We just finished a teleseminar this morning where the idea of Land trusts came up. They work in some cases, but despite being advertised as a hot new strategy, I’m not convinced they are always workable. In fact, in some instances I think that using a Land trust could even give someone a false sense of security.
A trust is a 3-party arrangement where the founder of the trust (i.e., the donor, grantor or settlor) transfers legal title to various assets (the trust property) to a trustee, to hold and to manage for a third party (the beneficiary), on such terms as the grantor sets out. The beneficiary has the beneficial title to the property – meaning at the end of the day, the beneficiary owns the property.
The biggest benefits to having a trust are:
- the ability to transfer assets from one generation to the next without having to go through probate
- the ability to maintain control over the acquisition and disposition of trust assets through the trustee, until such time as the beneficiaries are ready; and
- the ability to provide an income stream to the beneficiaries;
The biggest drawback to having a trust is that it provides NO legal protection from lawsuits or creditors. You may have a trust and all of your assets properly recorded in that trust … but those assets are still not untouchable.
Here’s a short synopsis of Revocable (Living) trusts and Land trusts:
Revocable (Living) Trust
A trust where you have the right to revoke the trust and reinvest the trust assets elsewhere. Assets in a revocable trust are included in the grantor’s gross estate for federal estate tax purposes. This is the most popular form of trust, as complete control remains with the grantor (who typically is also the trustee). Assets in the trust avoid the cost, time, expense and publicity of probate.
A true Land trust isn’t like a typical Living trust, typically a Trustee is used to manage the business of the trust, and to act as gatekeeper for the beneficiaries of the trust, distributing cash or property on terms dictated by the trust documents.
In a true Land trust (also called an “Illinois-style” Land Trust) the Trustee’s role is not to operate the trust, but simply to hold legal and equitable title to the real estate properties held within the trust. The trust is actually controlled and operated by its beneficiary, while the Trustee serves as a figurehead – holding title and signing documents, contracts, deeds, etc., as directed by the beneficiary.
Land Trust Pros
The allure of Land trusts is the simplicity with which the beneficiaries may be changed. As the Trustee is on title as the owner of the property, the beneficial owners can be easily changed in unrecorded, unpublished transactions. So, you can purchase a property, drop it into a Land Trust, and then resell the property to a third party, without triggering a due on sale clause.
Land Trust Cons
The first problem is that Land trusts aren’t legal in many states. Usually, when someone holds both legal title (i.e., the name on the deed) and equitable title (i.e., the underlying, true owner) a trust isn’t considered a trust anymore, and is dissolved. That’s why in a typical trust situation a Trustee may have legal title, but the beneficiaries hold the equitable title.
The next issue is the Trustee. Because the property is in the Trustee’s name, you’ve got to find a Trustee that you can rely on and trust implicitly. Remember, the Trustee has the power to sell that property at any time. If you look to an outside third-party service provider, you will be looking at hefty fees.
And, even if you are in a state where a Land Trust is recognized, you’ve still got the “self-settled” issue to contend with. A self-settled trust is defined as something you organize yourself, for the benefit of yourself. In most states, self-settled trusts offer no creditor protection at all, and even in the states that do offer protection to a self-settled trust, there’s still the Bankruptcy Act to consider. In 2005, major changes to the Bankruptcy Act were pushed through including a 10-year “lookback” period, meaning that any assets transferred into a self-settled trust within 10 years of a bankruptcy filing can be pulled back out of the trust and used to settle your debts.