This is the first part of a two-part article on Land Trusts.
Question: What Do the Polio Virus & Land Trusts Have in Common?
Answer: Neither can be eradicated!
Let me preface this article by explaining that I have a legal degree, a law license and 30 years of experience practicing as a licensed lawyer. I have represented 1,000’s of investors, and I am receiving no compensation or renumeration for this article. And, I have a strong disfavor against non-lawyers who give bad legal advice.
After writing, teaching and speaking publicly about land trusts and asset protection for nearly 30 years, I thought that the land trust had finally been eradicated, but like any good virus, land trusts seem to never go away and occasionally spring back to life. Recently, I learned that there is yet another “national speaker,” proclaiming the virtues of land trusts. This “national speaker,” like any good oil snake salesman, claims that a land trust will cure almost any real estate ill. The pledge is that by buying a “full day of training,” you will learn that a land trust will provide you with-
- Estate planning
- Asset protection
- Easy evictions, if you sell on land contract
- And a whole bunch of other benefits
By attending a “full day of training,” and presumably buying a package of non-lawyer legal forms, you will understand how important it is to “never put your name on title again.”
This is just horrible legal advice, and, in this article, I will explain why land trusts do not accomplish all these proclaimed goals. By the way, I have been writing versions of this article for nearly 30 years. And land trusts have not gotten more appealing over the past three decades. If anything, there are fewer reasons to use a land trust today than ever before.
What is a Land Trust?
There are many types of trusts. Trusts are used most commonly as estate planning tools to reduce estate taxes, avoid probate, and manage assets for beneficiaries until those beneficiaries are able to manage the assets for themselves. These are usually called “Living Trusts” or “Loving Trusts,” and there are also “Testamentary Trusts.”
Another entirely different type of trust is the land trust. A land trust differs from other types of trusts in that the trustee’s role is limited simply to holding legal title to property. The trustee does not manage the property. And here it is important to understand an essential concept under western property law. In the United States, and namely Indiana, we think of real estate rights as a bundle of rights, with one right to hold title (legal title) and an infinite number of rights as to the use of the property (equitable rights). Equitable rights include the right to paint the bathroom blue, to cookout on Sundays, to plant flowers in the backyard, to rent the spare bedroom, etc. Some of these equitable rights are limited by government police powers, such as zoning and building codes, and private agreements, such as neighborhood covenants, easements, etc. The right to use the property is separate and distinct from “holding title.” The former being equitable title, and the latter being legal title.
How the Land Trust Works
Under a land trust, a true land trust, the only thing held by the trustee is legal title. The land trustee has no equitable rights to the property. And that is key to understanding the limited value of the land trust.
By way of illustration, Bill owns a rental property, and he decides to use a land trust. So, Bill transfers by deed his rental property to Carol, an old friend from college, as land trustee. Bill still maintains equitable title and retains the right to make all decisions as to the use of the property. In a typical scenario, Bill identifies a limited liability company (an LLC) as the equitable owner of the property through a beneficiary designation under the land trust documents. Carol merely holds legal title. Carol has no rights to control or benefit from the property. Bill’s LLC really controls the property and would be identified as the landlord under any lease agreement with a tenant.
It is true that transferring ownership of real estate to a land trust is a means of providing a property owner with (limited) anonymity. In other words, if investment real estate is owned by a trust, it makes it more difficult for creditors of that trust to locate in the public records all the other properties owned by the real estate investor. To make the matter even simpler and more direct, tenants trying to sue you will find it more difficult to discover all of the property that you own, if you own your real estate in separate trusts.
You may be surprised to learn that anyone with access to the Multiple List Service (MLS) System can simply perform a name search to locate all the properties that you own in your name. Public records can be similarly searched by computer now. Holding title to your real estate in separate land trusts reduces, but does not eliminate, the chances of a computer search revealing all the properties you own.
It is 2021 folks! It’s not hard to figure out who really owns a house.
And in an increasing number of states and cities, landlords are required to provide detailed information about themselves through mandatory landlord registration. The anonymity provided by land trusts has largely been evaporated thanks to these forces- the Internet, landlord registration and online data.
Anonymity Versus Asset Protection
Land trusts are just one way to gain limited anonymity. Buy anonymity is NOT asset protection. A land trust is NOT a fool proof way of avoiding creditors. A land trust provides no asset protection, and provides no limited liability to the beneficiaries of the trust. A trust merely makes you harder to find. As an attorney, I know that I can find the owner of any property with a little effort, regardless if it is owned by a land trust, limited liability company, or corporation.
Only lawfully created and maintained limited liability entities provide limited liability to real estate investors. Those limited liability entities include limited liability companies (LLC’s), corporations, limited liability partnerships (LLP’s) and to a certain degree limited partnerships (LP’s). Trusts provide none of the protections afforded by state law to the owners of limited liability entities. That may or may not be the law in Georgia or Ohio or Florida, but that is the law in Indiana.
Adding a Personal Property Trust Does Not Help
There is a strategy of adding a personal property trust to a land trust to create “THE ULTIMATE ANONYMITY PLAN.”
Just as land trusts do not provide limited liability, personal property trusts provide no such limited liability either. It has incorrectly been suggested that limited liability or asset protection is provided to a real estate investor by layering trusts on top of each other. However, no true asset protection is provided to a real estate investor who holds his properties in a land trust whose beneficiaries are a personal property trust. Adding two or three layers of trusts to a land trust does not serve as a substitute for a limited liability entity. Layering such trusts in such a fashion does provide additional anonymity, but a good plaintiff’s attorney will be able to pierce that anonymity and discover the true beneficiaries of the trusts and the interrelationships of the trusts.