Who Uses Land Trusts?
As a property owner, how do you protect yourself against those who would search out individuals who have done well for themselves only to file frivolous lawsuits against them for their own financial gain?
The good news is that there is a unique estate planning tool, called a land trust, that will allow you, as a property owner, to title your property in the name of a trustee.
That trustee will then become the face of your property to the world. The beauty of a land trust is that, whether you own one or many properties, only you and the trustee will know of your ownership.
What is a Trust?
A trust is a legal contract between the settlor (the person who creates the trust and determines how it will be managed), and the trustee (who is designated to manage the trust property) whereby the settlor transfers title to his or her property to the trustee who then manages that property for the benefit of a third party referred to as the trust beneficiary.
When title to property is transferred by the settlor to the trustee it is split into two different property rights:
- Legal title to the property - the right to be known to the public as the owner of the property; and
- Equitable or beneficial title to the property - the right to use and benefit from the property.
A trust allows the settlor to transfer legal title to property to the trustee, while retaining equitable title and beneficial interest in the property and, in some cases, control over the property.
What is a Land Trust?
A land trust is a type of trust specifically designed to hold and protect real estate. A land trust is also the safest way to hold title to all types of real property.
Unlike an LLC, which involves annual fees, public disclosure, and possibly extra taxes, a land trust has no such downsides. A land trust is also private and fast to set up.
Land Trusts & Asset Protection
Land trusts began in England in the Middle Ages as a way to prevent seizures and taxes by the King. Does this sound familiar to you? If you have personal tax liens or judgments, an effectively executed land trust can prevent these threats from attaching to the property or equity held in the trust.
Many people consider using and an LLC or a living trust to protect their real estate from financial threats. However, both an LLC and a living trust are part of the public record and neither offers you the privacy of ownership that a land trust provides.
Why Hold Property in a Land Trust
There are a variety of reasons why you may want to hold property in a land trust, chief among these are:
- Privacy - The primary reason to hold property in a land trust is the privacy that a land trust will afford you. Unlike when property is held in your own name, your ownership of property held in a land trust cannot be discovered simply by searching public records. This is because your name will not appear on any public document as the owner of the trust or the trust property.
- Asset Protection - A land trust also protects the owner against liens and judgments attaching to the property due to lawsuits, compliance code violations, taxes, etc.
- Probate Avoidance - A land trust avoids probate. In other words, when the owner dies, the real estate held in the land trust can be passed on to his or her heirs without having to go through probate, saving both time and money.
- For The Distribution of Your Property - For some individuals, a land trust is an excellent alternative to a living trust as a way to posthumously distribute property in a manner that will avoid conflict between family members and other potential private beneficiaries.
The use of a land trust will also allow you to safely acquire new property. Furthermore, if you already have an LLC or a living trust, either (or both) can work very well in conjunction with a land trust.
Transferring Property into Land Trust
Transferring a property you currently own to a land trust: Most states and counties have fully searchable property databases. If you already own the property in your name, you will still be listed as the prior owner when it is transferred to a Land Trust. A quit claim deed or zero dollar transfer of the property from you to the Land Trust will be a tip off that you control the trust and the property.
- Naming an LLC as trustee of your Land Trust may provide privacy, but laws vary from state to state and the name of the Manager of the Trustee may be disclosed in the property records.
- Naming an unaffiliated individual as Trustee can provide privacy, but may make it difficult to sell the property if the named Trustee is no longer available.
- Transferring the property to a Land Trust may terminate title insurance for the property under the terms of some older title insurance policy provisions.
- Transferring the property to a Land Trust could invalidate your homeowner's policy if the Land Trust is not a named insured on the property insurance policy. In this situation, the insurance company may be able to avoid paying a claim.
- Transferring the property to a Land Trust could trigger a due on sale clause if you name an LLC as beneficiary.
- Land trusts do provide some privacy, but they do not provide any asset protection. Pairing a land trust with a beneficiary LLC and Trustee LLC may provide some asset protection benefits but can have unintended tax consequences.
