Learn from Clint Coons, Esq. the five major mistakes real estate investors make when using land trusts and easy ways to avoid them.
So many of the real estate investors I’ve met at my events and training workshops have the industrial, do-it-yourself spirit. It’s what attracts us to real estate. And while I fully support the independent spirit so many real estate investors share, DIY can lead to costly mistakes when it comes to asset protection.
Perhaps you’ve heard from a real estate guru online or a speaker at your local REIA event that land trusts are easy to put together yourself and you don’t need a professional to create these types of trusts. And while this is true — there are plenty of options for DIY legal out there — be careful if you’re using the DIY approach to create your land trust. Just one mistake could leave the whole thing unraveling.
When push comes to shove and your land trust is tested (that is, your trust is involved in a lawsuit), the last thing you want is to find out you didn’t set it up the right way from an asset protection standpoint. This could easily result in the trust being dismantled. If that were to happen, you would be left holding the bag.
So, let’s go over five major mistakes I see real estate investors make all the time when it comes to land trusts.
Mistake #1 – Serving as Your Own Trustee
In short: never serve as the trustee of your land trust. With a land trust, one of the primary goals is anonymity. If you serve as the trustee of your own land trust, you’ve blown one of the major benefits of using a land trust at all — keeping your name off title. If you’re the trustee, everyone knows that you are somehow associated with that piece of property.
Another big reason why you shouldn’t make this mistake is because of the merger doctrine. The merger doctrine states that, if the trustee and sole beneficiary of a trust are the same individuals, then title merges back to your name as the grantor and the trust is never considered a valid title-holding instrument. It’s an archaic law, but it’s sometimes applied in certain cases.
When it comes to your trustee, using a nominee trustee is one way to avoid this big mistake.
Mistake #2 – Using Your Home Address on Trust Tax Statements
When you transfer title into the name of a trust, you must fill out a “preliminary change of ownership” form with the assessor’s office. Basically, this form states that the trust is now the owner of this property, so send tax statements to this address. Don’t use your home address for this purpose.
The purpose of using a land trust is anonymity, but if you use your home address, your association with the property is easily seen. In this case, you’ll want to set up a PO box to avoid this mistake or, again, use a nominee trustee.
Mistake #3 – Failure to Assign Interest
You don’t want to hold the beneficial interest in your land trust. If you do, you’ll be held liable if the trust is ever sued. A lot of people either miss this crucial third step or botch it. The result is sad but true: in the face of a lawsuit, they’re personally liable.
To avoid blowing your liability protection, you have to assign your interest over to an LLC. This adds a layer of asset protection to the property held in the trust.
Mistake #4 – Informing Your Lender
One of the benefits of using a land trust is that it enables you to transfer property into the trust without invoking the due-on-sale clause of your mortgage. This is because land trusts are covered under the Garn-St. Germain Act and public law. What this means is that a lender cannot accelerate your loan (that is, force you to pay the entire amount due on your mortgage) when you transfer title into a grantor trust.
A mistake I see real estate investors make all too often is to inform the lender that they transferred title into the land trust. You do not need to do this. Although the lender can’t accelerate the note due to Garn-St. Germain, lenders are becoming sneakier all the time. I’ve seen lenders put language into agreements about “title transfer fees.” These fees could amount to 1% or more of the mortgage if you transfer title into the name of a trust.
Ultimately, there’s no reason to call the lender and inform them about transferring title into the trust. It will only create confusion for the lender and possibly additional costs for you.
Mistake #5 – Referring to the Trust as a “Land Trust”
Unless you live in one of the handful of states that recognize land trusts by statute, you don’t want to refer to the trust as a “land trust.” This is because most states don’t recognize “land trusts” as a type of trust, creating confusion and problems for you when working with professionals.
Instead, when naming your land trust and discussing the trust with professionals, call it a “grantor trust.” This language is recognized in all fifty states. If you have a living trust set up for estate planning purposes, then this language should sound familiar to you — your living trust is also a grantor trust.