Community land trusts; good idea or bad idea?

Question

I was doing some research on land trusts and came across the definition of a community land trust. From the Grand Forks Community Land Trust website we see that a CLT is defined as "community-based 501c3 nonprofits whose intent is to provide perpetually affordable housing options. Their purpose is to provide access to land and housing to people who are otherwise denied access; to increase long-term community control of neighborhood resources; to empower residents through involvement and participation in the organization; and to preserve the affordability of housing permanently."

They do this by purchasing land and leasing it out to lower to medium income earners. Because buyers are not buying the land the purchase of the home is more affordable therefore being a solution to the affordable housing problem growing in our country. One catch I see is that upon resale a seller is restricted as to how much they can sell their home for. In other words, it has to still remain affordable to low-mid income earners. According to CLTNetwork a buyer can buy a home but "In return, the homeowner agrees to sell the home at resale-restricted and affordable price to another lower income homebuyer in the future."

What are your thoughts on a CLT and has anyone had experience with them? They sound like a good idea in the short term but I have troulbe imaging how this would help people as the markets dramatically change over time. Is there any possibility of getting someone to come in a flip a property for profit in one of these communities or will the CLT developer be doing that? I'd love to hear thoughts and opinions!

Lew Payne · Answer

I researched many of these same trusts, for selfish (personal family planning) reasons.  The problem with the 501(c)(3) trusts is that they're too restricted on use of funds, require quite a bit of accounting and administration, are restricted on what business they can conduct, what business they can directly or indirectly own, and have restrictions on use of profits.

As a result, I went the non nonprofit (the "profit") route with mine.  It is a conservancy trust, and its purpose is to conserve the assets we own for the benefit of future generations of my descendants (my "community").  It can also own unrelated businesses, without UBTI/UBIT, etc.  As a result, it owns a flipping finance operation (Housing for Humanity, LLC) and a management company (Management Moguls, LLC).  Since it's structured as a 541(c)(2) trust (11 US Code

Lew Payne · Answer

If you're not familiar with legal structures and their ramifications, it's difficult to explain in a few paragraphs.  You have, in essence, asked "teach me how to perform neurosurgery" and many of your assumptions will be incorrect (thus making you your worst enemy!).

A trust can have any name, regardless of purpose.  I can call a personal property trust the "Steven Johnson Conservancy Trust" or the "Johnson and Johnson Baby Powder Trust."  A trust can hold land (without it needing to be a so-called "land" trust), vehicles (without it needing to be a personal property trust), or whatever.

If anyone talks to you about a "land trust" - run away from them.  There are only a few legitimate uses for a land trust... most hucksters use them for the wrong purpose, to get around due-on-sale clauses by breaking the law, or by using scare tactics to lull you into a false sense of privacy.  Many states have legislated away the anonymity of the so-called "transfer of beneficial interest" by requiring notification (including to your bank and to the tax assessor) in order for it to be legally binding.

You do not put individual properties into a trust, as that creates potential inside liability for the trust.  You do not put risky assets, in general, into a trust.  You create separate (or series) entities that hold the risky assets, which are themselves held by a holding company that is owned by two distinct legal entities (a single-member LLC is ineffective, and so is anything with two mirror entities such as husband and wife), each having a different class of membership interest and "poison pill" provisions that create tax ramifications for any judgment creditor that wants to attach the membership interest.  My family trust is one such entity, and my irrevocable dynasty trust is my other entity.  Said properties are then managed by a separate management entity, via individual property management contracts with each of the series entities.  Everything has its own bank account, along with separate books (accounting).  A fiduciary corporate trustee (in SD, UT, NV, or AK) provides administrative duties in compliance with trust situs requirements.

The irrevocable trust, which maintains fully discretionary distributions with no ascertainable standard and meets the requirements of the Restatement (Third) of Trusts along with those of 11 USC 541(c)(2) and is "a restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title" is fully judgment-proof against state and federal claims.  In addition, I've researched Medicaid trust appeal cases (such as the FAIR Hearing Decision 1409508) and further refined my trusts such that Medicaid has no grounds for ruling against the trust.

It has taken literally one year (on and off) of working with my estate planning and real estate attorney to refine these structures to the point where they are where I want them to be.

PS - It is foolish and unwise to put your personal residence in an irrevocable trust, unless it is a QPRT or non-QPRT, but even then they are unnecessarily restrictive.  It is also foolish to attempt to encumber (protect) your primary residence through the use of an artificial HELOC for equity-stripping.  There is a correct way to protect the equity in your personal residence, and it does not involve the use of artificial schemes or straw-men which are quickly undone by the courts.

Steven J. · Answer

@Lew Payne

Thanks for the answer! Although much of it is over my head I'll look into it more. I figured there would be a lot of restrictions as to funding on these types of deals. From what I understand a conservation trust is the same as a land trust, correct?

So do you put individual properties into your single trust for future generations along with your businesses? Does that provide enough protection should you face litigation? I thought a land trust only provides anonymity not protection from being sued. Please school me on this!

Community land trusts; good idea or bad idea?

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