A land trust is a private agreement to hold the title to real estate. With a land trust, one party, the trustee, agrees to hold title to the property for the benefit of another party or parties, the beneficiary(ies). The one who establishes the trust is the settlor. Next, we will do a further breakdown to clarify the roles for each party to the trust.
The settlor who created the trust is usually the one who held the title to the property before transfer into the trust. The settlor is often the beneficiary of the trust as well. So, naturally, the people who call us to establish land trusts are usually the people who own the real estate.
The beneficiary typically receives the benefits of the property that the land trust owns. So, the trust beneficiary usually enjoys the proceeds of the rental or sale of the property that the trust owns. Alternatively, the beneficiary will often transfer beneficial interest in the trust to a limited liability company (LLC). The LLC can give legal protection in the event of liability on the property. Plus, the LLC can offer asset protection to hinder seizure of the property should someone sue an LLC member.
The addition of the LLC is primarily for income property rather than one’s primary residence. This is mainly because a personal residence is in a separate tax category. So, when you live in the house, you’ll usually want to personally remain as trust beneficiary. That way, you can write off your mortgage interest on your personal taxes. Plus, when you sell your personal residence, you can avoid taxes on a significant portion of the profit. So that is why, for your personal residence, you want to be the trust beneficiary rather than transferring beneficial interest to an LLC. For your income property or a second home, however, we like the LLC to be the beneficiary for liability protection.
Okay, now back to the trustee. The trustee holds the title to the property. If so drafted, the trustee must follow the instructions of the beneficiary. As such, the beneficiary typically has the right to both direct the trustee and receive the income from the trust.
Who Should Be the Trustee of a Land Trust?
It depends on the purpose of the land trust, but most people set them up for privacy of ownership. So, we will address the question as if the purpose the trust is anonymity. When this is the case, the trustee should not be the settlor or someone with the settlor’s last name. So, the trustee could be a trusted friend or relative.
Better yet, we often set up an LLC to serve as trustee. This way, when the settlor is the manager and/or member of the LLC he or she maintains control. Plus, we have seen uneducated trustees become quite uncomfortable serving in the trustee capacity. Many trustees (rightly or wrongly, and mostly wrongly) are concerned about personal liability. So, that is why we set up so many LLCs for our clients to serve as trustee.
Wyoming LLC Trustee
Most often, we set up the trustee-LLC in the state of Wyoming. Wyoming LLCs offer enhanced legal protection — one member can enjoy charging order protection. Plus, we usually include the added services of a Wyoming virtual office. So, the LLC has an address and phone number in Wyoming for extra anonymity. That is, you don’t have to use your home address. Plus, we add the nominee manager services. Nominee means “in name only.” So, with this service, you can own and control the company. Yet, our personnel shows up in the public records as LLC manager. We have a nominee service agreement that says what the nominee can and cannot do. Basically, the nominee cannot do much without your written instructions.
Therefore, by placing an LLC in the position of trustee, it can give you the benefit of control. Plus, it gives you the added benefit of privacy. Speaking of benefits, let’s talk about land trust pros and cons.
Who Does What to Who?
Here is a summary of how the three parties to the land trust relate to one another. The trust agreement, at the creation of the trust, governs the relationship between the trustee and beneficiary. So, the trustee often has no more power than the settlor gives him in the trust agreement. This is because we intentionally draft the trust for the benefit of the settlor and beneficiaries. Plus, the trustee typically has no function other than to do as the trust deed instructs.
As mentioned, the settlor and beneficiary are most often the same person or the same people. As we also discussed, the settlor can elect to have his or her own LLC serve as trustee. This gives the settlor substantial control over the trust. Therefore, the settlor does not need to involve a third party; a third party that may fear risk or not act as quickly as the settlor desires.
Our organization has established thousands of land trusts. If you want to establish a land trust, please call or fill out a free consultation form on this page.
Land trusts are most often revocable. Therefore, the settlor may change, modify, or terminate them while he is or she is still alive. The beneficiaries may remove an uncooperative trustee. Since the trustee holds title as a fiduciary, they incur no personal liability for merely being on the title. Nor can the trustee lose the property to his or her personal creditors.
