Land Trust

How does a land trust work?

Think of the basics of trusts:

There’s a trustee and a beneficiary. The trustee manages the trust and the beneficiary benefits from the trust.

The history of land trust come from Illinois. Illinois was the first state to legally acknowledge land trust. a Land Trust is basically a title holding trust.

Think of a living trust. Most people understand living trust because they take personal property and put it into a trust.

The strength of a living trust is to avoid probate court which ties up estates, for 1 to 2 years of times. Depending on how many assets and the value of those assets, it could be even longer.

But a land trust for REAL ESTATE INVESTING is a wonderful tool because you can change real property into personal property, and  this is an unusual concept. You can also sell or assign your beneficial interest. You can do this on the kitchen table.

Asset protection is a reason why Real Estate Investors use living trust and land trust. You do not want to be your own trustee though in a land trust because you’re trying to have privacy and if you name yourself as a trustee then you are negating the privacy issue

There are many benefits to a land trust.

Asset Protection

Land trust can shield the true owner from judgments and lanes that are against the beneficiaries or may come down the road against the beneficiaries.

Ease of Transfer

The beneficial interest in a trust can easily be transferred with only a signature in the assignment doesn’t even need a notary.

Mask the Due on Sale Clause

Regarding due on sale clause is in mortgages, investors use the land trust to perhaps mask due on sale clause violation. 72+ land trust is what we used to be able to buy by taking over payments.

Federal Law Garn St Germaine

There’s a federal law called the Garn St Germaine Act, and this federal law states that the lender can NOT call the loan due when it is a transfer into a trust which the borrower is a beneficiary. Under this act this is a legal transfer and the lender cannot call the loan due because of the transfer into a trust is for estate planning purposes.

Transferring the Beneficial Interest

Once the property is in the trust, the seller of the property transfers their beneficial interest to the investor. This transfer is only known between the trustee and the beneficiaries and it’s not recorded. This is private.

If you name the trust after the original seller, for instance “ bill investor as trustee of the mike seller land trust. “

The bank is going to see the trust name and see original owner’s name you bought it from.

Land Trusts can conceal who the true owners of the property are.

The Powers and Responsibilities of the Trustee

The trustee cannot disclose the names or identities of the beneficiaries under the terms of the trust agreement unless there is a court order.

The IRS And Taxation

Regarding taxes, the IRS considers a land trust as a “disregarded entity”.  There is no tax return for this trust.

Transferring the Beneficial Interest

Regarding transferring the beneficial interest, this is considered to be personal property or not real property. This transfer does not need to be witnessed or notarized nor does the assignment get recorded.

Secrecy

Beneficial interest can be kept secret. There is no documentary stamp tax on the sale.

Title Insurance

Regarding tile insurance, if the beneficiaries sell his/their interest, the title insurance will still remain in effect long as the trust is in effect. Why, because the actual title to the property does NOT transfer, only the beneficial interest of the trust transfers.

Asset Protection

Regarding asset protection, if you were to cause a car accident or otherwise harm another person and a person wanted to sue you, the first thing the attorney is going to do is to look for assets to attach. If you have no assets in public record it may be difficult for someone to sue you if you have no assets in public record.

To protect the property, in case you get a judgment against you, the lien will attach to the property. If the property is  in a land trust, if a beneficiary gets a judgment lien against the owner/beneficiary it will not attach the property held in the land trust. Even if a beneficiary has many judgments against him/her, they can still sell their interest on the trust without interference. Normally if you bought a property and you were on the deed, the judgment immediately attached to that particular property. So owning beneficial interest versus owning deeds will help you in the case of asset protection.

Sub2, Lease Options, and Contract for Deed

You do not need to do a “subject to the existing financing transaction” to use the land trust. If you buy under a lease with option or a contract for deed, you can protect the property from liens and judgments. Just put the property into a land trust before you enter into the lease with option or the contract for deed.

Personal Liability

If someone signs a note or is formally assuming an existing mortgage, then the individual becomes personally liable for a judgment. To avoid personal liability, the property can be purchased by the land trust and the trustee executes the mortgage documents.  The mortgage signed by the  trustee limits the lender’s security to be only against the property and the land trust. Therefore unless the beneficiary has personally guaranteed the note, no judgment can be issued against the beneficiary on a personal basis.

When Managing Tenants

Why land trusts can help you if you were managing property

If a tenant does not pay their rent, you can sympathize with the tenant to extent that you let them know it’s “out of your control as the property manager”, and the trustee will be filing for an eviction. You can minimize confrontation as the manager not the “owner” from the tenant.

Joint Ventures and Land Trusts

Many times in a joint venture agreement you can use a land trust. Problems such a death or financial problem or divorce can affect a joint venture partner.  When the property is in the land trust these problems have no effect. You can use a beneficiaries agreement which spells out what steps to be taken in the event of a problem such as death or financial problem or divorce.

Avoiding Probate

Land Trusts can help avoid probate with real estate.

Possible Disadvantages

If there’s any disadvantage to land trust perhaps a title company isn’t well-versed in land trust. Also when you refinance a property sometimes it’s better to take the property out of the land trust, refinance, and then put it back in the trust.

The agreements used in land trust involve