Asset Protection Series: 6 Benefits to Using Land Trusts to Protect Yo

Joseph O. Cronin, J.D.

Asset Protection Series: 6 Benefits To Using Land Trusts With Real Estate

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Disclosure: Nothing in the Patriot Real Estate | Blog constitutes legal advice. This information is not intended as legal advice or representation. No attorney-client relationship is formed nor should any such relationship be implied. Nothing in this blog is intended to substitute for the advice of an attorney, especially an attorney licensed in your jurisdiction. If you require legal advice, please consult with a competent attorney licensed to practice in your jurisdiction.

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Owners of real estate, especially those with investment properties, are increasingly vulnerable to being sued. Lawsuits may arise from interactions with creditors, tenants, and business associates. Moreover, these suits may be based on fraudulent claims and can cost owners thousands of dollars in legal fees to defend their innocence. Since we live in such a litigious society, it’s evermore important to identify strategies to help protect what you have worked so hard to build and acquire.

One popular tool that is regularly used to safeguard real estate is a land trust. This instrument has helped countless real estate owners, investors, and businesses shelter their real estate assets. In fact, Walt Disney created numerous land trusts across the state of Florida to purchase 27,000 acres of land.[1] That land was later used to construct the word’s largest amusement park, Walt Disney World, in the sleepy town of Orlando, Florida.

A land trust is an agreement that requires one party, the trustee, to hold title to real property for the benefit of another party, the beneficiary.[2] There are two different ways for an interested party to use a land trust. The first option allows an owner of real estate to transfer their existing title to the property over to the land trust. The second option allows an owner to purchase property, and then take title, in the name of land trust. In both situations, the creator of the trust agreement will have the trustee deed recorded. This puts the public on notice that the real estate investor is not the owner. The creator of the trust, known as the trustor, may structure it so that he or she remains the beneficiary for their lifetime. The beneficiary normally retains rights to direct and control the trustee, who manages the trust. However, the rights of the beneficiary, as well as the extent of the trustee’s fiduciary duties, are all documented in the trust agreement.

Since land trusts are revocable (meaning they can be modified, cancelled, or terminated during the lifetime of the trust beneficiary), they do not offer true asset protection that is found in irrevocable trusts.[3] However, a land trust is still very attractive because it offers 6 important benefits:

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Benefits

1. Privacy

2. Avoids Probate

3. Transferability

4. No Due on Sale Clause

5. Tax Benefits

6. Avoids Litigation, Judgments, and Liens

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1. Privacy. The major benefit that real estate owners and investors achieve by choosing this instrument is privacy of ownership. Mr. Disney reportedly used land trusts because it allowed him to purchase the Florida properties in secret.[4] If he had purchased and taken title to those parcels in his own name, then it’s conceivable that the asking prices would have radically increased. By using land trusts, Mr. Disney maintained anonymity and likely saved himself millions. Since trusts aren’t recorded in any public databases, such as the Registry of Deeds, it becomes difficult, but not impossible, for interested parties to identify the true owner. To maintain privacy in the property, the owner should take title to the property in the name of the trust (i.e. “123 Main Street Trust”) using a nominee trustee.[5] If the owner takes property in his own name, then interested parties could identify him through a basic search. Similarly, if he takes title to the property in a trust with his name (e.g. “John Smith 123 Main Street Trust”), then an interested party might be able to deduce that he’s the true owner. When property is held in a land trust, the named beneficiary is kept private, and it can even be changed without recording that update in public records.
2. Avoids Probate. Land trusts allow investors and their families to avoid probate court.[6]Probate normally starts with administering the estate of a deceased person, which includes distributing property through a will. Depending on the state where one resides, the legal probate process can be complex, time consuming, and very expensive. However, if one’s property is held in a trust, such as a land trust arrangement, their assets will pass outside of probate court to the named beneficiaries.
3. Transferability. One of the most important benefits that land trusts offer to real estate owners is transferability. Once real property is placed into a trust, the interests of the trust’s beneficiary are considered personal property.[7] A unique benefit is that the beneficial interest to any property held by trust can be sold, gifted, and/or conveyed to another party without public disclosure. Moreover, because a transfer can be done without a notary, witness, or public recording, transactions can be completed quickly and effortlessly.[8]
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5. No “Due On Sale” Issue. Another benefit is that, in certain instances, an owner of real estate can transfer title of his or her property into a land trust without violating the due on sale provision in the mortgage contract. The Garn–St Germain Depository Institutions Act of 1982 (herein “Garn-St Germain Act”) created protection for owners who transfer their real estate assets into a trust, which includes a land trust.[9] The Garn-St Germain Act states that “a lender may not exercise its option pursuant to a due-on-sale clause upon … a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property.”[10] Provided that those conditions apply, a transfer of title by a borrower/land owner into a land trust will not breach the due on sale clause in the mortgage agreement. However, if the borrower fails to remain a beneficiary of the trust, or if the borrower changes the rights of occupancy (meaning who is living in the property), then transfer will likely violate the due on sale provision. In such an event, if the lender has knowledge of the transfer and subsequent breach, then it will have discretion on whether to call the promissory note due.
6. Tax Benefits. Land trusts also allow an investor to preserve the relevant tax benefits. A land trust should be classified for income-tax purposes as a grantor trust.[11]  
7. The IRS generally considers a land trust to be a pass-through entity by and, as such, it requires no tax return.[12] This allows the beneficiary (e.g. John Smith) to report any trust income and expenses in the 1040-tax form, and avoid filing a separate trust-related tax return. Another important tax benefit held by the trust’s beneficiary is depreciation. Depreciation is the measurement of decline in an asset’s value spread over the asset’s economic life.[13] The U.S. Internal Revenue Service (“IRS”) allows for a reasonable deduction of depreciation as a business expense in calculating the taxable net income. This enables an investor to offset income produced from their investment property by the annualized value of depreciation on their real estate asset.[14] To calculate the value of depreciation, the following 3 factors must be used that dictate how much depreciation an investor can deduct each year: (1) your basis in the property, (2) the recovery period for the property, and (3) the depreciation method used.[15]
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9. Avoids Litigation, Judgments, and Liens. Holding title to a property in a land trust may also help an owner to avoid litigation, large judgments, and liens. Potential lawsuits may be thrwarted, since public searches into an owner’s record may reveal few or no assets. With no real property to go after, one might be discouraged from filing a lawsuit. This point is especially true with contingency-based lawyers.[16] Even if someone decides to file a lawsuit, and their attorney agrees to proceed with the case (whether on a contingency-fee basis or not), using a land trust may help to prevent large judgments against an owner of real estate. This is because, as held by the court in First Federal v. Pogue, judgments against individual beneficiaries do not attach to property held in a land trust.[17]
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Citations:

