Today Toby Mathis, Esq. speaks with Lauren Robins, Esq., a senior real estate attorney with Anderson Advisors, about helping savvy investors use land trusts in the right scenarios. Lauren explains how land trusts act as a versatile tool for investors, likening them to a ‘Swiss army knife’ due to their broad range of applications. We explore what land trusts can and can’t do, including the intricacies of trust ownership and beneficiary roles. Lauren details how land trusts can help avoid unnecessary taxes, clarify sale clauses, and offer homestead exemption benefits. We also discuss equity stripping and how land trusts serve as a protective measure for investment properties. Additionally, Lauren sheds light on the Garn-St. Germain Act and how land trusts can be utilized effectively for flips, wholesaling, and ‘subject to’ deals.
Highlights/Topics:
- Land trusts – a ‘Swiss army knife’ for investments
- What land trusts can and can’t do
- Trust ownership, beneficiaries
- How land trusts can be useful
- Avoiding unnecessary taxes, sale clause confusion
- Homestead exemption benefits
- Equity stripping
- Land trusts as protection for investment properties
- The Garn-St. Germain Act
- Using land trusts for flips, wholesaling, and ‘subject to’ deals
- Not all investors know about this extremely useful tool
- Share this episode with someone who might be interested!
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Full Episode Transcript:
Toby: Hey, guys. Toby Mathis here and I’m joined by attorney Lauren Robbins. First off, welcome Lauren.
Lauren: Hi. Thank you so much for having me, Toby.
Toby: Lauren’s a real estate attorney who works with savvy investors, and will be explaining to us why her people are using land trusts in their real estate investing. Lauren, I’m just going to hand it to you.
Lauren: Let’s just dive right into it. Really, with land trusts, they’re a great tool, and there are a million different uses for them. In order for you to really be using them the right way, we want to know what situations they’re best for. Let’s go ahead and dive in.
Oftentimes when I’m talking to clients that are real estate investors and that have been doing this for decades and decades, the way that I talk about land trust is that they’re like a Swiss army knife. They are useful in a lot of different scenarios, not in every situation or scenario but in a lot of different ways. When or how you want to use them is going to really depend on what you’re doing and where you’re doing it.
Honestly, they can be used for active business activity, your primary residence at that place. We’re going to look at that a bit more here in just a moment. Really with these land trusts, I want us to be thinking about the fact that they’re useful in a lot of different ways. But when it comes to land trust, we do need to know these basics with them first.
Honestly, a land trust in most cases doesn’t in and of itself provide any asset protection. All it’s going to do is prevent your personal name from showing up there on title, full stop. That’s what it’s going to do. Unless you’re in a state like Florida, in which case, congratulations, a land trust provides as much protection as an LLC does.
In a lot of states, just a land trust by itself, it’s not really that impressive on the outside. With a land trust, I do want to clarify, this is not your mother’s land trust. This is not a state statute–specific land trust. This is something that’s called a revocable grantor trust, similar to what your living trust is. That means that it’s a document that you can change or revoke at any point in time.
Because it is a revocable grantor trust, then it has some specific benefits to it. The ownership doesn’t have to be someone else. It can ultimately still be owned by you. But because it is a revocable grantor trust and it’s not an irrevocable trust, then that’s where it’s not providing that asset protection all by itself. It needs to be used in connection with something else.
Toby: Hey, Lauren, can I ask a couple of questions on that? Just because I want to make sure people are getting this. The title is in the name of the land trust, but you still get the benefit of the ownership, is that what I’m hearing?
Lauren: Correct. When we’re here talking about land trust, really, that’s just a term to let us know what is in this trust. It’s just a piece of land. It’s not being created. It’s not being meant for holding your entire state plan. Ultimately, that’s what we mean when we say a land trust. Really, this is just a trust, which is a private document here. We call it a land trust just because of what it is that it’s holding and usually also, that pertains to the name of the trust.
Toby: Not just land, it could be a single family residence, duplex.
Lauren: Yeah. We say land trust just because it rolls off the tongue a little better than single family trust.
