Advantages and Disadvantages of Using Land Trusts in Real Estate

Land trusts are known for providing several advantages, which is why they are such a valuable step in creating and implementing the pan needed to protect your real estate assets but there are several disadvantages of using only a land trust to protect your assets.

Advantages:

• The transfer of property is much easier than a LLC - A land trust is equipped with detailed instructions for the grantor, trustee, and beneficiary. As such, a land trust makes it much easier to transfer property, should something happen to the beneficiary. Instead of being forced to deal with a complicated will, the new beneficiary can instead be easily assigned under the guidelines of a land trust.
• Offers privacy of ownership and transferring interests - Many individuals want to keep the value of their real estate assets off of public record. The beauty of a land trust is that it offers privacy ownership, which means that the value of its real estate assets won’t be on the public record. If a lawsuit materializes, then it will be much harder for someone to go after your real estate assets, since they won’t be able to know their true value.
• Avoids transfer taxes - Unlike transferring a property into an LLC, transferring a property into a land trust can typically be accomplished tax free. In these instances, the federal government often treats the property as if it was owned outright by the beneficiary.

Disadvantages:

• Little protection to offset litigation or taxes - The biggest disadvantage of land trusts is that they do not provide asset protection. This is why transferring your assets to a land trust is just the interim step to protecting your assets. As a revocable grantor trust, there are instances when a lawsuit can be submitted against a lone beneficiary. Should this occur, then the courts might force the beneficiary to alter the terms of the trust to benefit the claims of a creditor. If a lawsuit is presented, it will be very easy for a legal professional to trace how the land trust was created, which will eliminate anonymity and result in the aforementioned legal action against the beneficiary. Additionally, once anonymity is removed so too is the tax advantage that a land trust can provide.
• Not recognized by statute in many states - Land trusts are not legally recognized in many states, which means that obscurities can occur, putting you and your assets at a risk. Additionally, state statutes change all the time.

Topics covered: Real Estate Investment, Land Trust, Taxes

Work cited: Jessica Conflitti, November 25, 2019