Land Trust Blog Series: Part 1

The Basics:

We could start the series off with a history lesson on where land trusts came from, when, why and all the recent changes, but really, who cares. Let’s just get down to the basics.

Simply put, a land trust is a way to hold title to real estate whereby a Trustee holds legal and equitable title to the land but the beneficiary directs the trustee, manages the property and draws income from the trust.

A Trustee can be any legal entity capable of holding title to real estate. In an earlier blog post about Common Investing Mistakes I wrote about a heated argument I had with a prominent title underwriter centered around the fact that an LLC may serve as Trustee of a land trust. In the end, we all “agreed” an LLC, a Corp, your attorney, accountant, mother, whoever- can serve as Trustee. Even though your trustee can be any legal entity; you should take the time to choose your trustee wisely. Choosing a Trustee is like drafting a contract. You aren’t choosing a trustee for your situation now. Rather, you are choosing a trustee for when the you-know-what hits the fan. Real Life Example: I’m in my office, having a typical day of reviewing and drafting contracts when the receptionist runs back to my office and asks what I want her to do with the DEA and homeland security agent holding for me on Line 1. Ummmm, what? I pick up the phone and am asked if I own the property located at 123 Main Street and am I aware that there is a massive marijuana grow project at that property. I explain, in the nicest way. that I am the Trustee for the land trust that holds title to that property and that no, unfortunately, I can not release the beneficiary information. I’m not going to get in to the rest of the story, but what do you think would have happened if those clients had just picked their brother, son or best buddy to be Trustee of the land trust? I’m pretty sure they would have spilled the beans in half a second. Another reason to choose a professional trustee centers around the whole privacy issue. If you pick your brother who only holds title to your 3 investment properties the relationship in that transfer could be assumed; whereas, if you are using a professional trustee that holds title to hundreds of other properties only that trustee knows who is who and which is which.

The next player in a land trust is the beneficiary. Again, any legal entity can be the beneficiary of a land trust: you personally, an LLC, your IRA, etc. You have 100 percentage points to play with at this position. So if you are going in with a partner on a deal you could both be beneficiaries each holding a 50% interest or 75/25, etc. Get it? I don’t recommend have any more than three beneficiaries in one land trust and if you have more than 2 use a power of direction which vest the directive power over Trustee in one person.

The last big piece of the puzzle is the land itself. You can create a separate land trust for each property or you can group your properties and place multiple parcels into a single land trust. The ultimate decision is based upon your liability exposure (law suits, high crime rentals, etc) and your investment strategy (buy and hold, flip, assign, bulk sale, etc).

Get these three parts down and the rest will be just filling in the blanks.

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