Land Trust Traps for the Unwary Investor

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I received eleven calls this week from real estate investors who wanted to set up land trusts to protect their real estate investments.  Understand that it not uncommon for me to receive a few calls each week on this topic but 11 within three days.  Did this topic hit PR-Newswire? To make these calls even worse, each and every caller was confused as to why and how to properly use a land trust in investing.   So here is my land trust lesson beginning with the two most common myths.

Land trusts do not offer asset protection
Land trusts hide your ownership of real estate

A land trust does not provide asset protection.  To obtain asset protection from a trust the trust must be irrevocable i.e., you can not modify or cancel the trust after it is created, your interaction with the trust assets are severely restricted, and you cannot be a trust beneficiary.  A land trust does not fall into the irrevocable category.  The land trust is in fact just the opposite – revocable.  It has been a fundamental fact of English and U.S. common law for hundreds of years that a person cannot protect his assets from his creditors by putting property into a trust that the person fully controls.  Further, the person is not protected from the trust’s creditors i.e., if harm occurs with the trust the trust owner is responsible.  Face it, a land trust by itself will not protect the investor.

Land trusts do not always hide property ownership.  To keep your ownership of real estate private two things must occur – you take title to the property in the name of the trust using a nominee trustee and you purchase the property for cash. 

Title to assets held in trust are typically held by a trustee in the name of the trust e.g., Clint Coons as Trustee of the Bigger Pockets Trust Dated 9.23.10.  As you can read, if I am trying to mask my property ownership I should avoid serving as the trustee of my own trust.  Therefore, the sophisticated investor will use a trusted friend or attorney as his initial trustee.  I write initial trustee because when title is recorded in the trust you may want your trustee to resign and you assume the position.  (This change is trusteeship does not get recorded so anyone looking at your trust would assume the initial trustee is still serving.)  Unfortunately anonymity is a two-prong test and using a nominee trustee only satisfies the first prong; the more difficult is buying for cash. 

If you are fortunate to have sufficient wealth to purchase all of your investments for cash then you can achieve anonymity with a land trust; however, if you are like the vast majority of investors and require financing then all bets are off.  When you purchase real estate using financing the lender will seek a deed of trust or mortgage to be filed against the property.  Either of these documents will let the world know that you, as the purchaser, is liable on a note to the lender and the lender has secured its interest against your property.  This is where the anonymity begins to unravel.  If a competent attorney performs a thorough asset search you may not show up on title (you nominee trustee appears) but you will show up on the financing documents leaving one to reasonably assume that as the party responsible for the debt you most likely have an interest in the property.

As you can see the land trust will not provide the two oft touted benefits quoted by many real estate gurus.  This does not imply that the land trust does not have a place in the investor’s arsenal for in fact it does and in the current investing climate it is more important than ever.

See Part 2: Why and how you should use a land trust for real estate investing.

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44 Comments

  1. Clint,

    I totally disagree with you. I have been using land trusts for privacy and asset protection for 30 years. While it is true that a basic land trust is not designed for asset protection, if you combine them with other entities they are the important first step in asset protection. Also, regarding the recording of the note, I do not use banks that record the note (most banks do not), therefore, my anonymity is maintained since the trustee signs the mortgage (which is the only document that gets recorded).

    Randy

    • Randy,

      I am not sure what you disagree with. In my post I state how land trusts BY THEMSELVES do not provide asset protection. I was planning on discussing the LLC with a land trust this week – “Next week I will cover why and how you should use a land trust for real estate investing.” – so where is the disagreement. I think you agreed with me on the protection issue. Regarding the filing of a debt instrument against the property – every bank that I work with (I hold property in 6 different states) has filed the mortgage or other debt instrument with the county. What banks do you work with that do not record the mortgage or note?

      • Cliint,

        In my state, Illinois, lenders use a note and a mortgage. The note is signed by the borrower (beneficiary) and the mortgage is signed by the Trustee. Sometimes the lender will require the note to be signed by the Trustee but, if so, he signs with his exculpatory language preventing him/her/it from having any personal liability. Nonetheless, in all cases the borrower/beneficiary does not sign the mortgage (the owner of the property signs the mortgage and that is the Trustee). Since the mortgage is the only document that gets recorded (99% of the time the bank does not record the note), the beneficiary/borrower’s anonymity is maintained.

