Land Trusts: An Important Instrument For The Successful Real Estate Investor/Developer

Land Trusts: An Important Instrument For The Successful Real Estate Investor/Developer

By: Harry Frieland, Esq.

A Land Trust is a simple, easy and inexpensive device for acquiring and retaining title to real estate which results in the ability to provide a source for further asset protection and privacy.

Trusts are not new to the real estate scene and have been in place for many centuries. They have been used as a method for protecting title to real estate and giving the investor and his/her assets an additional layer of security and anonymity against lawsuits, unhappy tenants, divorced spouses, disgruntled former employees and governmental agencies.

Before you can understand and fully comprehend the benefits and nuances related to a Land Trust, it is essential that you make yourself aware of the general operational structure of the instrument itself. A Land Trust establishes a form of property ownership by way of a private agreement. Under this arrangement, a trustee agrees to take title to property for the benefit of a third party(s) called the “beneficiary”. Usually the trust is set up by the current property owner or a party who wishes to purchase the property (the “investor”). The investor thereafter becomes the beneficiary of the trust. The beneficiary directs and controls the actions of the trustee and receives the benefits and income from the trust asset.

The rights and obligations of the trustee and beneficiary are spelled out in detail in a Trust Agreement. The Agreement creates a relationship whereby the trustee has only those powers which the beneficiary gives him, and his only function is to act as directed by the beneficiary. The trust is revocable by the investor who established it and may be altered, modified or terminated at the discretion of the investor. Under the laws of most states, and if the instrument is structured properly, the trustee incurs no personal liability in his fiduciary capacity and any creditor of a trustee has no capacity to lien or otherwise affect the trust property.

Forming a Land Trust involves creating two (2) legal documents:

• A Deed from the investor or current property owner to the trustee as fiduciary for the trust.
• A Trust Agreement between the trustee and the investor or property owner which sets forth the powers, obligations and rights of the trustee, the beneficiary, and the party forming the trust.

After the Trust Agreement has been formally signed by all parties and the Deed to the property has been properly recorded, the property will be titled under the name of the trust and not under the name of the investor or property owner. The Trust Agreement itself is not recorded publicly and the trust is not required to obtain an identification number from any federal or state taxing authority. All taxes are paid by the beneficiary who receives the profits from the trust asset. For maximum protection, each property should be set up in a separate and distinct trust.

The Land Trust arrangement presents the investor with a powerful legal instrument for taking title to property and should be used if an investor or property owner seeks one or all of the following benefits:

• Any claims or liens against the trust property will not affect the beneficiary personally or other assets of the beneficiary. Any judgments, foreclosures, or other enforcement activities can only be satisfied out of the specific trust asset.
• Because title is recorded in the name of the trust, the true owner of the property, the beneficiary, is not made public. Therefore, it will be difficult for the average person to ascertain who really owns and controls the property.

It should be noted that if someone wants to take the time to do a full title search, the name of the beneficiary may be discovered if there is a recorded document which sets forth personal information about the beneficiary. In most instances, people search only the records as to who owns the property and this limited investigation will rarely, if ever, provide the identity of the true owner. It is highly recommended that an investor create a corporation or limited liability company to be the named trust beneficiary so as to further ensure that there is an additional layer of privacy and potential insulation from liability.

• In most states, there can be no disclosure of the interest of any beneficiary without an Order of a Court having proper jurisdiction.
• Any judgments against any beneficiary will not affect the title to the trust property and will not prevent the trust property from being sold.
• Probate can be avoided as to the trust property by having a succession of ownership specifically set forth in the Trust Agreement.
• The beneficial interest in a Land Trust is considered to be personal property which allows for the beneficiary/owner of the trust to be changed without recording a change of title in the public records. This is extremely useful where a Contract of Sale cannot be assigned or where there is a Due On Sale clause in any mortgage.

By contracting or taking title in the name of a trust, it frees the beneficiary to assign his interest to a third party without triggering any default provision in a Contract of Sale or mortgage. In essence, a non-assignable mortgage can be assumed because the assignment of a beneficial interest will not come to the attention of a lender due to the fact that it is an assignment of personality and does not have to be recorded with any public recording office.

• A Land Trust is an excellent vehicle for structuring clear and concise direction for real estate ventures involving multiple owners and can be used to facilitate the easy transfer of beneficial interests.
• Usually a transfer of title into a Land Trust will result in a nontaxable event since the IRS tends to treat the property as being owned by the beneficiary for tax purposes and most states do not assess any transfer fees when a property owner transfers his interest into a revocable trust.

As has been previously set forth, under a Land Trust arrangement the trustee holds the title to the real estate but the power to direct and manage the property rests in the beneficiary.

A Land Trust should not be considered as an instrument providing absolute asset protection and it does not always guarantee complete privacy as to property ownership.

However, the use of a Land Trust does have the effect of discouraging potential litigants who will encounter difficulty and expense in attempting to peel away the layers of privacy created by the trust and, this privacy can be enhanced by having an entity serve as the beneficiary (LLC or Corporation). The assets of the beneficiary under a properly drafted Trust Agreement should be secure from the reach of any creditor or lien holder of the trust itself.

A majority of the states do not have any statutes governing Land Trusts and tend to rely on existing case law involving trusts in general when faced with legal issues involving Land Trusts. The states of Florida, Hawaii, Illinois, Indiana, North Dakota and Virginia, however, do have specific statutes or case law pertaining to the formation and subsequent use of Land Trusts in real estate transactions.

You should consider using this amazing device when investing in any type of real estate. With a Land Trust in your control, no one will be able to easily discover what real estate you own, and, upon your death, you can avoid probate and extensive delays in the distribution of your property to your heirs.

By employing a Land Trust, you can create a mechanism which will be an effective shield for your assets which are outside of the trust property and allow for transferring interests in real estate with minimal complexity.

If you are a real estate investor or developer and wish to learn more about Land Trusts and how they can be used to your advantage, contact Harry Frieland, Esq. at (973) 538-4700 Ext. 3394 or email to hfrieland@fskslaw.com.

HARRY FRIELAND is Of Counsel to the law firm of Fein, Such, Kahn & Shepard, P.C. and concentrates his practice in the areas of business, corporate and real estate law and any transactional matters in these fields. Mr. Frieland has been a frequent lecturer and panelist before public and private groups in the fields of business and real estate, including the creation of business and investment structures, how to invest in commercial and residential real estate, investments in tax sales and foreclosures, and ways to protect real estate assets.

Fein, Such, Kahn & Shepard, P.C. is a general practice law firm of more than 50+ attorneys serving clients in New Jersey and New York. For nearly 30 years the firm has offered innovative solutions to business and individuals in the areas of asset protection business planning, civil litigation, creditor representation in the areas of foreclosure, bankruptcy and collections, elder law, family law, personal injury, tax, and trusts and estates. For more information, go to www.fskslaw.com.

This Article does not constitute legal advice nor create an attorney-client relationship.

© 2015 and 2020 Harry Frieland, All Rights Reserved. Permission is granted to reproduce and redistribute this article so long as (i) the entire article, including all headings and the copyright notice are included in the reproduction, and (ii) no fee or other charge is imposed.