’d have to disagree .Where did you hear a land trust doesn’t give you protection ?? That’s innacurrate to say ..
After studying the subject I see multiple ways trusts make more sense and offer more protection than an llc . An llc alone offers very little if any protection in fact .
I ONLY take title in land trusts now and I use my llc as the beneficiary as well as create a new trust for each property . Banks donot like to lend /refi on these though so if your strategy is bbrrrr then use an llc .
Banks don’t like them because there’s no personal liability ( the owners are not even recorded as public record) the banks and ambulance chasers want a neck they can get their hands around ..once again :going back to why I use the protection and anonymity they offer over a single member llc .
In a trust your not personally liable in a single member llc the judge “ pierce the veil “ like a wet paper bag if you screw up .
Trusts are complicated and the laws vary by state .the operating agreement that drives it are safely tucked away in my filing cabinet not at the courthouse for lawyers to comb through ! theres grantors trustees and beneficiaries involved . It’s a lot to take in
If you get creative you can really offer a hedge of protection just by using the right names for your trust and structuring it right . If you set up an llc with your brother in Florida as the trustee and use your South Carolina llc as a beneficiary and take title of property in a land trust in Georgia ..you could have three state case laws that a lawyer would have to litigate and fully be versed on to attempt to even bring a suit against your property ! Also you get creative with names say if your initials are John Doe you could name the trust “ J and D legal group “ do you honestly think a local scum bag attorney is going to pursue a slip and fall case against the owners with a name like that ?? You can name whatever you want ! All He’s going to know when he looks it up is that a big out of town law firm probably owns this and that he will be crushed in court !
most lawyers don’t even know them or better yet how to litigate against them . In my experience You’d have a hard time finding a local lawyer who can even help you properly set one up ! Judgments and liens have a much harder time sticking to a property.
Don’t think for a second if you get a judgment on you in court on a single member llc they won’t seize your personal assets . Most people don’t have enough protection but they think they do because they operate under the guise that an llc helps them immensely which is not the case .
.. also when a lawyer goes to bring a suit against you the first thing he’s going to do is take a little trip to the court house and find out everything you have recorded under your llc and your name and he does this to calculate your assets and your net worth to see how he will go after you . If you were smart and took title in a land trust he would have nothing to go on and therefore couldn’t find anything or estimate your worth ! You could be the beneficiary of 100 properties in town and he’d know nothing ! How’s that for protection ???
@Dennis M. is spot on!
Inter-vivos revocable trusts are a great way to keep a target off your back. Once you have the paperwork, a trust costs nothing to create (except for notary and recording fees), and nothing to maintain--they are transparent for IRS/tax purposes.
As a real estate broker and investor, I have used trusts for years, all with great success. NOTE: I am not providing legal advice... but unfortunately you'll find that MOST lawyers have no clue about this type of trust.
@Marc Winter @Dennis M. What type of financing is available when taking title in a trust (or transferring title to a trust to improve protection)?
@Mike Dymski
We have been using private money and sweetening the deal by permitting the lender a small percentage of ownership as a beneficiary in the trust . As far as banks go I don’t know if you could get secured commercial loans under one . I use unsecured lines of credit owner financing and private lending partners to buy . I hate having my own cash tied up
For our free and clear properties, yes, we use land trusts. A corporation manages our series LLC. Each property in in a cell of the LLC. And each is titled with Series X Trust.
@Marc Winter
Thanks Marc. Where do I find the forms? I contacted an attorney that was recommended, but they wanted $600 to set up the trust and $800/yr to act as the trustee. Thought that was pretty steep and blew them off.
@Dave Erickson
600$ to make a trust ! 😦
800 to be a trustee !😯
Geez we make them in ten minutes using a template and pay a notary 10 bucks to make it official . Nothing to it . Don’t you have a person you can trust in your family or a close friend .
We use land trusts. We also have an LLC. Each provides a different concept of protection. I use the word concept because until you get sued and win or lose everything is just an academic exercise up to that point. Always seek competent legal advice from a qualified attorney who specializes in the area of law you need help with.
1. Land trusts provide privacy. Use a seperate Land Trust for every property, each with different names.
2. Land Trusts avoid Probate.
3. Land Trusts CAN BE pass through entities that do NOT file a tax return.
4. Land Trusts do NOT provide liability protection.
5. Your first LLC should collect all rents but OWN nothing. If you choose to set up a second LLC, It should own the beneficial interests in the Land Trusts but never manage the properties.
6. Insurance is very affordable. Get a rental dwelling policy for the rental unit(s) with a minimum of $500,000 in liability protection, a liability policy for the LLC with the same minimum and an umbrella policy over everything else of 1 million or more.
7. Your lease and sublease should be written to protect the Land Trust LLC and shift all burden onto the Management LLC.
8. Never lie under oath! Be as vague as their attorney will let you, but never lie. Never volunteer information you have not been asked. One of the worst problems people create for themselves is not knowing when to shut up. A good attorney will tell you when to shut your mouth. A good rule of thumb however is never attempt to fill in the blanks for opposing counsel. Be prepared to say "I don't Know" in a loud clear voice EVERY time they ask you a question you don't know the answer to.