        Regarding the issue of land trusts providing asset protection; I have written books on this subject but will try to boil a few concepts down for this post. I have personally avoided litigation from a property buyer who was trying to hold me responsible for repairs to a property AFTER closing. There was no misrepresentation involved on my part…just a greedy buyer trying to get the seller (my trustee) to pay his bills after the fact. Once I explained to the buyer’s attorney that I was not the owner (my trustee signed the listing agreement, seller disclosure, deed, etc.) and that the property was held in a Virginia Land Trust (I encouraged him to spend all the time and money he wanted on pursing the trust), he realized that he needed to look elsewhere for an “easy mark.”
        The point being in this example that not all benefits in using a land trust will be found in the statutes.

        I agree that one should delineate between protecting the assets of the beneficiary from a non-property issue vs. a direct property related issue (like a slip and fall at a rental property). For further example, my associate in Florida protected 250,000 of equity in properties held in land trusts because the previous owner’s bankruptcy’s trustee could not figure out who actually “owned” the property. I personally protected 40,000 in equity last year when the previous owner’s bankruptcy’s attorney did not understand land trusts (I had purchased the beneficial interests in three land trusts). The point here being that since most people do not know about or understand land trusts there is a definite by-product…asset protection at the ground level. I could go on and on but will end this post for now.

        Thanks for being pro-land trusts and keep up the informational posts.

        • Clint, thank you for posting on this particular topic.

          Randy, thank you for clarifying this topic and how the state of IL’s protocol is on land trust for re investment purposes especially for myself who is just beginning to get myself educated in re before diving in. I’ll keep your contact since I’m also in IL. It just shows that every state is different when it comes to handling re investment. really great to know.

    • Clint
      Thank you! Very helpful advice. Also, I am in state of PA. It seems as though this state may insist I pay transfer tax when I deed property to land trust. The state views it as a business trust not a living trust.

  2. Perhaps you haven’t heard of this strategy, but many investors use Land Trusts in connection with properties bought Subject To the existing mortage. Since my trust is on title but the loan is in someone else’s name, how exactly will this property be traced to me, the investor? And no, the loan won’t be called from a change in title based on the due on sale clause, as it’s a huge non-issue, esp. nowadays.

    There is only one way I can think of that I can be linked to the property. That is through my website. If I’m offering the property for sale or rent–and it’s out there on the web, preserved forever via the ‘cached’ option, it’s not hard to find the connection and work backwards from there.

  3. Clint,
    I have several properties titled in land trusts. These were all short sales, the deed transferred directly from the original owner naming me as the trustee. The note was satisfied with cash in most transactions, but in two cases a bank was involved. The bank allowed me to sign as trustee on a commercial loan, these loans are all non recourse.

    So in effect the deed went directly from the original owner to a land trust named after the property. Now I will grant you there is no asset protection of the particular property in the land trust, but each property is in it’s own separately named land trust.
    So each property stands alone, a law suit against one property can only attach to that particular trust property.

    If you are doing wholesale flips in which you take title, the land trust is the best entity in my opinion.
    On a recent flip, the city government recorded a few violations against the property, just before and then again after the deed changed. I did not know about these violation fines, until well after the transfer to the new owner. My title policy took care of the violations before the deed was transferred to the land trust.
    The new owners policy took care of the violations incurred during my ownership, but later tried to collect the pay out from the land trust.
    They asked for me as trustee to pay the fines, but had no recourse to collect as the land trust was dissolved at the transfer of the deed, and as trustee I had no ownership interest.
    The only asset of the trust was the property so the debt is not collectable.

    With a land trust there are some down falls, the property is easily refinanced compared to if it was in a LLC, but the lender will want the property removed from the trust triggering transfer tax, unless a commercial loan is used, which for a residential property is less that satisfactory.

  4. Believe me, no one is going to get rich selling land trust information. I have been doing it for years and it is barely worth my time (I have students in almost every state). However, I believe so strongly in the benefits of using a land trust that I want everyone to know how to use them to their advantage.