Land Trust Pros and Cons
Land Trust Benefits
There are many land trust benefits. Here are some of the biggest advantages:
- Privacy of Ownership – Under a Land Trust arrangement, your identity as trust settlor and beneficiary remains private. The legal owner of the real estate is not disclosed, except in cases of subpoena or court order.
- Ease of Transferability – The land trust beneficiary (or “owner”) may be changed without recording a change in the public records. So, you can sell the rights to the property without changing the title. You do this by simply changing trust beneficiaries.
- Privacy of Transfer – Assigning beneficial interest in the trust is typically not public.
- Aids In Lawsuit Prevention – A contingent fee attorney may not accept a case if he/she cannot find assets.
- Avoids Probate – A Land Trust arrangement allows you to designate succession of ownership. You can do this as you wish, thereby avoiding probate and costly, time-consuming proceedings relating to the property.
- Facilitates Multiple Ownership – Where there are many owners, a Land Trust can have multiple beneficiaries.
- You Retain Tax Advantages – You are still eligible for the homeowner’s and senior citizen’s real estate tax exemptions.
- Can Use In Any US State – Not all states have land trust laws, but can use in all states. Tennessee may be one exception, though our clients there have used them.
- Helps Avoid Due-On-Sale Clause – The Garn St. Germain Act allows you to transfer one to four dwelling units without invoking the due-on-sale clause.
- Keeps Sales Price Secret – When you assign beneficial interest privately, the sales price is not made public.
- Helps Prevent Property Liens – That is, a judgment against a person does not automatically attach to the property. Attaching a personal lien to the property requires additional legal procedures.
Land Trust Disadvantages
Whereas land trusts have many benefits, there are also some small disadvantages, as follows:
- Financing – Lenders may require you to place property in personal name to obtain financing. Then, you can transfer the property back into the trust obtaining the loan.
- Does Not Protect from Lawsuits – May need to include an LLC, for example, as the beneficiary for lawsuit protection.
How They Protect Privacy
The land trust is comprised of two legal documents:
- There is a trust agreement between the settlor and the trustee. This document establishes the rights, powers, duties, and obligations of the parties; and
- A deed from the settlor to the trustee.
First, you execute the trust agreement. Then, you record the trustee deed. Once completed, the recorder’s office will no longer reveal to the world that you are owner of the property. In addition, the trust agreement remains private (in your file cabinet at home). Thus, no one need ever know that you retain an interest in the property. That is, the public records will not reveal this information.
Litigators generally have no interest in suing people who have no assets. What is one of the easiest ways to find out if someone has deep pockets? You search the public records for real estate holdings. For the successful real estate investor, this search could paint a big fat bull’s eye on their backs. Whereas a land trust is not a true asset protection trust, it is a powerful privacy tool. It helps to ensure that a litigator’s search for deep pockets comes up empty.
LLC + Land Trust for Asset Protection
First, remember, a land trust is a privacy device, and not a corporate entity. Accordingly, land trusts do not enjoy the liability protections that corporations or limited liability companies may enjoy. If someone slips and falls on the property, the beneficiary can be held liable. That is why we establish a corporation, LLC or limited partnership to serve as beneficiary.
Second, one can usually transfer property into a land trust free from taxation. The internal revenue code addresses this. The federal government will treat the property as if it was owned outright by the beneficiary. See I.R.C. §§ 671- 678. In addition, in many states, the transfer of property a revocable trust does not require transfer or recording taxes.
Finally, here is what many investors find. Most attorneys and accountants have no idea what a land trust is, or how it works. While this can certainly be frustrating, there is an upside. Think about it. This means that many of the litigators in your community will be unfamiliar with land trusts. A significant number will stop their search for deep pockets at the end of the public records trail; the county recorder’s office.
The land trust is an ideal tool for privacy of ownership. Keep in mind that a land trust, by itself, does not provide true asset protection. There are tools that can provide real estate asset protection, such as an LLC as the trust beneficiary. So, you can use land trust for lawsuit prevention. That is, so a contingent fee attorney does not readily see that you have “deep pockets.” This is because, as we have clarified, the land trust conceals your ownership.
For liquid assets, on the other hand offshore trusts provide the most powerful asset protection. For that topic, here are some offshore asset protection examples that you may want to know about.