Frequently Asked Questions
Below is a list of questions asked by my students before they buy. Please read these for help understanding what my Land Trusts Made Simple® course can do for you!
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Common Land Trust Questions
Do I Really Need a Land Trust?
I have discussed with many hardened litigation lawyers whether they would "take on" an out-of-state Land Trust with an unknown location of the Trustee, Beneficiaries and Director. This situation could be further complicated by an out-of-state entity as the beneficiary (or possibly multiple out-of-state entities as beneficiaries).
The reaction is always the same from the litigation lawyers: Give me a $10,000 retainer and I will "see what I can do." While it is true that some people with deep pockets or maybe a government agency might cough up the money to start chasing you (and your Land Trust), most will not. Most frivolous lawsuits will be stopped in their tracks once the plaintiff realizes that this is not going to be easy (or cheap).
The more a Land Trust is used to accomplish the many goals that an investor seeks, the more convinced the investor will be (that a Land Trust is the best initial entity). I am not saying that Land Trusts are bullet proof or that they are singularly the only asset protection device you need.
What I am saying is that if you start with a Land Trust for each property that you own (insulating each property from the other) and structure your assets from this basis, you will build a structure that is hard to beat.
Part of the issue here is when to begin your asset protection planning? Some "advisors" tell their clients they do not need to worry about asset protection planning or using Land Trusts until they accumulate substantial net worth. I disagree.
The first step in asset protection is privacy. Even before you have many hard assets (you at least have your future income to protect) you can benefit from being more private with your personal information. Learning NOW how to use a Land Trust (even if you only have one property) can save you lots of trouble in the future. Additionally, you will be learning as you invest and get better at structuring your deals. Waiting to learn is never good advice.
(Hidden benefit of using a Land Trust: Public recordings related to your property will show up on your personal credit report, thereby lowering your credit score and access to credit. If you hold title to property in a Land Trust, any liens relating to your property will not report to your personal credit report. This allows you time to work out the problem more favorably with your creditor since it does not appear on your credit reports).
How do I insure property held in a Land Trust?
Insuring your Land Trusts is the same as insuring the properties that are held in your personal name, an entity, or another trust. Sometimes investors become so busy with other operations of their investment portfolio that they forget to address the updates necessary to keep the property insured accurately with the insurance company.
So, form a routine in your real estate investment operation to follow these simple steps when a change occurs with a property.
When you buy a property, form a new Land Trust, For example:
Robert Smith, Trustee, under trust #1YK2 dated 3-1-11 and all named and unnamed trustees and beneficiaries
Call your insurance broker or agent and report that exact name in writing via fax or email.
Then mark your calendar for receipt of the policy endorsement (30 days)
Make sure all insurance policies insuring this property (the basic and umbrella policies) are changed to reflect the exact name of the trust.
Anytime during the policy year that you change trustees or beneficiaries you will not have to endorse the policy with that change. Just for safety though, I suggest that every time you change trustees that you go through the above procedure to inform your insurance company. It is better to have a paper trail on all changes that occur so there is no question of coverage at the time of a loss.
There will be other important information to report to your insurance
Broker, agent, and insurance company, but the named insured is very important at the time of a claim. If the exact name of the land trust is not reported to the insurance company then they can deny the claim when a covered loss occurs. Make sure the name of the Land Trust is an exact duplicate of the named insured on your insurance policy.
In summary, every time you do any of the following you will need to endorse your insurance policies to reflect the change:
- Buy a property
- Sell a property
- Change trustees
- Add personal property (furniture, appliances, equipment)
- Increase Rents (if you do not have “Actual Loss Sustained” coverage)
- Increase building limits to reflect increased cost of construction i.e. replacement cost coverage. Make sure you have Building Ordinance coverage to reflect the new building requirements of your municipality when a loss occurs.
- Delete any property or equipment due to a sale, loss, or reduction in limits needed.
* All notices to your broker, agent or insurance company should be in writing with an endorsement returned from the insurance company reflecting the order, change, or request given.
BONUS THOUGHTS FOR THE READER
You should have the following basic coverage on a rental property:
- Real Property – building
- Personal Property – contents, furniture, tools, equipment, etc.
- Loss of Rents – to replace rental income at time of loss
- Building Ordinance Endorsements – meet the local code requirements
- Liability – both primary and contingent amounts (umbrella liability)
- Worker’s Compensation – if applicable in your state
- Non-owned & Hired Auto Liability – for subcontractors and employees
* The above is only a partial list of the insurance coverage that you may need for your real estate investment property. Take the time to sit with your professional insurance broker/agent and have him or her advise you of all the insurance protection that is necessary for your real estate investing operation.