    Randy

  5. Clint, I can’t tell you how angry your comments and article on Land Trust has made me. You first two comments were… “Land trusts do not offer asset protection and Land trusts hide your ownership of real estate”. This comment is totally wrong and untrue. It would only be true if you listen to those who have no damn clue what they are talking about or have no experience drafting “Properly Drafted Land Trust Documents”.

    Along with my Attorney’s and Trustees, I’ve been involved in over 300 transactions involving “Valid” Land Trusts and our company has been involved in literally thousands of transactions with Land Trusts. On occasion transactions of all types in up in courtrooms and the same is true for us. Over the last 12 years, having been challenged in the courts several times, NOT ONCE has any of our Land Trusts been penetrated or failed, including challenges by high priced attorneys, state attorney generals, lenders and even from the IRS.

    When drafted and documented correctly Land Trusts can offer excellent, if not the best, asset protection available.

    Land Trusts DO NOT “hide” true ownership, at least not Valid Land Trusts. Real and True Ownership is in that of the Trustee. Just because someone vests their title to a Valid Trustee, it does not and is not “hiding” ownership. True ownership is now in the Trustee. The Settlor (Grantor) now becomes “A” beneficiary of the trust and now only owns an “Personal Interest” in a Trust, not a “Real” Interest in Property. The Beneficiaries remain in full control, NOT Ownership, of the corpus (property). The Trustee is the true and full owner of the “real property”. The Trustee is only that of a “holder of title” and has no power of direction which lies solely at the direction of the beneficiaries. The beneficiaries maintain full and 100% control of the corpus but it is the Trustee who is and remains the full and real owner of the property.

    With a Valid Land Trust in place, which includes a Valid Trustee, the corpus of the trust is fully protected because a Valid Trustee (one that complies by all state and federal laws) is exempt from lawsuits. There are dozens and dozens of regulations that a Valid Trustee must adhere to. If they do, they cannot be put at risk or subject to suit by would-be judgment creditors of any of the beneficiaries.

    The only exception, in most states, for additional liens being able to be placed on the corpus would be Mechanics and Property Tax Liens. Note that in only a few States, such as TN, LA and WA, those states do not recognize the in ability of a creditor to attach a lien on the corpus. However, there are other LEGAL measures and methods, when combines with the use of a Valid Land Trust allow the corpus full protection.

    For most homeowners, a combination of an in expensive Family Revocable Living Trust, LLC, Family Limited Partnership and Valid Simple Land Trust, is all that is needed to provide adequate and full Asset Protection.

    • This is the most inaccurate and bogus post I have seen yet on land trusts. I have used them successfully for over a decade and, if used properly, they do provide outstanding asset protection. The writer has no clue. Scott Moyes is absolutely correct. Clint needs to find a new job.

      • Gary,

        I am pleased to read you have used the land trust successfully. So have I and many of my clients. Regarding my “not having a clue”, have you by chance read my recently published book “Asset Protection for Real Estate Investors”? You might change your opinion on my understanding of this subject. You can find it on Amazon.

  6. Pingback: Land Trust Traps for the Unwary Investor « Clint Coons Blog

  7. Enjoyed reading the blog. I have a question.
    Can a foreigner be a trustee of a land trust in California? If so, any chance this will invalidate the land trust. The beneficiary of the land trust will be either a LLC or a US citizen (The owner of the property now).

  8. I have a question related to land trusts. I currently own five properties with a total of 10 units in my own personal name. The properties are all financed. I am thinking about transferring these properties to land trusts to get them out of my name and my name out of the public records. My understanding is that as long as I am a beneficiary of the trust when the transfer is made this will not trigger state transfer tax nor have a lender exercise the due on sale clause by law with this transaction because it is allowed for estate planning purposes. Next I create an LLC to be the trustee and beneficiary of the land trusts. This change is made privately and is never recorded in any public record. I also have a 2nd LLC which is hired bu the 1st LLC to manage the properties. This entity enters into leases and contracts with vendors. Now I have accomplished both privacy and asset protection. Thoughts on the effectiveness of this design?

