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Trust Strategies

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By Randy Hughes

After using Land Trusts to hold title to my real estate, contracts and notes for the last 40 years, I have discovered that 99% of the population does not understand the nature of a Land Trust nor the many benefits that can be derived. I consider this good news.

Because of their low profile, Land Trusts are very useful for (off the radar) real estate transactions. The following ideas are merely suggestions that you might consider. Be careful to think through all the ramifications before engaging in these concepts.

If you want to borrow money conventionally and you will use a deed to real estate as collateral for the loan, you will have to give the lender the full deed. In other words, you cannot divide a deed up into pieces no matter how much you are borrowing. For example, if you owned a parcel of real estate in your own personal name (your name is on the deed), with $100,000 of equity and you wanted to borrow only $20,000, you would have to collateralize that deed in full. In other words, you would have to give $100,000 of equity to secure only a $10,000 loan.

The Land Trust can be used to solve the problem of over-collateralizing a loan. The beneficial interest of a Land Trust can be divided into unlimited shares. Therefore, a Land Trust holding a piece of real estate with $100,000 of equity could use some of its shares (but not all of its shares as is required by a personally held deed) as collateral for a $10,000 loan. With a share value of $1,000 there would be 100 shares.

The beneficiary of the Land Trust could “temporarily assign” 10 shares for a $10,000 loan. This would leave 90 shares unencumbered that could be used for future financing. The flexibility of using a Land Trust far exceeds the standard method of title holding.

In another scenario, assume that two real estate investors have owned their properties (of similar current market value) inside Land Trusts for 30 years. Both investors are “out” of depreciation. Neither investor wants to conventionally sell their properties and incur huge capital gains.

Once again, the Land Trust trots in for the rescue. Each investor (beneficiary of the land trust) sells the beneficial interest to the other on an installment sales agreement. The terms are nothing down, interest only (no capital gain to report) and a ten-year balloon (enough time to figure out what to do next).

What this transaction accomplishes is a new amortization schedule for each investor (new basis). The deal is private and flies under the assessor’s radar (no reassessment upon the “sale”) and no transfer tax is triggered. If the parties involved so desire they can hold options to buy the beneficial interests back after (or during) the ten years has lapsed.

If you don’t think this will work, look up and read the tax court decisions on; Weaver, 71 TC No. 42. 1978; Rushing CA-5, 441 F.2d 593, 1971 and Pityo, 70 TC No. 21 1978.

The key to taking advantage of these creative ideas is finding someone who will “play.” Of course, my mind wonders to people who have studied my Land Trusts Made Simple® home study course or taken one of my live seminars. It is those who understand how the “game is played” that benefit you the most. I encourage you to seek out other “players” like yourself…it will benefit you greatly.

There are many other similar structures that I discuss in detail in my Land Trusts Made Simple® home study courses. Please go to: www.landtrustsmadesimple.com for more information. Or, if you would like to attend one of my FREE Land Trust Webinars, go to: www.landtrustwebinar.com/411 Also, feel free to call me with any questions. I actually answer my phone! 1-866-696-7347

 

Land Trusts – Holding Beneficial Interest

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By Jay Butler

Land Trusts, sometimes referred to as Florida or Illinois ‘type’ trusts because of their favorable state laws and years of case history, are designed to hold title to real property and real property assets including real estate options, contracts and mortgages. Land Trusts are most commonly used to transfer title of income-producing property without invoking a due-on-sale clause with their lender. Public Law 97, also known as the Garn – St. Garmain Act, prohibits financial institutions from invoking a due-on-sale clause upon transferring title so long as, among other things, the beneficial interest holder is the same the day after the transfer as it was the day before the transfer and there is no transfer in the rights of occupancy in the property.

Both residential and commercial real estate investors alike have made the mistake of listing themselves as the beneficial interest holder in their land trust agreement. Even though the beneficial interest holder of a land trust agreement is not filed anywhere in the public domain, should the property held in the land trust face an inside lawsuit, or should the individual listed as the beneficial interest holder of the land trust face an outside lawsuit, all the assets of both the land trust and the individual are at risk to seizure by a judgement creditor.

Although land trusts provide an excellent veil of anonymity, it is still a form of an intervivos trust and thus not an asset protection vehicle. Intervivos means ‘among or between the living’ hence the term ‘living trust’. Land Trust assets are considered personal property to the beneficiary, which is not subject to seizure by judgement creditors in some states. However, existing court precedence has held that,“If a settlor has the right to revoke a trust, all of the assets are treated as owned by the settlor and is ignored for creditor purposes, just as it is ignored for tax purposes.” Meaning, while land trusts can provide you with an excellent veil of anonymity in the public domain, they are not a shield of protection as is an entity.

Land Trusts can be revocable or irrevocable. While generally created as revocable, if a judge were to call you into a debtor’s examination, requiring you to provide ownership information under penalty of perjury (wherein you may not plead your 5th amendment rights), you must disclose all of your assets or risk being held in contempt of court. If the beneficial interest holder of the land trust is an entity, you stand measurably improved chances of protection as such structures provide outstanding asset protection under scrutiny.

It is therefore of paramount importance to assign the beneficial interest of the land trust (at least 24 hours after transferring title) to another ‘person’, such as a Limited Liability Company. With recent state supreme court rulings in Colorado,California and Florida rendering most single-member Limited Liability Companies (LLC) useless as tits on a bull, we recommend that when possible you form any such single-member limited liability companies in states like Nevada, Wyoming or Delaware whose respective state statutes offer the same charging order protection to single-member LLC’s afforded to multi-member LLC’s.

Placing the beneficial interest holdings of a land trust into an entity isolates individual liability from an inside law suit to the LLC and protects LLC assets from a judgement creditor in the event of an outside law suit to the individual. Factoring equity value, cash flow and overall risk of each property should aid in determining just how many entities require forming to hold the beneficial interest to your land trusts. We suggest holding beneficial interest to your land trusts in either a Nevada, Wyoming or Delaware Limited Liability Company or (Family) Limited Partnership.

In 2011, Nevada enacted legislation NRS 78.746 which extends Nevada “C” Corporations the same charging order protection afforded to Limited Liability Companies and Limited Partnerships. In addition to a few other minor restrictions, such “C” Corporations must have at least 2 and no more than 99 shareholders. Wyoming is considering adding this favorable concept into its legislation but, at the time of this article, has not yet done so. Meaning, you can also have a Nevada “C” Corporation act as the beneficial interest holder to your land trust as it too affords ‘charging order protection’ just like a Limited Liability Company and Limited Partnership.

In-so-far-as taxes are concerned, a Land Trust is a private agreement amongst the involved parties and requires no financial reporting, however the entity which acts as beneficial interest holder is required to file a tax return annually either in the form a 1065 (Partnership), 1120 (“C” Corporation) or 1120-S (“S” Corporation).

For states which require beneficial interest holders of a Land Trust to be disclosed, Personal Property Trusts can be used as an effective vehicle “between” the property (held in the Land Trust) and the ultimate property owner (ie. Corp, LLC or LP). This use of ‘layering trusts’ can be a very effective tool in dissuading would-be creditors from attacking you, all without creating unreasonable costs or sacrifices in time and energy during your real estate transactions.

Whether owning, renting or holding for long-term growth, be sure to mitigate unnecessary liabilities for your business by assigning the beneficial interest holdings of your land trust to an entity.