- In states where transferring property incurs a stamp tax (i.e., Florida), there is no automatic exemption for transfer to a Trust and if an LLC is named as beneficiary or trustee, the stamp tax will in all likelihood be due. Many believe that the stamp tax can be avoided by transferring to a Land Trust where you are named personally as the beneficiary and trustee, then, once the transfer is complete, you assign the beneficial interest or trustee position to an LLC. The Florida Department of Revenue specifically addresses this, writing the stamp tax is due for an assignment of trust beneficial interest.
Buying property in a Land Trust when you need bank financing for the property:
- Lenders in many states are not familiar with Land Trusts and may be unwilling to provide a loan on property purchased in a Land Trust.
- Lenders may require you, as an individual, to be the Grantor of the Land Trust, the initial and current Trustee of the Land Trust, and the primary Beneficiary of the Land Trust, or they will not provide a loan. This requirement may cause your name to be included in the title records.
- Lenders may not allow you to name an LLC as Beneficiary or Trustee.
- Lenders may require additional legal documents, certification, and statements of authority before they will close on the transaction. These documents, with your name on them, may be filed in the property records and compromise your privacy.
- Almost all lenders will take some action that jeopardizes your privacy and places your name in the public record.
- Lenders may not allow you to obtain the signature of a Nominee or Power of Attorney to secure the loan.
- Government backed loans require the beneficiary to be a natural person and do not allow the Trustee to be an entity.
Buying property in a Land Trust for cash: This is by far the easiest way to purchase property in a Land Trust.
- For rental property, it will provide privacy if you list an LLC as Trustee and asset protection if you name an LLC as Beneficiary. However, purchasing the property in an Anonymous LLC, will provide the same benefits at a lower cost.
- For a primary residence, it will provide privacy if you list an LLC as Trustee, but you should not name an LLC as beneficiary as it could jeopardize your state homestead exemption and your primary residence capital gain exclusion.
- However, whether the property is a rental or primary residence, the equity in the property in a Land Trust may still be available to pay the claims of creditors.
Advantages and Disadvantages of Land Trusts
A land trust is a separate legal entity that owns or takes authority over a piece of property at the direction of that property’s owner. Land trusts are living trusts; as such, land trusts allow for the management of the property during your lifetime. Like other types of trusts, a land trust can be tailored to your specific and unique needs.
Land trusts are frequently used for estate planning. These types of trusts are revocable, i.e., they can be terminated or amended at the discretion of the creator of the trust, also known as the grantor. The trustee and beneficiaries compose the other two key parts of the land trust. The trustee is the person who is responsible for managing the trust. For example, if a land trust holds a rental property, the trustee would be responsible for collecting rent payments and making sure that the property is properly maintained. Beneficiaries benefit from the land trust.
Advantages of Using Land Trusts
Land trusts can protect your privacy and shield you from liability. A land trust can provide anonymity because the trust owns the property, not the individual person. Therefore, the real estate investor’s name is not listed on any public real estate records. Land trusts also allows you to keep the property separate from other assets.
A land trust provides for “ease of conveyance” upon your death. Essentially, setting up a land trust allows your property to transfer directly to your heirs or beneficiaries as opposed to being subject to probate which can be costly and time consuming.
Finally, creating a land trust is a fairly straightforward process which requires two main documents: the land trust agreement and a deed to the trustee.
Disadvantages of Using Land Trusts
One reason you may not want to use a land trust is because you will give up your redemption rights. Redemption rights allow you to reclaim your property before, and sometimes even after, foreclosure.
Most land trusts also do not qualify for secondary market loans. Additionally, you will forfeit any homestead exemptions by forming a land trust which can have some serious tax consequences.
While land trusts can provide anonymity, this protection is not bulletproof. It’s possible that a court could issue an order requiring full disclosure of the property’s ownership. It’s important to remember that the real property owner, not the trustee, is the person who ultimately owns the property. Like the anonymity protection, the liability protection is also not foolproof for these very same reasons.
Finally, you will still have to file Form 1041 each year as the IRS requires all trusts, including land trusts, to pay taxes.
While land trusts may be easy to create, the legalities can be complex and vary from state to state. It’s best to consult with an experienced estate planning attorney in your state to find out if a land trust is right for you.