1. 1. Dave Roos, “How Land Trusts Work” September 27, 2013. HowStuffWorks.com. October 5, 2015.
2. 2. John C. Murray, “The Use of Land Trusts and Business Trusts in Real Estate Transactions,”Real Property, Trust and Estate Law eReport. American Bar Association. 2007.
3. 3. Clint Coons, “Land Trust Traps for the Unwary Investor,” September 23, 2010.
4. 4. Dave Roos, “How Land Trusts Work” September 27, 2013. HowStuffWorks.com. October 5, 2015.
5. 5. Clint Coons, “Land Trust Traps for the Unwary Investor,” September 23, 2010.
6. 6. Ronald Runkle. “How Should My Home be Owned: In Trust or Out of Trust?”. Law Office of Ronald Runkle & Associates, P.C. © 2008.
7. 7. Bentley Mooney, Jr. “Protect Your Assets With a Land Trust.” CCIM Institute, Sept. Oct. 1994
8. 8. Alex Everest. “10 Reasons to Use Land Trusts to Buy Real Estate.” Deal Maker Library.
9. 9. Published L. No. 97-320, 96 Stat. 1469, 1505 (codified at 12 U.S.C. § 1701j-3(g)(1982).
10. 10. Darryle-CA, “My Analysis of the Garn St. Germain Act and the Federal Regulations,” InnoVest Resource Management; Foreclosure Forum. May 04, 2006.
11. 11. 26 U.S.C. §677
12. 12. Randy Hughes, “Do I have to file a separate tax return for my Land Trust?”. Land Trusts Made Simple.
13. 13. 26 U.S.C. §167.
14. 14. Id.
15. 15. IRS Publication 527 (2014), Chapter 2. Residential Rental Property (Including Rental of Vacation Homes).
16. 16. Alex Everest. “10 Reasons to Use Land Trusts to Buy Real Estate.” Deal Maker Library.
17. 17. First Federal v. Pogue, 389 N.E. 2d 652 (1979)

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Disclaimer: No Attorney-Client Relationship is formed by these articles, comments, or responses to the Patriot Real Estate | Blog posts.The information and materials on this blog are provided for general informational purposes only. This information is not intended to be legal advice. The law changes frequently and varies from jurisdiction to jurisdiction. Being general in nature, the information and materials provided may not apply to any specific factual and/or legal set of circumstances. No attorney-client relationship is formed nor should any such relationship be implied. Nothing on this blog is intended to substitute for the advice of an attorney, especially an attorney licensed in your jurisdiction. If you require legal advice, please consult with a competent attorney licensed to practice in your jurisdiction.