Toby: All right, sorry to interrupt you. Let’s keep going.
Lauren: With a land trust, if you’ve encountered any kind of trust before, then you know that there are those three different parties. There’s the grantor, trustee. When you’re using a trust like this as a real estate investor, then ultimately you are going to be all three of these parties. That’s where we get to keep that ownership still with you. A lot of times when we’re using a trust for business purposes, that’s when the beneficiary is ultimately going to be somebody else. We’ll dive into that in a minute here.
I’m sure that a lot of people are asking, okay, if this is not going to be providing me asset protection just in and of itself, why would I even bother? Why should I have this additional piece of paper, this additional trust?
There are a lot of reasons and situations where a land trust can be really useful. Again, regardless of what kind of property it is—single family, apartment, multiplex—it can still be useful. These are some of the more common reasons why I recommend a lot of clients to use a land trust because in a lot of states, there’s some transfer tax if you’re going to change title from your name into the name of an LLC.
Again, even if you’re not selling it for money, there’s no exchange of funds, no money changing hands, the state still wants to be getting some money from you. In almost all states except for Pennsylvania and Alabama, transferring title from your personal name into the name of a trust, there’s no transfer tax that applies, whether or not you have a mortgage on the property. That’s really great.
You can use a land trust just because statutorily, you can use it to not have to pay taxes unnecessarily. That’s one benefit, not having to pay unnecessary taxes, which I think almost everyone can agree on. That’s what we want to do, especially when we’re investing. We don’t want to pay taxes when we don’t have to. It can also help to prevent any due-on-sale clause confusion.
When you’re transferring title from your personal name into the name of a trust, if your loan is owned by anyone—Fannie Mae, Freddie Mac, some other party—then you still generally can’t invoke that due-on-sale clause. That’s another benefit of a land trust. It can avoid that clause from coming into play.
Also, it can be a really great tool for wholesale deals and also subject-to deals. Again, we’ll dive into that more in a minute here. We have seen with the higher federal interest rates, they’re a lot more subject-to deals happening. These can be a great tool for pushing that as well.
Toby: A subject too is just when you’re buying a property subject-to the existing mortgage, and you’re going to keep paying. You may not want to let the lender know. The lender is not prejudiced in any way. They’re still guaranteed by the previous party. It’s still secured by the real estate, but you take it over and you’re getting beneficial interest. There are some people that get a little wonky about that. I think in some states, I think Illinois, you have some issues there.
Lauren: Yeah. Not to say this works. It’s never a one-size-fits-all, this is going to work in every state, every situation. It can be a great tool for those active business deals when you’re investing in real estate. Again, we’ll talk about that a bit more.
I also want to make sure that we’re talking not only about business. But when it comes to investing, honestly, you need to have your own personal stuff figured out first so that you can grow and have that peace of mind, honestly.
A lot of times we’ll recommend a land trust for your primary residence, because that way your name is not showing up there on title, but you still own that property. You still have full use of the state homestead exemption that’s available in your state. Every state offers some level of guaranteed amount that if you ever had to sell your home to pay whatever creditors, then there’s a guaranteed amount that would remain yours through that homestead exemption.
There are some states where it’s unlimited, and you get that full value of your home guaranteed to you. That’s in Florida and Texas. But in a lot of other states, your homestead exemption isn’t the full amount of your home, but it’s at least something. We still want to be able to utilize that because that’s just a built-in benefit to having a home in that state. We don’t want to be giving that up unnecessarily.
With your primary residence, having any land trust of some kind, you still have full use of that property. You can sell it whenever you want. You can do whatever you want to with it, but your personal name isn’t going to be there on that public record. For a lot of people, having that public-facing anonymity, especially when it comes to their home brings a lot of peace of mind.
It does provide a lot of benefit here so that you can know, hey, my personal stuff is as protected as possible. They can make sure that they’re moving forward with the best foundation. They can continue to grow and not worry about their personal assets being labeled with a neon sign that it’s owned by them.
