A land trust is a pass-through entity that becomes the owner of a specific property. For this exercise we will only discuss the ownership of real property, specifically real estate. These documents are much hated by Realtors, lawyers, lenders and municipal governments to mention a few, but loved by real estate investors who understand them.
A land trust is a simple document which becomes the controlling or holding vehicle of a specific property. Its life span is limited to the term imposed in its internal clauses and extinguishes itself if the property is sold. Essentially, one property in, same property out and poof, the trust no longer exists!
The trustee of the trust administers the day-to-day financial dealings of the trust, but the owners are called the Beneficiaries. The trustee may or may not be the trustee. The trustee must be an individual; the beneficiaries can be individuals, partnerships, corporations, LLCs or other different type entities.
Trusts are hated by lawyers because they don’t make as much money on them as they do with LLCs or corporations and they are most commonly used to convey property by transfer of the beneficial interest without doing a formal closing.
Realtors don’t understand land trusts and because of that, they tend to believe they are illegal. Because they are not taught about them in real estate schools and various state regulations can vary about the actual administration and legalities of them.
If a buyer of a property is a land trust, Realtors care less because a sale is a sale. If the seller of a property is a land trust, the closing agent must understand how they work or these deals can be harder to close.
Lenders have a huge problem with this type of trust because the actual ownership of the property can be changed in minutes with no notification in the public record. So lending to the trust is impossible unless the mortgage note is personally guaranteed by a Beneficiary of the trust. In most cases, they will not loan to a trust under any circumstances.
Municipalities who collect transfer taxes on the sale or transfer of a property don’t like land trusts because the ownership of the property can be transferred without changing the ownership in the public record. The land trust continues to own the property, but the Beneficiaries have changed, literally in minutes by essentially what is a bill of sale between the buyer and seller.
The Clerk of the Court or person in charge of recording documents for the county will have an opinion as to whether a land trust transfer is taxable since the owner of record doesn’t change. This opinion will vary from county to county and you will need to ask a local attorney about doing land trusts in your real estate purchasing.
The more important powers of the trust are that the Beneficiaries remain anonymous in the public record and potential liability is limited to the assets of the trust – essentially the one property that it owns. As always, when dealing with anything that has legal ramifications, contact an attorney for advice. In the case of trusts, pick an attorney who is investor and land trust friendly.
By Martin Fisher