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How To Buy Real Estate With A Land Trust

A land trust in real estate is a revocable grantor trust that allows private landowners to transfer title to a trustee, as a means of maintaining anonymity. The owner instructs the appointed trustee in all manners concerning the property, as outlined in the land trust agreement.

If you’re interested in purchasing real estate with a land trust, these steps will help you get started:

  1. How does a land trust work and who are the parties involved?
  2. What are the key facts to know about a land trust?
  3. Reasons to purchase real estate with a land trust
  4. Financing options: Can a land trust obtain a mortgage?
  5. Tips on how to name your trust property
  6. How to choose the right trustee
  7. Setting up your trust with LLC as beneficiary
  8. Consulting and hiring legal counsel to achieve maximum benefits

 How does a land trust work and who are the parties involved?

There are only three parties involved in a land trust. The parties include the grantor/settlor, the trustee, and the beneficiary. The grantor, or settlor, is the creator of the trust and the one who transfers the assets into the trust. Then there is the trustee, the person who manages the trust and who holds title to the trust property. The trustee has specific instructions and duties that are assigned to them by the beneficiary, such as, collecting rent payments, paying expenses, and handling tenant questions and concerns. Lastly, there is the beneficiary who usually is the same person as the grantor. The beneficiary possesses actual ownership of the property, holds equitable title, and receives the benefits of the assets. Additionally, the beneficiary has the power to fire the trustee and appoint a successor trustee at any time.

Forming a Land Trust

To effectively form a land trust, there needs to be a land trust agreement form. It should be accurately drafted, preferably by a legal professional who has strong knowledge of the law and will include proper language. There also must be a property deed. The trustee’s name shouldn’t go on the deed as a means of protecting the trustee’s anonymity. In some cases, the trust name and the trustee name are required to be on the deed. To know for sure, you should call the county recorder’s office to confirm their requirements. 

What are the key facts to know about a land trust?

Here are some of the important details about land trusts:

Land trusts are revocable, allowing you to change, remove, or transfer the property

Equitable ownership and legal ownership are separate legal titles

Land trusts are private (ownership is not listed in the public records)

They are relatively inexpensive given their benefits

Land trusts are primarily used for investment properties – a revocable living trust is more commonly used for a personal property

May also be referred to as a Title Holding Trust

Land trusts do not inherently offer asset protection

Reasons to purchase real estate with a land trust

Purchasing real estate with a land trust gives the owner many benefits, including the following:

Prevents the due-on-sale clause upon transfer of an encumbered property

Hides the ownership of the property

Prevents property liens and judgments

Can help you avoid litigation since your name is not on the title

The ability to keep the sales price a secret

Tax neutrality – beneficiaries are responsible for paying tax

Avoiding probate in the event of death by converting real property to personal property

Death of the beneficiary does not stop the trust

Ease and simplicity of transfer

Can protect real estate investors from liability

The beneficiary can report equity interest without reporting the mortgage

One of the main benefits of a land trust and the primary reason people choose to create a land trust is to prevent a lender from invoking the due-on-sale clause. Most, if not all mortgages include a due-on-sale clause. The clause allows banks to “call in” or accelerate the loan if the title gets transferred. Fortunately, there is a workaround regarding this clause that protects the beneficiary.

In 1982, the United States Congress enacted the Garn-St. Germain Act. Under this act, mortgage lenders cannot enforce the due-on-sale clause on a property that is part of a land trust. A land trust is covered under this act since it’s a revocable trust. However, there are certain limitations to the Garn-St. Germain Act that should be understood. Some of the limitations include properties that contain more than 4 housing units, commercial properties, and properties purchased with a loan not backed by the federal government. Of course, laws are not always black and white, and the subtle nuances are much better understood by lawyers who have years of experience using land trusts.

Another advantage of employing the use of land trusts is the anonymity they provide. The trustee name is the only name that appears in the public records. As long as your name doesn’t appear as the trustee name, your ownership of the property remains hidden. Based on the terms of the trust agreement, the trustee cannot disclose your identity to anyone, except in the case of a court order.

Finally, if someone wants to sue you and come after your assets, the property or properties that belong in a land trust will not appear in the public records under your name. Meaning, if a creditor or potential litigant looks up your name and sees virtually no assets, the chance of being sued is less likely.

Financing options: Can a land trust obtain a mortgage?