Toby: I’ve actually seen that come up in litigation, where somebody will actually go and find out where the individual lived, the potential defendant. Actually, this is almost a quote. I can’t remember exactly what the council said, but it says, your clients in Huntington Beach, those are very expensive homes, so we know they have money.
Lauren: Yeah. Honestly, when it comes to litigation, a lawsuit isn’t even going to get filed or go anywhere, unless the other party’s attorney is pretty sure that they can get some funds out of you. This is something you talk about all the time. By having anonymity, not having your name on everything publicly, then you really don’t look like a good candidate at all to be sued.
We don’t want to be giving anyone any incentive. Just because you’ve worked really hard and you have a really beautiful home, it doesn’t mean that needs to be everybody’s business.
Toby: Yeah. I always call it security by obscurity. It’s just, don’t let people see what you own. It’s very unlikely they’ll ever try to take it. If they can see everything you own, then they feel like they’re going to help themselves to your assets. Just keep your stuff private, keep it out of the public. Keep your name off of things to the extent you can. It sounds like a land trust. I know we sometimes call them residence trust because there’s a slight difference between.
Lauren: We use different terms just so that we’re aware of what exactly is being held in that trust. When we heard Anderson say a primary residence trust, it’s the same revocable grantor trust. It’s just we have different wording in there because of what it is, what is being held in that trust.
A lot of times, you can combine this with equity stripping. That would be a whole other ball of wax if we wanted to talk more about that. That is you can still be engaging in equity stripping if your home is in a primary residence trust or a land trust of some kind.
Toby: These are just tools in a toolbox, and you might be using two or three of them any time depending on the circumstances, but this sounds like it’s a pretty effective tool in many situations. Keep on going. Let’s see what else we got.
Lauren: Other than your primary residence, these are so good for investment properties because you can be transferring title from your name into the name of this trust. On that public record, it just looks like you’re no longer the owner. Even though you still own that property, you can rent it out, all of that. No one can see that. Again, that idea of the obscurity, providing that security and that benefit.
When you’re looking at a public property record and it’s saying, okay, this property is owned by a land trust, it is going to say the trustee of the land trust just because there does need to be someone or some findable entity like an LLC. An LLC can be your trustee. There does need to be an agent that’s named just because a land trust is not a document that’s filed with any government body or anything. It’s a private document. You do have to basically name a public agent, but again, that’s where using an LLC as your trustee can be helpful. That’s all the information that the public can ever find, trustee of land trust.
Toby: Lauren, so it could be a Wyoming LLC that doesn’t have your name on it. You claim that it’s yours. It could be a trustee of a land trust that holds a piece of land. Your name’s nowhere on the property, whatsoever.
Lauren: Your name is nowhere near the property. It’s also not findable. You can’t find any information on who the member or manager is of a Wyoming LLC. Again, you’re getting that bonafide anonymity there because they cannot see who the beneficiary is of that trust. Again, your trust, that’s a private document. That’s not something that anyone has access to.
It’s oftentimes here with the beneficiary that will want to use an LLC. The LLC is the thing that’s going to be bringing the asset protection part or that liability limitation part. That’s, again, not something that anyone else publicly is ever going to be able to find.
Toby: Is it true, the only way they’ll ever see that is if you actually get sued and they go after the land trust, which they would have to sue? The trustees are not responsible for any of the actions of the land trust, but it’s still the party that they’re going to name? They’re going to say, we’re suing that land trust through its trustee, and then they’re looking for who those beneficiaries are. When they find out it’s an LLC, they’re going to be a little frustrated?
Lauren: They’re going to be quite crestfallen, them and their attorney, because they’ll see, oh, it’s owned by an LLC. If it’s part of your overall structure, and you have a Wyoming holding company that owns that beneficiary LLC, even better, because then again, the ownership is coming to a full stop. They can’t legally be getting to you personally.
Toby: If people are asking, hey, why would I do this and an LLC, why wouldn’t I just do the LLC, sometimes you do.