    • Mike,

      To begin with using a LLC is not a good idea unless you are creating a Florida Land Trust. For a company to serve as a Trustee is must be licensed and bonded. Most people do not want to go the the licensing and pay over the bond for their company to serve as a trustee thus, stick with an individual.

      If you are married, have your wife serve as the initial trustee and you as the beneficiary or vice-versa. If you are not married, ask your attorney to serve (or a close friend provided they are up to date on their taxes). When I set up a land trust I will serve as the initial trustee then resign after the beneficial interest is assigned to the LLC. My client is the successor trustee who assumes control upon my resignation.

      After the property is recorded into the name of your trust then assign the beneficial interest to your LLC(s).

      The anonymity will not apply unless the property is unencumbered or purchased subject to an existing mortgage. If you are the borrower your name will appear on public record.

      Best of success with your planning.

  9. Generally, I like your structure but DO NOT make the same LLC the beneficiary AND the Trustee. This is called a “merging of interests” in effect voids your trust. I prefer individuals as trustees and LLC’s as beneficiaries.

      • Mike, you state that your reason for creating the trust is to transfer ” these properties to land trusts to get them out of my name and my name out of the public records.” Should you be both grantor AND trustee of your trust that just “ain’t gonna happen.” As trustee your name would continue to be linked to the property on the deed and in the public records.

  10. A Land Trust is a “type” of living trust but because a Land Trust is designed to hold ONLY real estate and real estate related assets it is unique. The Trustee holds legal and equitable title and therefore, the beneficiary (which owns a personal property interest) cannot be one-in-the same person.

  11. Clint, I believe there are two main issues when it comes to “liability.” The first is whether the individual investor’s personal obligations may be collected by attachment against his beneficial interest in a land trust. I believe it is clear that the answer is “yes.” (Example, investor “Chuck” causes a car accident and the other driver gets a $2,000,000 judgment against Chuck. Chuck has $500,000 of liability coverage. The injured party tries to collect the balance of $1,500,000 from Chuck and can levy against Chuck’s beneficial interest in the land trust in order to collect). The second issue is a bit more complex. If an individual investor (Chuck) buys rental real estate through a land trust, and the tenant gets hurt on the property, may the tenant get a judgment against Chuck IN ADDITION to getting a judgment against the Trustee? If so, then you are correct in the notion that a land trust will provide NO liability protection. Please reply — thank you!

  12. So I have two rental properties and they are both held in mine and my wife’s name and they are subject to loans that are in both our names. Are you suggesting that post purchase, a land trust would not be a good thing to do? Also, can a trust be used again and again or is it a one shot deal per property? Thanks.

  13. Kent Harris

    I got an Email from a Company that has a 4 day $4,000 course on asset protection. His last Email said a Real Estate Investor lost 140 doors to a Legal aid Attorney and he spent $500,000 defending an illegal eviction case, which turned into a 12 person class action suit from previous people that had been evicted. It said the previous tenants got very little. Also they said they that the properties were seized Pre-Judgment. Is this even possible?

    I just got started 6 months ago and so far have not had to evict anyone. If I had to evict someone I would use a service to do it legally and by the book. Is this guy blowing smoke? I have no way to verify this story is true or not, I looked it up on the Internet and couldn’t find anything. I guess I can ask my Real Estate attorney about it. Also how can someone seize property that the Lender has first lean position?

  14. Question, how can I use a land trust with bank owned properties? Do I have to buy the property before I can put it in a land trust and sign it over to my end buyer? please help, I\’m new

  15. I am afraid I disagree with you on much of what you say. First you state that the land trust does not provide asset protection. A land trust isolates problems which occur with the property to the holdings of the property. When you sue a land trust you can only get as a settlement the holdings of the land trust, protecting other assets. In addition when you sue an individual you can not receive the property covered in the land trust if it is owned by two or more beneficiaries. The rules regarding partition protect it. And if the beneficiary is an LLC owned by the beneficiaries even more protections are acquired.

    It is of course possible to sue a person and a land trust, but that does not change the validity of the above. A person is always responsible for his actions but that is not the same as saying the vehicle is not an important part of a plan of asset protection.