9. The correct term is "Quit Claim" not quick claim.
10. Illinois is not a COPE entity state. LLCs can be attacked based upon your personal issues like auto accidents and such. Carry the highest auto liability insurance protection you can afford.
11. The Garn St Germain Act impacts the home you live in when placing a property in trust for estate planning purposes.
12. Be careful of some of the advice on moving title. It borders on mortgage fraud. Do you want to be a test case?
I am not an attorney and do not play one on television. If you need help finding a competent attorney let me know and I will point you in a few directions.
Good Luck and Good Investing
.. also when a lawyer goes to bring a suit against you the first thing he’s going to do is take a little trip to the court house and find out everything you have recorded under your llc and your name and he does this to calculate your assets and your net worth to see how he will go after you . If you were smart and took title in a land trust he would have nothing to go on and therefore couldn’t find anything or estimate your worth ! You could be the beneficiary of 100 properties in town and he’d know nothing ! How’s that for protection ???
Nowadays I dont think any one physically goes to courthouse to search but, searching title profiles and skip tracing your assets perhaps, Dennis?
As for the land trust providing actual asset protection directly in and of itself, no it doesnt. Asset protection from dissuading an on looker from filing a suit then yes but wouldnt that be indrect asset protection or "optics," only?
.. also when a lawyer goes to bring a suit against you the first thing he’s going to do is take a little trip to the court house and find out everything you have recorded under your llc and your name and he does this to calculate your assets and your net worth to see how he will go after you . If you were smart and took title in a land trust he would have nothing to go on and therefore couldn’t find anything or estimate your worth ! You could be the beneficiary of 100 properties in town and he’d know nothing ! How’s that for protection ???
Nowadays I dont think any one physically goes to courthouse to search but, searching title profiles and skip tracing your assets perhaps, Dennis?
As for the land trust providing actual asset protection directly in and of itself, no it doesnt. Asset protection from dissuading an on looker from filing a suit then yes but wouldnt that be indrect asset protection or "optics," only?
You would be wrong on that as far as “optics “ .and yes at my county I heavily invest in you have to physically go to the prothonotary and search they will not have that available online or over the phone. Of coarse land trusts aren’t the end all answer to every situation they certainly offer another curtain to have to pull back and offer a variety of benefits you can’t get with an llc alone .
@George Skidis thanks for all the info. I am curious about your comment on moving title could be mortgage fraud? Trusts seems to be fairly common, not trying to trick the mortgage company, but do want to protect myself. Could you give an example of how it could be mortgage fraud?
I am new to all of this, and one of my main goals is to stay out of trouble. Trouble with tenants, trouble with attorneys, etc. trouble costs money and defeats the purpose of REI.
I have a property manager in place, so tenants will likely not even know that I exist, unless an attorney gets involved.
Dang! What a great breakdown. I see all kinds of ridiculous answers to trust questions here on BP. Most take the fact that someone said so as being the gospel truth and the law of the land.
Great job. Most investors need to go take a class on how LT's work and how to use them properly. And, how not to use them in fraudulent manners.
Appreciate your insight!
@Jeff Cichocki good point. Education is king. Do you know of any classes or webinars that are available on trusts??
Many Gurus teach assuming existing loans by convincing the seller to place the property in trust "For Estate PLanning Purposes". Then the investors buys the beneficial interest and "Assumes" the loan. What happens to your reputation in business when the bank finds out you assumed a non assumable loan? Could the bank then file a lawsuit to seize the property, Could they file charges against you for mortgage fraud?
Now to your earlier statement, "Move it into the trust and don't tell the mortgage company". How is that any different than the first scenario. The best way to keep the government out of our business is to practice ethical behavior even when no one is looking.
My rule of thumb for ethical decisions has been would I be willing to share this with my wife, children and spiritual advisor? If the answer is no, don't do it.
The National Real Estate Investors Association offers some free classes on Ethics at national REIA University.
@George Skidis Thanks, appreciate the input.
Question. With regards to single family homes with conventional financing. When you use trusts do you close in the trust? Or close in your name, then notify the lender and transfer to the trust? Just trying to get the concepts figured out. Sounds like I need to speak with an attorney.
@Account Closed,
There are only three people that I know of that specifically teach a land trust class. They are Dyches Boddiford (known as the professor in his circle), Jack Shea and Bill Bronchick (real estate attorney). I am not affiliated with any of them.
I have taken Dyches class a couple of times now. It has nothing to do with how to use a LT to defraud banks. It is a bit of a technical class. But, it's not overly complicated. I highly recommend his class when he offers it. You can find him at assets101.com.
I have not taken a class from Bill Bronchick. At some point I will as I like to get different perspectives on things. I have purchased several of his courses. You can find him at bronchick.com
I have not taken a class from Jack Shea. I am planning to. He's a very interesting character. You can find him at jackshearealestate.com.