Lauren: Sometimes, yeah. There are states where you can absolutely just transfer the title from your personal name into the name of an LLC. But like we were talking about a few minutes ago, there are a lot of states that will impose a pretty hefty transfer tax if you do it. You can use this to avoid having to pay those transfer taxes, which can be thousands and thousands of dollars.
Toby: I live in one. I’m in Clark County, Nevada, where a transfer into an LLC is not taxable. Taking it back out, they assess a transfer tax, and it sucks. You have doc stamp fees in Florida. You have all little hidden gems that are rolling around there. For the most part, if I had five or six properties pointed to an LLC, I don’t want my LLC out there on each.
Lauren: No, you definitely don’t, especially if you’re going to have multiple properties pointing to one LLC, you don’t want to have that LLC’s name on that public record. That’s a big reason for avoiding those unnecessary taxes. Also, if your loan is not backed by Fannie Mae or Freddie Mac, then there can be some issues, some trouble if you’re transferring title into the name of an LLC.
Toby: With higher interest rates, you’re seeing that.
Lauren: Yeah, especially now that not as many people are trying to get mortgages. They’re looking real closely at all of their existing borrowers and what’s going on. When things are a bit more profitable for them, they’re not looking as closely, but right now, definitely, they’ve got a magnifying glass on it.
Toby: I think it’s the Garn-St. Germain Act. I think it was 1982.
Lauren: Correct. The Garn-St. Germain Act, it basically just states that any lender, it doesn’t matter if they’re the biggest lender or the smallest. They are not invoking that due-on-sale clause, if you’re transferring title from your name into the name of a trust. Again, the fine print says so long as you are ultimately still the beneficiary, but you are.
Toby: I think it’s supposed to be for your residence, primarily.
Lauren: It does, yeah. The act does say, you also have to live in the property, but that’s not something that anybody’s ever seemed to check out. Once they see, oh, you transfer title from your name into a trust and you can provide documentation to us to show that you are the beneficiary of the trust, it’s over and they’re done. They don’t want to violate that Garn-St. Germain Act because that was a big, huge case in getting banks and lenders more regulated and putting them in their place.
Toby: Stop the shenanigans. When you’re transferring to a trust, we actually want properties and trust from an estate planning standpoint. They definitely want them in trust. Just as a matter of course, most of these properties, you don’t want them in your name.
Lauren: Yeah. Again, transferring title from your name into a land trust, your lender is going to be like, okay, fine. They won’t be calling the loan due. I worked in foreclosure law for several years before switching to the good side and doing asset protection. I’ve seen that a lot of times with lenders calling the loan due, I’ve seen what that actually looks like for lenders. For the most part, they want to avoid doing that whenever possible because it’s just more expensive for them, and they usually lose a lot of money.
Back to this investment property idea. You can be using a land trust for holding investment properties. Whether they’re going to be fix-and-flips or properties that you rent out long-term, they can be used in either scenario.
A lot of people will ask me, okay, can I reuse my land trust after I sell this property? You technically can, but that’s silly because a land trust is a private document, so it doesn’t make any real sense to try and repurpose it.
Toby: You might have some residual liability floating along with it.
Lauren: Oh yeah. A land trust, this thing is disregarded. Inherently, it’s just a disregarded thing. It’s a private document. It’s not something that you need to be filing with the Secretary of State to change or update the name of.
Ultimately, on those points alone, let alone whatever residual liability that could flow from one to another property, if you reuse the same land trust, all signs point to no. It’s not going to be the best use of your time and the best use of this tool.
Again, part of why this is such a good tool is you can create a land trust for every property that you own, and it’s really simple. It’s a really simple process.
Toby: You don’t have to register it with the Secretary of State. You’re not getting franchise taxes. You’re not getting all the stuff that comes along when you’re dealing with just LLC sometimes.
Lauren: It’s a really great tool, again, for that reason as well. In addition to using it, whether it’s stationary ideas where you’re just putting the property in the trust and leaving it there, you can also be using it when you’re engaging in wholesale real estate and also subject-to deals.
Again, this is just a tool. The trust is going to be the buyer on that initial purchase agreement. If you’re going to wholesale it, then you go out and find a new beneficiary for that land trust.
