One of the most useful devices for owning real estate is the land trust, yet surprisingly, very few people know enough about them to use them. Every week I deal with title companies, Realtors, insurance agents and even attorney who have no idea what a land trust is or how it works.
Why land trusts
Land trusts have been around for hundreds of years for the main reason that they offer real estate owners privacy. No one knows what stocks or bonds or gold you own, or how much you have in the bank. Why should everyone be able to look up all the properties you own and how much they are worth?
When I first started using land trusts twenty five years ago one needed to go into the property appraiser’s office to look up a name and that was enough to make people want the privacy of a land trust. But today every person on the planet with access to a computer can log into your county appraiser’s web site and find out everything you own, what you paid for it, what it’s worth and even details as to how many rooms it has and whether it is carpeted!
If you were to be involved in an auto accident, or be accused of sexually harassing someone, or slandering someone, or have an accident on one of your rentals, the first thing an attorney looking at the case would do is look up what you own. If you don’t own much it would have to be a serious case for him to do a lot of work on it. Then again if you owned a lot of properties, a little injury could look a lot more serious.
How land trusts work
A land trust is an arrangement where someone else (a trustee) holds property for you (the beneficiary). Your name does not appear in the public records, the trustee’s name does. But you have all the benefits of ownership. You get the rents and profits when it sells, and you pay the taxes. The trustee just has his name listed in the public records and it looks like he is the owner. But you are the real owner.
You can set up a land trust two ways. You can either buy a property directly into a trust, in which case your name never appears on the records at all. Or you can deed property you own into a land trust. By the second method there will be a record that you once owned the property, but someone looking up what you currently own would find nothing owned by you.
In most cases the trustee does nothing but hold the title. The tax bill is mailed to the trustee as the owner and he forwards it to you, as well as any other legal notices related to ownership of the property. Because this trust is passive (the trustee does nothing) it would not be allowed in some states because of an old law which forbids passive trusts. In those states the trustee might need to have a duty or two such as paying the taxes or receiving the rent checks to make it an active trust.
Courts have looked at land trusts for over a hundred years in America and most have allowed them to exist. Since the property is not in your name but in actuality you really own it, courts have said that this is a legal fiction, but one that they allow to exist because it gives so many benefits.
Some of the other most popular benefits from this arrangement are:
Keep property taxes lower. Many property tax offices raise assessments when a property is sold. Since a sale of the property can be kept secret and even when deeded the sales price can be kept secret, these cannot be used by the tax offices to raise taxes.
Avoiding liens and judgments. Liens, judgments and other claims against you or your partners are not liens against the property because you don’t own the property. This means you can buy and sell properties, even if you have judgments or liens against you.
Keep sale price and sales price secret. When using a land trust you can keep the price of the property secret. This is because if done right you don’t have to pay transfer taxes on the recorded deed.
Avoiding probate. When you die you can have your land trust property instantly go to whomever you name in your land trust. No probate, no delay, no lawyers, no fees.
Additional benefits of land trusts
While privacy is the main benefit of using a land trust, there are many other benefits and every couple years we find a new benefit. Not all will work in every state, but most should be available in most states. Here is a brief summary of the benefits that apply in most states. For a more detailed discussion, see my books, Land Trusts for Privacy & Profit, or Land Trusts in Florida.
Keep change of ownership private. When you sell a property in a land trust, you can sell the beneficial interest of the trust, rather than conveying by deed. This way no one knows the property has been sold.
Ease of control. When you have several partners owning a property, especially if they live in different states, a land trust can allow you to manage it more easily. One person can be the director so a deed does not have to be signed by everyone.
Ease of management. When you are dealing with tenants, you can position yourself as merely an agent of the trust. This allows you to sympathize with their problems while explaining that the trustee insists that they comply with the lease.
Ease of negotiation. When buying or selling property for a land trust you can set strict rules for the trust and then present yourself to the buyer or seller as the good guy, wanting to make the deal, but limited by the trust.