This report does not have the space to advise you of all the potential insurable risks you have in your real estate investing operation. You need to counsel with your insurance professional.
Do I need to “register” my Land Trust?
The laws vary from state-to-state, but generally the answer is no (you do not need to register your Land Trust). The key to this is making sure that you use a properly worded Deed to Trustee when setting up your Land Trust. When you record a conveyance indicating the powers of the Trustee and Beneficiary as well as the rights of ALL Beneficiaries, it extremely rare to also record the Trust Agreement.
Should my Land Trust be Revocable or Irrevocable?
A Revocable Land Trust is generally considered a Grantor Trust and is considered to be a “disregarded entity” by the Internal Revenue Service. The Beneficiary (whether it is an individual, corporation, LLC or personal property trust) of a Revocable Land Trust does not have to file a special tax return (a trust tax return). However, if an Irrevocable Land Trust is formed a trust tax return may be required. BE CAREFUL! The income tax rates for trusts are much higher than for individuals. Seek competent advice if you are going to form an Irrevocable Land Trust.
While it is true that an Irrevocable Land Trust has much more asset protection value than the Revocable type, the Grantor should be careful not to create a “gift” to the beneficiary (assuming the Grantor is not the Beneficiary) as this would create a taxable event.
Are Land Trusts more for PRIVACY or ASSET PROTECTION?
Some so-called “experts” state that the privacy aspect of a Land Trust is not legitimate. They point out that several states require full disclosure of the beneficiaries of a trust for a transfer of title to be valid. While it is true that some states (PA, HI & AZ) require beneficiary disclosure, this is a simple problem to solve. All one needs to do is make a Personal Property Trust the beneficiary of the Land Trust and the ultimate beneficiary is still not revealed!
These same “experts” also state that it is easy to track the ownership transfer from an individual to the Trustee of a Land Trust (assuming the property is titled in the individuals name initially). Therefore, the true beneficiary is known even though the property has been placed into the Land Trust.
While it is true that following the chain of title would lead someone to assume that the previous owner is now the beneficiary of the Land Trust, it is not guaranteed. Furthermore, I tell my students to NEVER TAKE TITLE to a property initially.
When making the original purchase the student should have the title transferred DIRECTLY from the seller to the Trustee. This procedure will also help you if a creditor ever tries to claim you made a subsequent Fraudulent Conveyance. You cannot make a fraudulent conveyance of a property in which you were never in title.
NOTE: A conveyance made with actual intent to defraud either present or future creditors is fraudulent as to both present and future creditors.
There are two types of fraudulent transfers: 1) those made with actual intent to defraud and 2) those made under circumstances that constitute "constructive fraud." It is obvious what actual intent means (i.e. the transfer of an asset immediately after entry of a judgment against a debtor). What is not so obvious is the concept of constructive fraud. The conditions establishing constructive fraud are much more objective than those involved in showing actual fraud. Thus the creditor is freed from the burden of proving the transferor’s actual intent. There are three categories of constructive fraud, as follows:
- Transfers made when the debtor is insolvent or will be rendered insolvent as a result of the transfer; for example a debtor who transfers a family residence to his spouse during business difficulties and has a negative net worth as a result of the transfer;
- Transfers made when the debtor engages in a transaction or is about to do so with unreasonably small assets, as when an individual transfers most of his assets immediately before engaging in a risky business venture; and
- Transfers made when a debtor intends to incur or believes that he will incur debts beyond his ability to pay such debts; for example, when a debtor transfers assets immediately before entering a program of business expansion that will require substantially more capital than the debtor will have after the transfer.
NOTE: ALL CATEGORIES OF CONSTRUCTIVE FRAUD REQUIRE THAT THE TRANSFER BE MADE WITHOUT FAIR OR ADEQUATE CONSIDERATION!!!
Constructive and actual fraud often compliments each other. For example, if a transfer is made with the actual intent to defraud a specific creditor, it will be voidable regardless of the transferor’s financial condition and regardless of whether the transferee paid fair and adequate consideration. Conversely, where the elements of constructive fraud are established, the transfer will be voidable regardless of the transferor’s intent.
HINT: If the property is already in your name you can transfer title to a friend, relative, corporation, etc. FIRST. Then, transfer again to the ultimate Trustee that you want to use. Of course, the issue of transfer tax vs. privacy will have to be taken in to consideration prior to this type of “re-transfer.”
Land Trusts can be strengthened to be more of an asset protection tool via creative thinking and special protective devices placed in the Trust Agreement. For example, if you form an Irrevocable Land Trust you have a much stronger structure that judges are less likely to attempt penetration. Since Irrevocable Land Trusts can have some adverse tax consequences, most people form Revocable Land Trusts.