The name stays the exact same on that purchase agreement. It’s just, ultimately, the separate agreement, your trust agreement, the beneficiary is going to change. You go and sell the beneficial interest in that trust. It makes these kinds of deals run a lot smoother.
For wholesaling, you still are going to be getting that finder’s fee because you are still providing a really key service. You’re helping the right seller find the right buyer for that property, but it just makes it so that you’re not having to change that purchase agreement, the buyer name from your name or your business entity’s name to somebody else. It gets to just stay clean and be the same name the entire time.
Toby: I’ve actually done those deals. They’re pretty simple. Sometimes you’re switching the trustee, that’s it.
Lauren: You change the trustee, which again, that’s fine. You can absolutely do that. It’s just another document that you sign privately and then you’re good to go. These are really great for wholesale deals and then also subject-tos.
With subject-to deals, then it can be a little tricky, because we never want you to be using them as a way to circumvent paying necessary sales, capital gains, or transfer taxes. But it can be really useful when you’re using that seller financing option, which again, I’m seeing more and more of.
Again, you’re just changing out who the beneficiary is in these situations. It can be a great tool here. I don’t ever want to say with a subject-to deal, just have a land trust. I never want there to just be one document with a subject-to deal. I can’t even tell you the number of times that I’ve spoken with a client that got burned with a subject-to deal.
I had a client a few weeks ago that did a subject-to deal before working with us. The person that was still on title because they didn’t use a land trust, they just had one page agreement. That person has actually passed away, so now there’s a deceased individual on title. That needs to go through probate because that seller did not have an estate plan of any kind, nor do they have any family members that are willing to part with this right now that my client has been paying the mortgage on for 4½ years.
I don’t ever want there to be an issue like that ever again. If they had a land trust where title was in the name of the trust, and then my client was now the new beneficiary, it wouldn’t matter. It wouldn’t matter if that seller had passed away or not. They could still have rights to that property. They would have to be paying taxes, sure. Transfer tax. Yeah, absolutely. That’s okay. When you’re actually purchasing a property, you have to pay taxes when they’re required and they’re due.
Toby: For those of you thinking, what about the lender, the lender’s not prejudiced because the lender’s getting paid.
Lauren: The lender has not had a missed payment, again, in 4½ years. If my buyer had been not paying the mortgage, that’s where it’s better for the seller because they still hold title, ultimately. They still have the right to that property, but as long as your buyer is paying that mortgage, then it can be a really beneficial tool.
But again, you want to have more documentation than not, but a land trust is just a tool to make it easier for both parties. Again, in case of something like what we just went over, if the seller passes away unexpectedly, you don’t have to go through probate.
Toby: Perfect.
Lauren: Again, land trusts are really useful in all these different scenarios for all these different reasons. A lot of times, I have clients where we talk about a land trust. After that conversation about it, they go on and create a land trust for almost every single property that they have, because it’s pretty simple to create 10, 15, 20 land trusts. You can use the same […].
If you own a home, if you are getting into investment properties, and you’re looking at getting into wholesaling or subject-to deals, you should really be thinking about using a land trust to be making those deals smoother, avoiding unnecessary taxes, and avoiding any unnecessary issues with any lenders.
Toby: Fantastic. I see a link there, aba.link/qag. Is that what it is?
Lauren: Correct.
Toby: That’s excellent. Thank you for summarizing and why people are using it. This is something that I’ve seen over 27 years as an investor that I use often. It’s one of those weird things that’s been around forever, but not a lot of investors know about it.
Lauren: If you don’t know all the ins and outs, then it can be a daunting tool. It’s just an item in your real estate investing toolbox. We can absolutely help you figure out what situations that’s best to use it in and when it’s just not going to be the best fit for you. If you want to get more information about this, then you can absolutely contact us. We’d love to go over it with you.
Toby: All right. Hey, guys, like and subscribe. Share this with anybody you think would benefit. Thank you, Lauren, for coming in and sharing with us.
Lauren: Absolutely. Thank you so much again for having me.
