September 3, 2021
(Think Realty) - Unfortunately for real estate investors, separating fact from fiction when it comes to land trusts can be difficult. A land trust is a simple tool that has been around since King Henry VIII ruled England. Its purpose then, to hide ownership of land (so a commoner would not have to serve in the military or lose the benefits of his land upon death), is the same today.
There are several benefits to land trusts, the main one being privacy.
Privacy
A land trust confers anonymity for the investor, but only in the following situations:
- Title is taken in the name of the trust;
- Someone other than the beneficiary is named as a trustee; and
- The beneficiary is not a party to the mortgage.
The last two points are the most important because real property can always be transferred into a land trust to remove an investor’s name from the chain of title, but if his name appears as a trustee or he is listed on the mortgage, privacy is lost—or at a minimum—compromised.
- In situations where privacy is desired, consider the following scenario:
- Investor establishes a land trust with his attorney or Wyoming LLC as the trustee and the investor as the beneficiary;
- Investor funds the land trust with sufficient cash for the purchase of the property;
- Trustee enters into purchase and sale agreement with the seller on behalf of the trust;
- Title is taken in the name of the trust care of the Trustee; e.g., North Investments, LLC a Wyoming limited liability company, Trustee of the 1456 Trust Dated October 1, 2020;
- After closing, investor transfers beneficial interest in his trust to a different LLC;
- If using an attorney as the trustee, it is important to get a resignation and appoint yourself as successor trustee; and
- If using an attorney, don’t forget to pay him and send him a nice bottle of wine for all of his hard work (I prefer pinot noir from Willamette Valley.)
If you do not have sufficient resources to make a cash purchase, then consider working with a local lender and ask if the lender will permit acquisition in the name of a trust (do not tell the lender this is a land trust. Refer to it as a grantor trust). In this scenario, the use of an attorney or LLC as the trustee is not an option because the lender will require the purchaser be listed as the trustee. The key to anonymity is not listing your name as the trustee when taking title in the name of the trust.
If you are questioning why an attorney is often recommended as your nominee trustee, the answer is greater protection. Situations have come up when investors utilize a good friend as a trustee on their land trusts only to have everything unravel when the friend is hit with a tax lien and every property the friend’s name appears on is encumbered by the lean. This is a costly mistake.
Protection from Judgments
If a creditor obtains a judgment against an investor who owns real property in his own name, the creditor will either apply for a Writ of Execution to force a sale of the investor’s real property or file the judgment with the county. A filed judgment will attach to the debtor’s real property and be paid when the debtor attempts to refinance or sell the property.
If a judgment is entered against a trust beneficiary, the judgment will not attach to the real property held in his land trust. (Remember, the judgment only attaches to real property held in the debtor’s name.) Thus, the real property held in a land trust can be conveyed free and clear of the judgments against a beneficiary. However, an aggressive creditor can enforce a Writ of Execution against the beneficiary’s beneficial interest in the land trust.
Due On Sale Protection
The primary reason for many investors utilizing a land trust is “due on sale” clause avoidance. This used to be an issue, but most lenders write Freddie/Fannie conforming loans. Under recent Freddie/Fannie lending guidelines, a transfer or residential real estate to an LLC will not constitute a violation of the mortgage acceleration clause. Despite Freddie/Fannie new guidance, if mortgage acceleration is a concern, then a workaround is to place the property in a land trust and assign your beneficial interest to an LLC. Although the transfer to a land trust is not exempt from acceleration, most lenders tend to look the other way and assume the trust is part of the borrower’s estate plan.
Facilitation of Property Transfers
Many investors will group several properties within one LLC when their overall equity exposure is minimal. However, their risk exposure will grow in proportion to the increase in the value of the real property and its debt reduction. There will come a point when the grouping of several properties in one LLC is unwise and additional LLCs are warranted to reduce overall exposure.
If the real property was in the name of the first LLC and the investor desired to transfer any of these to a new LLC, it would require the recording of two deeds — one from the first LLC to the investor and then from the investor to LLC #2. This is expensive and possibly fraught with errors. If each of these properties are held in a land trust, the process is simplified by merely preparing two assignments of beneficial interests — one to the investor and then from the investor to LLC #2.
By Clint Coons |