    Second you say it does not provide anonymity. While it is possible is some cases it does not in many cases it does, especially when a person seeks help from a knowledgeable professional. Cash sales and purchases by investors is not a rare occurrence, in fact it is quite common. In addition a mortgage and a note are two different documents at least in the state of Florida. As a trustee I regularly sign a mortgage which is recorded and the beneficiary signs a note which is usually not recorded.

    Land trusts are one of the most useful, flexible, and inexpensive tools available to a real estate investor.

  16. I agree with Clint Coons. It is funny to me when people set up trusts and name the Trust the same name as themselves or their family’s last name. I was taught to set up a different trust every time I purchase a property or use one trust to purchase the property and then use another trust to hold title. This along with a LLC/Trust structures seems to work best. Good Luck to every body.

    Terence Stacey
    USFH Management LLC

    • Terrence there is a reason you see Land Trust set up in the family name. Lets say you are a buyer of a property that has a mortgage and the mortgage has a Due on Sale Clause, which you wish to defeat. Let me make it clear I am not suggesting this or condoning it just explaining it. If you put the property in a land trust with another name, the bank holding the mortgage gets suspicious that a sale has taken place. If you put it in a land trust with the original owners name it is less likely to be scrutinized since properties are often put in Living trusts with the family name.

  17. I am afraid I have to agree with you on both counts Clint.

    Your first assertion that a land trust does not protect assets is incorrect. Any cause of action that arises from anything but the negligence of the beneficiary or a personal guarantee offered by the beneficiary limits the beneficiary risk to the property held in that specific land trust. If that beneficiary owned 6 properties each in individually held land trust only the one property in one trust would be available to creditors. Which means the land trust has protected the 5 other properties.

    Your assertion that land trusts do not always hide the ownership is really misleading. It should say that in most cases with a properly formed land trust they DO hide ownership. Sure you can construct a scenario in which they do not, but your motivation would have to be to confuse your audience since they so clearly do hide the ownership. As a trustee for land trusts the only thing that can cause me to reveal the beneficial ownership of a land trust is a court order. In over a decade as a land trust trustee that has never happened.

    Its like anything else if you decide to write negatives without mentioning offsetting positives you are no longer informing your audience you are intentionally misleading them.

  18. Question. I’ve been using a Land Trust in Florida to purchase my cash paid for flips. I’ve been told by my bank that I can not set up a Land Trust bank account. So….who does the Title Company make the check out to? The Trustee? The Beneficiaries? Someone has to get a 1099 and I’m positive my Trustee does not want this extra hassle.

    • You just need a new bank. I have opened bank accounts for Land Trust in Both PNC and in a small local bank. You can also direct your trustee to issue a written authorization to make payments due to the Land Trust in your name.

  19. Thanks, GARY MIALOCQ for clear the matter. Here, became confused with couples of lines where something said without sources. We know, there are lots of alternative way to dealing with living trust (whatever type).

    If anyone can do his or her trust correctly, never will face any difficulties with LT.

  20. Michael Sholtis

    So much about land trusts but so little about actually using one. I see every author posting about the particulars of the details behind the protections it does and does not offer yet nothing about the actual process. Sure recording the trust is simple… It only took my attorney an extra week to understand it. Then try opening up an account at any bank, national or otherwise lol if that is not the most annoying process that no one anywhere understands… If i hear EIN number one more time ugh.

    Right now I really don’t care about protections I just want a bank account. Simple. Does anyone anywhere have a banker they have worked with that understands the details of a land trust? (only a question I have asked time and again yet no one has one? but everyone keep telling me land trusts are great).

    Honestly no offence but if I read one more article that talks about the land trust theory, missing that actual work that goes into putting one into practice I am going to scream. It is my opinion land trusts do not work and are such a hassle and make no sense to anyone in the process to bother with. Get an LLC that everyone understands and everyone agrees work. Sure a good real estate attorney understands but a bank- good luck, and accountant -good luck, then add a partnership the land trust and the land trust will prevent you from doing everything even with a free and clear building. So far both my land trust experiences have been beyond poor.

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