OVERVIEW OF A LAND TRUST
A land trust is a revocable trust whereby one party (the Trustee) agrees to hold ownership of a piece of real property for the benefit of another party (the Beneficiary). Land trusts are used by nonprofit organizations to hold conservation easements, by corporations and investment groups to compile large tracts of land, and by individuals to keep their real estate ownership private, avoid probate and provide several other benefits.
The Beneficiary is often the former owner or purchaser of the property. It’s not unusual for the Successor Trustee to be the Beneficiary in Land Trusts, although this can also be a non-related 3rd party where privacy concerns are paramount.
The successor Beneficiary in a land trust is usually the heir of the Beneficiary of the land trust, and the provisions of the land trust agreement provide for an orderly transfer of the beneficial Interest (and with it control over the assets) to the Successor Beneficiary upon the death of the primary Beneficiary without any further judicial proceedings, thus avoiding probate in the same way that a Living Trust does.
Individuals use land trusts mainly for privacy and to avoid probate. No one knows what one’s bank balance or stock investments are, yet anyone with an internet connection can look up a person’s real estate holdings. A person who has an auto accident or a doctor who accidentally injures a patient is a much better target for a lawsuit if he or she owns real estate investments. So some investors put their properties in land trusts so their name does not appear in the public records. The land trust also allows the property to immediately pass to their heirs at the moment of death, rather than go through a long probate process.
Here are a few other reasons to use land trusts for titling property to real estate.
Privacy. In today’s information age, anyone with an internet connection can look up your ownership of real estate. Privacy is extremely important to most people who don’t want others knowing what they own. For example, if you own several properties within a city that has strict code enforcement, you could end up being hauled into court for too many violations, even minor ones. Having your real estate titled in land trusts makes it difficult for city code enforcement to find who the owner is, since the trust agreement is not public record for everyone to see.
Protection From Liens. Real estate titled in a trust name is not subject to liens against the Beneficiary of the trust. For example, if you are dealing with a seller in foreclosure, a judgment holder or the IRS can file a claim against the property in the name of the seller. If the property is titled into trust, the personal judgments or liens of the seller will not attach to the property.
Protection From Title Claims. If you sign a warranty deed in your own name, you are subject to potential title claims against you if there is a problem with title to the property. For example, a lien filed without your knowledge could result in liability against you, even if you purchased title insurance. A land trust in your place as seller will protect you personally against many types of title claims because the claim will be limited to the trust. If the trust already sold the property, it has no assets and thus limits your exposure to title claims.
Discouraging Litigation. People tend to sue others who appear to have money. Attorneys who work on contingency are only likely to take cases which they can not only win, but collect, since their fee is based on collection. If your properties are hard to find, you will appear “broke” and less worth suing. Even if a potential plaintiff thinks you have assets, the difficult prospect of finding and attaching these assets will discourage litigation against you.
Protection From HOA Claims. When you take title to a property in a homeowner’s association (HOA), you become personally liable for all dues and assessments. This means if you buy a condo in your own name and the association assesses an amount due, they can place a lien on the property and/or sue you PERSONALLY for the obligation! Don’t take title in your name in an HOA, but instead take title in a land trust so that the trust itself (and thus the property) will be the sole recourse for the homeowner’s association’s debts.
Making Contracts Assignable. The ownership of a land trust (called the “beneficial interest”) is assignable, similar to the way stock in a corporation is assignable. Once property is titled in trust, the Beneficiary of the trust can be changed without changing title to the property. This can be very advantageous in the case of a real estate contract that is non-assignable, such as in the case of a bank-owned or HUD property. Instead of making your offer in your own name, make the offer in the name of a land trust, then assign your interest in the land trust to a third party.
Making Loans “Assumable”. A non-assumable loan can become effectively assumed by using a land trust. The seller transfers title into a land trust, with himself as Beneficiary. This transfer does not trigger the due-on-sale clause of the mortgage. After the fact, he transfers his beneficial interest to you. This latter transaction does trigger the due-on-sale, but such transfer does not come to the attention of the lender because it is not recorded anywhere in public records. This effectively makes a non-assumable loan “assumable”.
If you’re considering creating a Land Trust…We Can Help!
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