If you don't want to go somewhere to take a class or it isn't offered on your timeline, there is a course out there that I bought that I think is pretty good. It's actually broken down into two courses (basic & advanced). The courses are from Randy Hughes. I'm not friends with him, but I have met and spent some time talking to him at an event we both attended. He's a pretty sharp guy too. You can find his stuff at landtrustsmadesimple.com.
There is also an attorney out of Florida that has a few books out on the topic. They are very good. His name is Mark Warden. He is affiliated/works with Jack Shea a lot. They are good friends. I have not met either of these guys, but I have bought their books and courses online. Very good material.
Regardless of who you get your information from, you will find that they all have similarities and differences in how they structure and use them. I've tried to blend the best of their varying perspectives together to make up the trusts we use for the houses we buy.
Good luck!
@Jeff Cichocki
Thanks for the info! That is awesome and very much appreciated.
Looks like you are a lender. So what is your take on trusts? If someone gives notice that they are moving a property into trust is that a red flag for a lender? Does it trigger the due on sale clause? Curious for a different perspective.
@George Skidis Thanks, appreciate the input.
Question. With regards to single family homes with conventional financing. When you use trusts do you close in the trust? Or close in your name, then notify the lender and transfer to the trust? Just trying to get the concepts figured out. Sounds like I need to speak with an attorney.
It depends on your lender. I recommend full disclosure of your intentions before taking the loan. Let the bank know that you want the property owned by a trust. Many conventional lenders will not allow this. A few will. Search until you find one. Ask at your local REIA for reccomendations.
Don't forget asset protection rule #2: "Equity Stripping". A financed property is technically "Bank Owned". Hard to file a liability lawsuit against a bank. Many investors use are heavily leveraged and refi their properties every few years to pull out the equity and go on vacation or buy another asset.
We teach "The Ten Rules of Asset Protection" at my REIA.
Don't let the paralysis of analysis prevent you from getting into real estate investing. Learn everything you can, but start investing ASAP.
@Account Closed,
Generally speaking, I don't worry about it that much. We use them when we buy all the time. The lenders we use for our own purchases (private lenders) trust us and they don't worry either. Unfortunately, sometimes my underlying lenders don't like it when it's someone else's loan I'm using their money to fund. If it's national lender I'm brokering for, it's another it depends. It's a very misunderstood entity and makes people who don't understand them nervous.
In our area, I've yet to find an attorney or title company that knows what to do with them. Any time an attorney or title company starts balking, lenders get nervous. We try really hard to work with the same local title companies. We've trained them on how to deal with them.
Even as a lender, there are many things I still don't understand in this industry. There are lots of inconsistencies between lenders and brokers. There's pro's and con's to it all. The biggest pro is that there's a loan program out there for just about every situation imaginable; the biggest con is trying to find it when you're deal isn't the standard run of the mill deal.
What @George Skidis said above is correct. Regardless of what your reasoning for doing something is, you need to be transparent with your lender. Even when things are allowed, when they happen after closing and the lender wasn't informed this would be happening, they feel like someone is trying to pull a fast one. It never ends well when your financial partner in the deal starts to doubt your intentions. Whether or not it's intended, the perception of deception is a relationship killer.
As for whether or not it trips the due on sale clause, it depends on what's really going on. If the lender can't tell and the borrower is being evasive (even if it's for what the borrower perceives is a good reason), the lender may call it due. Most borrowers don't realize this, but almost every commercial type loan out there (all investment loans, even from private individuals) are commercial in nature. Almost every good commercial loan paperwork has a call provision. It trumps the du on sale clause. The call provision allows a lender to call the loan due at any time for any reason without just cause. Now, no one uses this clause unless they feel threatened in the deal, but it's there. The call provision is the one that people should be more worried about than the due on sale clause.
Residential mortgages that investors take over sub-to are more likely to trip a due on sale clause. residential mortgages don't have a call provision. Because of consumer protection laws, it's not allowed. Using trusts in deceptive ways can absolutely cause the bank to use it and call the note due. More often than not, as long as things look clean and the payments are being made, the banks will leave it alone.
Most guru's teach you to use land trusts in fraudulent ways (actually, I don't know of any that don't teach this way). The only time a property is allowed to be put into a trust and not be in violation of the due on sale clause is if it it's for estate planning purposes. Putting it in a trust to hide the sale from the bank is NOT estate planning. It is potentially mortgage fraud. I haven't heard of anyone going to jail over this, but I believe that at some point someone will.
Now with all that said... Investing is a great tool to better your life with. It can be extremely profitable and ti can be extremely rewarding to help sellers out of tough spots. Learn what you can so that you run a clean business. But get out there are do business. Go help some people and make some money.
Good luck!
@Jeff Cichocki wow, thanks for the detailed response! Greatly appreciated!
To make it very simple you buy the house in a trust with a trustee (that you trust) and the beneficiary being an LLC or C Corp. depending on what you're going to do with the property for tax purposes. Most people over complicate everything as I see on this post. The trust is not asset protection but the LLC or C Corp. provides that since they are the beneficiary.