A lot of folks, from experienced real estate investors to newbies, neither appreciate nor understand what land trusts are or how they may beneficially impact your real estate moves. Many confuse it with land contracts or misunderstand how they may benefit from land trust use. Another blog will cover land contracts.
The definition of a land trust is easily understood. It is a legal agreement whereby a trustee is appointed to maintain ownership of real estate for the benefit of another, namely, the trust beneficiary. They are often referred to as Illinois or Illinois type land trusts. Land trusts are employed by sundry organizations and other legal entities in their acquisition of real estate privately outside of public view. Institutional entities make effective use of this tool to avoid publicity and public knowledge of what they may be doing and planning to do. Undisclosed purposes may keep prices down and minimize competition. Think Florida orange groves and Disney World.
You do not have to be a Disney type player to benefit from land trusts. A whole lot of real estate investors, many of them landlords and real estate investors acquiring rental properties to either flip or buy and hold, take ownership to real estate in a limited liability corporation (LLC) seeking liability protection but forgetting the privacy factor which needs to be considered in tandem with the protection efforts when it is a matter of public record as to ownership and liability. If you are determined to be the true owner, it may not be enough to have the protection of an LLC when that corporate veil can be pierced and you become the target. You need to be insulated from public view. It is a matter of public record to look up the LLC online and determine the managing member and ownership interests behind that LLC. In fact, that liability may extend to all properties owned, individually and severally, subjecting you to liability as the deepest pocket after public record review.
Protection and privacy go hand in hand. Use a revocable living trust to title each property, undisclosed to the public using an anonymous name for the trust. It is not recorded. No public record. The actual beneficiary is hidden, thwarting efforts of potential claimants seeking redress from the deepest pocket, you. The mechanics are quite simple, the benefits huge. Consider the benefits.
Litigation is discouraged. Your credit is protected as there is no public disclosure that could impact your credit rating. Partners, as tenants in common, are protected as to liability arising from actions against their fellow partners. It further allows partners to easily sell or transfer their interests to others. Land trusts are easily assignable as well as assumable. Similar to a corporate stock assignment, the trust beneficiary can be changed without a title transfer. This is particularly advantageous in creatively acquiring bank REO’s or HUD properties. The practical effect of an otherwise operative due on sale clause is minimized or negated as the transfer never comes to the attention of the lender because there is no public disclosure. The non-assumable is rendered assumable. Purchase prices as well as sales prices are rendered secret, a significant benefit in situations where there is a double close and you want to keep the original seller in the dark about the particulars between you and the end buyer. Land trusts negate the costs of assessed transfer taxes on ownership transfers, the reassessment of increased property taxes, and the avoidance of probate, saving taxes and costly probate.
A land trust consists of two legal documents. First, a trust agreement between the trustor and trustee establishing the relationship and duties thereunder. The beneficiary is not publicly recognized as the true owner. Secondly, there is a deed from the trustor to the trustee. Neither document is recorded.
You need not look any further than the Illinois Department of Financial and Professional Regulation to confirm how simple all this is. On their website, it is stated ” land trusts are a simple, inexpensive method of handling real estate ownership”. They tout the privacy of ownership, ownership liability protection, the ease of conveyance and succession of ownership, uncomplicated partial interest disposition, the relative ease of ownership without revealing the actual ownership, and that the beneficiary can be an individual, a corporation, or other legal entity.
In summation, land trusts are amazing tools investors should consider with each property acquisition. Every single time.