Updated June 4, 2020
In the U.S., anyone with internet access can search the public record for recorded deeds and use that information to learn more about the investors’ financials. With such information freely available, anyone who purchases real estate can be targeted by criminals. For real estate investors looking to protect themselves, a legal instrument that can deliver is a land trust. So what are land trusts?
What are Land Trusts Exactly?
Land trusts are grantor trusts that provide investors with privacy and protection from lenders. When used in conjunction with LLCs, land trusts provide extensive asset protection. At the most basic level, these legal entities perform this straightforward function – they shift a property’s title out of your name and into a trustee’s care instead. However, despite their value, land trusts are often underutilized by real estate investors.
Why Aren’t They Used More Often?
The reason for this lack of usage boils down to a majority of attorneys and CPAs not coming across them in their usual practices. This is because only a small selection of U.S. states officially recognize land trusts via their statutes.
Unless you are dealing with an attorney based in Florida, Georgia, Hawaii, Illinois, Indiana, Montana, South Dakota, or Virginia, where their state statutes formally recognize them, then your regular attorney or CPA may very well say to you ‘what are land trusts?’ Because of this general lack of familiarity, many investors are either unaware of this legal entity altogether or worse, set them up incorrectly.
When Can I Use a Land Trust?
Land trusts are useful in almost any real estate transaction; for many investors though they are created for the following three reasons:
- Averting due-on-sale clause payments – Land trusts help real estate investors avoid violating the due-on-sale clause in their mortgages. This stipulation, built into most mortgages, provides lenders the option to demand the full payment of a loan’s balance when the financed property’s ownership is transferred without a lender’s prior consent. For investors with existing property mortgages, land trusts allow them to transfer ownership into an LLC without violating this clause.
- Providing ownership privacy – With the help of either your attorney or someone you assign as an initial trustee, your property’s title can be taken in by the trust, in care of the trustee. Once the property is officially recorded into the trust, your trustee can then resign and you can then assume their position as the undisclosed successor trustee.
- Avoiding state or county transfer taxes – Land trusts can help investors avoid transfer taxes and fees imposed by a state or country when a property’s ownership is transferred to an LLC (Pennsylvania being an exception).
In truth, though, this is only scratching the surface of what land trusts are capable of for the intelligent real estate investor. To learn more and how to utilize land trusts and other asset protection techniques for your real estate investments, click here for additional learning resources from Anderson. If you have any further questions or want to have your own land trust set up, then be sure to contact us for a free, 30-minute strategy session today.
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