If you don’t plan on using cash to purchase your desired property, then obtaining a mortgage from a lender is a possibility. Traditionally, banks have avoided lending money to people planning to keep their name off the title. Now, that’s beginning to change. Some banks, and in particular, community and regional banks, are willing to close on a loan in the name of a Grantor Trust.

Tips on how to name your trust property

The primary consideration when naming your land trust is privacy. For this reason, your name and personal address shouldn’t appear on the property deed or the land trust agreement. Many land trust agreements require the title to be recorded in both the trust and the trustees name. Therefore, it’s important to establish a unique name that won’t provide clues that you’re the property owner. As a recommendation, you can use the address of the property as the trust name.

How to choose the right trustee

Selecting a trustee is a very important part of the overall land trust creation process. Taking time to choose the right person is necessary because they’ll have fiduciary duties as well as management responsibilities over your trust assets. It’s crucial to find someone you can rely on to fulfill this role and act in the best interest of the beneficiary. Some characteristics to look for in a potential trustee include their financial integrity, knowledge, trustworthiness, honesty, shared philosophies, and conservation values.

Setting up your trust with LLC as beneficiary

The owner of the property determines who the beneficiary is when the trust gets created. As mentioned previously, the beneficiary is usually the property owner. However, it should be noted the trust alone doesn’t completely protect the beneficiary because there is no asset protection. Along with the control the beneficiary has over the management of the trust, there is the exposure to liability. Let’s use an example to explain this point more clearly.

If a beneficiary’s investment property is occupied by a tenant who slips and falls or files an environmental wildlife habitat claim, the tenant may want to seek monetary damages. Although privacy exists in a land trust, there’s still a chance a diligent lawyer will find out the landlord’s true identity.

How can beneficiaries ensure their assets are protected if a claim or lawsuit is filed against them?

To ensure the protection of your properties inside a land trust, you should place them in an LLC. The LLC acts as the beneficiary and in the case of an accident, such as a slip and fall of a tenant, you are personally protected. If a lawsuit is filed against you because the accident took place on your property, they will not be able to come after the equity in your home. Since the beneficiary is an LLC, the exposure it faces is limited to what’s inside the LLC.

What are the other benefits of an LLC besides asset protection?

An LLC, also known as a Limited Liability Corporation, is not formally recognized as a taxable entity, meaning there is no tax designation. Rather than an LLC paying tax, the profits get passed through to the owners, whether they are individuals, a partnership, S corporation, or a corporation. Other benefits of setting up your land trust in an LLC include the isolation of liability, the protection of owners, and the level of privacy provided.

Are there any disadvantages to setting up a land trust with the LLC as the beneficiary?

Some of the few downsides of an LLC becoming the beneficiary include the need for formalization, filing documents with the state, and incurring state fees. The process can be expensive. Although utilizing this option can be more costly, it’s an effective asset protection tool that can be extremely invaluable.

How do I assign an LLC as my beneficiary?

The first step to take is forming the land trust. Then you should transfer your assets or properties into the trust. Next, you will need to set up an LLC. Finally, you will assign your beneficial interest to the LLC. Once this has been done, the deed is the only document kept in the public records. The assignment will be kept private, and the land trust agreement is kept private. You can even file without the trustee’s name in certain states, depending on the rules of the recorder’s office.

Consulting and hiring legal counsel to achieve maximum benefits

There’s much to know and understand about the formation of land trusts. Laws vary from state to state, and those laws can change. The nuances involved are numerous and can be difficult to understand. Many people aren’t very knowledgeable when it comes to land trusts. They get confused about single family homes, non-profit organizations, easements, and land conservation laws. Some will even tell you they cannot be done in certain states. But the reality is, only eight states in the U.S. have statutes on land trusts. The remaining states follow common law, which is currently recognized in all 50 jurisdictions.

If you are considering the use of a land trust for your investment properties, it’s recommended to consult with a legal firm who has the foresight and relevant experience when it comes to these contracts. Anderson Advisors has thousands of clients spread out around the country who have benefited immensely from the formation of land trusts. You’ll receive complete guidance and assistance, from initial trust property setup to more complicated strategies such as conservation easement for private landowners.

We hope you’ve learned from this article and feel more confident about placing your investment properties inside a land trust. You’ve worked hard to grow your assets. By keeping your properties safe and reducing your liability, you can enjoy the long-term benefits of successful real estate investing for your family and future generations.

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