Avoiding future liabilities. There have been cases recently where lawyers have gone after people who owned property 10, 15, even 30 years ago because of some current problem with a property! If the property was owned by a land trust and the trust was dissolved after it was sold and there was no record of who the beneficiaries had been, it wouldn’t be possible to hold them liable.
Improved financial statement. When you have mortgages in your own name the amount of debt goes on your financial statement and if you have a high debt ratio you may look like a bad credit risk. When a property is in trust the mortgage can be in the name of the trust alone and you can list only your equity on your financial statement.
Saving on title insurance. If you sell the beneficial interest in a land trust, rather than deed the property, you do not need to get new title insurance.
Ease of transferability of interests. With a land trust you can transfer fractional interests in a property with a quick signature, rather than needing a notarized deed.
Simplification of making gifts. Interests in land trusts can be made as gifts to family members to take advantage of the gift tax exclusions. Each year you and your spouse can give $11,000 worth of land trust interests to each person tax free.
Limiting liability. By having a land trust sign notes and mortgages you can limit your liability for a default judgment if there ever is a foreclosure.
Avoiding partition. When a property is in a land trust a disgruntled partner or heir of a partner can't force the property to be sold. This makes it more likely you can sell a property when a project is completed and at the highest value rather than in the middle at a discount.
Ease of foreclosure. When you sell the beneficial interest it is possible to take it back more easily than if you sold the land and took back a mortgage.
Safer Lease/Options. Unlike a regular lease/option where a tenant can get a vested right to the property, a lease option through a land trust can be structured to keep the option from vesting until the tenant has built up substantial equity.
Avoiding personal problems of beneficiaries. When an investment is structured in a land trust you don't have to worry about the spouse of a divorcing partner changing the deal.
Avoiding real estate brokerage laws. Since a beneficial interest in a land trust is personal property, you could perform brokerage services for it without violating the real estate brokerage laws.
Avoiding seasoning problems. Some lenders won't loan on a property if it has not been owned a certain length of time, such as six months or a year. When a property is in a land trust it can be sold several times but the ownership on the public records remains the same, building up seasoning in the same name.
Loaning money. If you wish to loan money to someone, one form of security you can have is to have them deed it to a land trust and make you the director. That way you would have control of the property until you were paid.
Holding judges property. Judges are allowed to own interests in land trusts without violating ethical rules.
Biography
Mark Warda has been a Florida attorney for over 25 years. He received his BA with Honors in Political Science from the University of Illinois in Chicago and his JD from the University of Illinois in Champaign. He also studied law at the University of Oxford, England and studied German in Cologne and Spanish in Barcelona.
Mark started his first business at the age of three when, after learning that one needs money to buy things, he started selling his drawings to visiting relatives. While practicing law he noticed that his clients had problems they wouldn’t have had if they had known something about the law before they came to him. So he started Sphinx Publishing to publish self-help law books. His first book was Landlords’ Rights and Duties in Florida and his first printing sold out quickly even though it had just 57 pages of text typeset on a typewriter and was spiral bound. Over the next few years he wrote several more books and eventually quit practicing law to publish the books full time. After finding lawyers in other states who were also interested in simplifying the law, he began publishing versions of his existing books adapted to those states. By 1996 he found he was spending most of his time overseeing the publishing end of the business so he sold the company to a larger publisher, Sourcebooks, in Naperville, Illinois to give himself more time to write books.
In 1998 he started Land Trust Service Corporation to service readers of his book Land Trusts in Florida who were looking for dependable, affordable trustee services.
Today Mark is continuing to update his over 60 books and running Land Trust Service Corporation in Lake Wales, Florida with his wife Alexandra and his new son, Mark David.
Make sure you hear the special announcement form Mark Warda on www.TBREIA.com about the change in the Florida Land Trust Law! Also Mark Warda has sent a dozen new Land Trust in Florida 8th edition books with a CD Rom of forms to be raffled at the TBREIA General and sub-group meetings.
