Many small real estate owners (1-4 unit properties) are confused about the best entity to hold their real estate, with potentially disastrous consequences. In fact, the majority of small property owners still own their properties in their personal names.
If you own investment property, you’re probably worried about the liability of being an owner. In this day and age, you’d be surprised to know that 1 out of every 10 Americans is sued.
Land trusts are a great way to protect yourself from instances like this and are commonly referred to as asset-protection strategies. Never own real estate in your own name — use land trusts. John D. Rockefeller once said,
Own nothing and control everything. That is the essence of asset protection.
What is a Land Trust?
It is simply a revocable contract between two or more parties. It has been in use for centuries. The first party is the owner of the property — the grantor, in trust speak. He grants, or transfers title to the property to the trustee. He then becomes the beneficiary, along with any co-owners. Beneficiaries of the trust retain management, control and the right to receive profits from the property.
The trustee’s only job is to hold title to property for owners. He is prevented by law from divulging the identity of the beneficiaries (the true owners). He is also prevented by law from doing anything with the property that is not authorized in writing by the beneficiaries.
When you establish a land trust, the recorded title to the real estate is held by the trustee (friend, attorney, etc) on your behalf, while all the rights and benefits of ownership are enjoyed by the beneficiary (you, the property owner). For example, if you were to place your residence or any other real estate in a Land Trust with 123 My House St, title to the property would be as follows: 123 My House St Trust, Trustee. You retain complete control over the real estate. The simple change in title, however, provides many benefits to you as the beneficiary that would not be available if you held the real estate in your own name.
How A Land Trust Works
With a Land Trust the recorded title or deed to one or more pieces of real estate is held by your designated trustee (best friend, sister-in-law, etc). At the same time, all the rights and conveniences of ownership remain with you, the beneficiary of the trust. Rent payments and tax benefits, for example, continue to accrue to you.
The Land Trust agreement gives you, the beneficiary, complete control and management of the real estate, exactly as if the recorded title was registered in your own name. You may insure, develop or finance the property. Land Trusts are often established when a property has multiple owners. In these cases, the individuals named in the trust agreement are assigned the power of direction. They may choose to limit the power of direction to less than all the beneficiaries.
You, the beneficiary, will manage and control the property. You also have the right to add other property to the trust or to terminate the trust at any time.
The Role As Trustee
The land trustee holds the title in trust for you and executes deeds, mortgages, leases and other documents relating to the property only upon your written direction. As trustee, they do not manage your property, collect rent or make mortgage or tax payments.
Who Can Establish And Own A Land Trust
A Land Trust can be established by anyone of legal age qualified to enter into a contract either before or after property has been acquired. This type of trust can be created by an individual or by a group such as an association or organization, a partnership, corporation, syndicate, limited liability company or joint venture.
The individual or group signs a trust agreement with your appointed trustee. They instruct the trustee as to the holding of the title and determine who has the authority to direct the trustee. The title or titles are then conveyed to the trustee by establishing a deed in trust.
Benefits of a Land Trust
* Elimination of Probate Expenses and Delays - With the use of a land trust, you can arrange for your real property to be distributed automatically to your heirs without the complication and costs of probate. It can also expedite the sale of the property so your heirs are not burdened with prolonged payments for real estate taxes, utilities, insurance, and if applicable, mortgage payments.
* Protection of Privacy - Under a land trust, the identity of the real owner (trust beneficiary) is not a matter of public record and generally cannot be disclosed to the public unless requested by a governmental agency or court order in certain circumstances. Your real estate holdings remain confidential.
* Ease of Multiple Ownership - Even though the beneficiary of the land trust retains the right to manage and control the trust, the legal title to the property is held by the trustee. The trustee signs any documents related to any real estate transactions, eliminating the need for multiple owners to sign every document.
* Ease in Selling and Transferring Property - A land trust provides a convenient means of mortgaging and selling the trust property because it is not necessary to obtain deeds from all the beneficiaries and their spouses. It alleviates the need to obtain the release and waiver of homestead rights of a spouse’s interest in the trust property.
* Prevention of Partition Suits - A land trust enables you to avoid partition suits because a co-beneficiary cannot force the sale or division of the property held in a land trust.
* Assignable Interest and Use as Collateral - Your beneficial interest is assignable in whole or in part to third parties and may be used as collateral for a loan.
* Simple Disposition of Partial Interests - A land trust simplifies the problems of disposing of a partial interest in a property since the beneficial interest can be transferred by assignment. Therefore, it is not necessary to tender a deed with all the associated legal requirements. The assignment alone transfers the interest. This is especially important when real estate is held by a number of persons, such as a group of heirs. When property is owned by multiple parties, each beneficiary owns his or her share of the trust and each share may be disproportionate to the others.
Creating a Land Trust
Creating a Land Trust is fairly simple once you understand the concept.
1. Download and fill in a standard Land Trust Agreement template
2. Execution of the Trust Agreement
3. Record the Deed in Trust, which conveys the property into the Land Trust
Summary
A Land Trust is a simple and affordable tool with numerous benefits for property owners. Put every investment property into a separate land trust takes just a little bit of time and effort, but the benefits are worth it.
By creating a land trust, you can protect your ownership in real estate, avoid probate, protect your privacy, and simplify selling, transferring and borrowing against your property.
Hello,
I am in the process of learning more about Land Trusts for real estate asset protection. I have yet to come across positive confirmation of whether or not the mortgage will still show up on the credit report of the grantor once they fund the trust with the property. Could you please shed some light on the subject? Thanks, I hope to hear from you soon.
Best,
Ken