Smart investors take the time to learn all that is necessary to manage their real estate portfolio using Land Trusts. During the process of learning the essentials about Land Trusts, the question arises, “How do I properly insure my Land Trusts?” This question provokes some sound thinking.

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.

Here's Where a Habit is Your Friend

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. Then,

1. Call your insurance broker or agent and report that exact name in writing via fax or email.
2. Then mark your calendar for receipt of the policy endorsement (30 days)
3. 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:

1. Real Property – building
2. Personal Property – contents, furniture, tools, equipment, etc.
3. Loss of Rents – to replace rental income at the time of loss
4. Building Ordinance Endorsements – meet the local code requirements
5. Liability – both primary and contingent amounts (umbrella liability)
6. Worker’s Compensation – if applicable in your state
7. 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 be counseled by your insurance professional.

This is one of the areas where Land Trusts really shine. Most entities (i.e. corporations, LLCs, and some partnerships) MUST be registered with a governmental agency. The registration process divulges the owners and exposes them to public scrutiny. This is one of the main reasons that I suggest using a Land Trust as the FIRST entity in a line of barriers to confound your adversaries.

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 is extremely rare to also record the Trust Agreement.

As mentioned above, most Land Trusts formed by individuals to hold title to their real estate are formed as Revocable. This gives you the flexibility to change the Trust Agreement at will. A Revocable Land Trust though does not give as much asset protection benefit as the Irrevocable Land Trust.

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.

Privacy

Land Trusts were originally designed for privacy purposes. They hide ownership and keep the Beneficiary’s name out of the chain of title. This is the first line of defense regarding asset protection. The less people know about you, the less of a target you are for a lawsuit.

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 (Arizona, Pennsylvania, and Hawaii) 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 individual's 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 the chain of 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:

1. 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;
2. 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
3. Transfers that are 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 compliment 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 the 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 into consideration before this type of “re-transfer.”

Asset Protection

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 to penetrate. 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) 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 a tremendous benefit to using an out-of-state Land Trust to hold title to the 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.

Yes, but you need to be careful. If you (the Grantor) set up a Revocable Land Trust and make someone other than yourself the Beneficiary, you may have gifted the equity (from the property that you placed into the land trust) to the Beneficiary. This could generate a gift tax for any value above the $16,000 standard gift tax exemption, $32,000 for a married couple (as of 2022).

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.

The short answer is no. The IRS website says:

“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.

No separate bank account needs to be opened either since all of the proceeds of rents or sales should go directly into the account of the Beneficiary.

In short, when using Land Trusts the Beneficiary’s identity can be hidden from the general public without the requirement of filing a separate tax return (required for other entities like corporations, LLCs, and partnerships).

I devote an entire chapter to answering this question in my Basic Land Trusts Made Simple^® home study course. The fundamental answer is that you may have an individual, entity or institution serve as your Trustee. There are specific reasons why you would want to have each of these selections. For example, an individual might not charge you a fee to be your Trustee. The answer probably lies with your individual situation and should be tailored to your need when constructing your Land Trust Agreement.

Some of the other considerations for picking your Trustee are integrity, trustworthiness, ease of accessibility, liability insurance coverage, and maturity, to name just a few.

You may want to use an individual as your Trustee to save on trust fees because an individual does 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 such as a bank, title company, or professional trustee, who has experience and liability insurance protection. Then again, you may feel more comfortable designating your attorney as your Trustee. This can be especially true 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 courthouse records. Furthermore, there is a 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.

Finally, out-of-state Trustees are also hard to find and VERY hard to serve. This can be made more difficult when their address is a P.O. Box.

I get calls all the time asking if Land Trusts are legal in a particular state. The answer generally is yes. Six states, Illinois, Florida, Indiana, Virginia, North Dakota, and Hawaii have Land Trust statutes or case law allowing the use of Land Trusts to hold title to real estate and real estate-related interests. Interests like options, agreements for deeds, leases, property rights, mortgages, deeds of trust, and more.

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 a 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 the real estate-related interest 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 the representatives of your local jurisdiction (the Recorders Office, title company, and/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.

Knowledgeable attorneys will not give this advice. The problem is that attorneys do not get much if any, Land Trust education in law school. Therefore, only those attorneys that take it upon themselves to learn all about Land Trusts can give you accurate advice. The problem is not that Land Trusts are hard to understand. It is that you must research (and preferably use them daily. . . like I do) them to understand their true benefits.

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 linearly. 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 the property in your state or 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 40+ 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 students craft the best Trust Agreement for their situation, using the forms and bibliographies that accompany both courses.