Consult with an Experienced Trust and Estate Planning Attorney
Trusts are the cornerstone of estate planning, especially as it relates to asset protection. A land trust provides property owners with the added benefit of complete anonymity and privacy.
However, in order for a land trust to keep your assets secure and your ownership of property private, it needs to be drafted with the skill and expertise that only the most experienced estate planning attorneys can provide.
For more information regarding land trusts or for help drafting your own, contact a qualified trust and estate planning attorney in your area.
Have a business to worry about?
Probate is a court-supervised process for transferring assets after you pass away. Probate is usually necessary in Wyoming to transfer assets held by a decedent in his or her sole name at death worth more than $200,000. The process has several drawbacks primarily relating to delays, expenses and privacy. There exist several alternative techniques such as revocable trusts. Learn more about the probate process here.
A Power of Attorney is a legal document which allows someone to act for you. They quit being effective, though, when someone becomes incapacitated. In such cases a Durable Power of Attorney is needed. The Financial planning raises the concern of ensuring effective management of property and financial affairs after you become incapable of managing them. Durable Powers of Attorney provide a flexible and low-cost option for such situations. Lifetime financial planning tackles ensuring effective management of property and financial affairs after you become unable to do so.
Important events affecting a person's finances shouldn't be stopped because the person is unconscious or lacks the mental or physical capability of acting on his or her own. See inside for further information on Durable and Medical Power of Attorney forms.
Revocable Trusts are a popular tool and function as the foundation for most estate plans. ( Follow here for how Revocable and Irrevocable Trusts differ).
The term "living will" became a household word in 2005 due to events surrounding the acrimonious dispute in Florida over Terri Schiavo. Modern medicine makes such extraordinary situations possible and some may wish to place limits on medical care if they feel the burdens outweigh possible benefits. During such situations establishing a person's wishes is frequently impossible when that person loses the capacity to express themselves.
Despite all this, a majority of Americans have failed to provide their family members such guidance. This lack of guidance means family will have an unnecessarily difficult time predicting their loved ones' medical wishes. Completing an Advanced Directive ahead of time helps minimize undue stress during already trying times. Being healthy is no excuse not to begin this important process.
Medicaid planning stems from the understanding end-of-life and long-term health care can be prohibitively expensive for even middle class families. Medicaid is a joint federal-state program which provides means based assistance for those who qualify. Standards differ by state, but generally factor in the income and assets available to pay for medical expenses. There exist strategies for legally making assets inaccessible through the estate planning process. This is generally done via an irrevocable medicaid trust which is a type of Wyoming asset protection trust.
Do you have minor children? If so, then considering planning ahead. Find our guide to choosing and approaching a suitable guardian.
Estate Planning & LLCs
Your LLC is a valuable component of an overall estate plan. State and federal gift and estate tax exemptions are changing, and to keep your plan current an annual estate plan review is advisable. Learn more on our page about Wyoming LLCs.
Your LLC contemplates gifts of LLC units to other family members or to trusts that have been established for their benefit. If you did not sign an annual retainer agreement, make sure you contact your attorney and/or CPA to assist you in accomplishing and properly documenting annual gifts.
Periodically an appraisal of the assets in your LLC and valuation of the LLC itself is necessary. For gifts to be properly documented, appraisals of assets and valuations of LLC interests must be done at the time gifts are made. Updating must also be done in the event of the death of a member.
Don't Procrastinate On Estate Planing
Elder law is vitally important and we take this responsibility seriously. We have seen the damage caused by ignoring the many nuances and pitfalls which make elder law unique. We cannot sufficiently stress the importance of choosing a competent adviser to protect your interests. Following this vain, we are proud members of the Wyoming Elder Law Counsel. This distinction sets us apart from other elder law attorneys. Elderly law often requires advance planning due to legal waiting periods before tax strategies can be fully implemented. It is best to deal with the topic sooner, rather than later, so everything is in place when you, a family member, or other loved one passes away. Passing away without a will can lead to unnecessary anguish and taxes during an already difficult time. You should always consult an attorney when creating your estate plan.