A Revocable Land Trust does not have the strength that an Irrevocable Land Trust has (think: Curtain versus a Wall) but, nonetheless a Revocable Land Trust can be “beefed up” to have some protective elements.
Not only can the verbiage of the Trust Agreement have teeth placed into it but, by combining the Revocable Land Trust with other entities (i.e. Personal Property Trusts, LLC’s and Corporations) and other legal jurisdictions you can get benefits that most people do not comprehend.
There is also tremendous benefit to using an out-of-state Land Trust to hold title to property in your state. We cover all of the details and logic behind this technique in our Land Trusts Made Simple series of home study courses.
Can someone other than me be the beneficiary of my Land Trust?
Most revocable Land Trusts are set up by a Grantor who also becomes the beneficiary (or an entity that the Grantor owns becomes the beneficiary). In this event there is no gift tax problem and no requirement to file a tax return.
Do I have to file a separate tax return for my Land Trust?
“The Land Trust has no special distinction in the Internal Revenue Code and would be a simple, complex, or grantor trust depending on the terms of the trust instrument. Filing requirements would depend on the type of trust.”
A basic Revocable Land Trust is considered a “pass thru” entity by the IRS and requires no tax return. The beneficiary reports all the results of the trust (income, expenses and depreciation) on their personal 1040 tax return. The fact that no tax return is required is one of the many benefits of using a Land Trust (and no separate bank account need be opened since all of the proceeds of rents or sales should go directly into the account of the beneficiary). The beneficiary’s identity is hidden from the general public without the requirement of filing a separate tax return (required for other entities like corporations, LLC’s and partnerships).
Who should I use as my Trustee?
You may want to use an individual as your Trustee to save on trust fees and because they do not close on evenings and weekends. On the other hand, you may not know any trustworthy individuals and want to opt for using an institutional Trustee (i.e. bank, title company or professional trustee) who has experience and liability insurance protection. Then again, you may feel more comfortable designating your attorney as Trustee (especially if s/he helps you with your estate planning).
When considering individuals, you cannot beat a daughter who is married and lives out-of-state! This keeps the Trust close to the family but does not give away your last name (in the court house records).
Out-of-state Trustees are also hard to find and VERY hard to serve (especially when their address is a P.O. Box). Furthermore, there is great benefit to getting your children involved in the Land Trust process. The more your kids know about what you are doing and how you are trying to accomplish privacy and asset protection, the better off everyone will be.
Can I use a Land Trust in my state?
With the exception of Louisiana, real estate that is located in any of the 49 states and the District of Columbia can be held in a land trust pursuant to the law of ANY OF THE STATES mentioned above so long as the Trustee, the property or the beneficiary of the trust is domiciled there.
California, Nevada, Colorado, and Missouri have trust laws that enable a Trustee to hold title to property for a NAMED TRUST (JUST A TRUST...NOT A LAND TRUST); so there should be no problem putting real estate into a land trust regardless of where you or it is situated.
I believe that you could actually form a type of land trust in Louisiana (and get the job done), but would need the help of a local knowledgeable attorney to help you comply with the unusual old French Civil Laws that still dominate that state.
Be sure to check with your local jurisdictional people (recorders office, title company & or knowledgeable attorney) to make sure that you comply with all local customs. Also, keep in mind that laws change often and are open to different interpretations.
My attorney says that Land Trusts are ineffective, outdated and not as useful as they once were. Is he right?
All humans are ego driven and attorneys are no different. If your attorney does not truly understand how land trusts work AND the practical benefits they provide, he/she will likely not recommend their use.
Attorneys are taught in law school to think in a linear fashion. This is good for many legal confrontations. However, linear thinking does not help much when you are chasing someone running in a zig zag pattern. For example, most attorneys would not think to use an out-of-state Land Trust to hold title to property in your state (and why this makes good asset protection logic). Furthermore, most attorneys would not think to make an LLC or Personal Property Trust the beneficiary of a Land Trust (for additional privacy and asset protection benefits).
The bottom line is that finding accurate Land Trust information and guidance is difficult. This is why (after 35+ years of using Land Trusts) I have written two Land Trust home study courses (Basic and Advanced).
My Land Trusts Made Simple “Basic” home study course builds a solid foundation of understanding. The Land Trusts Made Simple “Advanced” home study course expands the student’s knowledge with specific Land Trust terminology and asset protection techniques. Both courses are designed to help the student craft the best Trust Agreement for their situation with forms and bibliographies.