Top Ten Questions About Land Trusts

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Here are the most frequently asked questions about how to use a Land Trust for privacy and asset protection. Written by THE National Land Trust Expert, Randy Hughes

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Top Ten Questions About Land Trusts

Randy Hughes, Land Trust Expert

Top Ten Questions About Land Trusts
(Answered by: Randy Hughes)

DISCLAIMER
This publication is intended to provide accurate and authoritative information with regard to the subject matter covered. It is offered with the understanding that neither the publisher nor the author is engaged in rendering legal, accounting or other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be retained. …From the Declaration of Principle jointly adopted by committee of the American Bar association and a committee of Publishers and Associations… Every effort has been made to reflect current tax law and interpretations as of the date of publication of this book. However, this is a dynamic field of endeavor in which new laws are enacted, tax laws are constantly changing, and old laws precede case laws, Revenue Rulings, and Treasury Policy. Readers are advised to proceed with caution before implementing the strategies contained herein and to consult with appropriate professional advisors prior to committing time and financial resources as a result of the material contained in this book or in the seminar from which it was obtained. It is for instructional purposes only. ALL RIGHTS RESERVED
Copyright 2012 Real Estate for Profit Publishing, LLC Sheridan, WY
All rights reserved. No part of this book may be reproduced or copied, stored in any information retrieval system or transmitted in any form or by any means without the specific written permission of: Investment Seminars, LLC 215 W. Loucks St. Sheridan, WY

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Top Ten Questions About Land Trusts

Randy Hughes, Land Trust Expert

1.

Q. My attorney says that Land Trusts are ineffective, outdated and not as useful as they once were. Is he right?

Answer!
 
Knowledgeable attorneys will not give this advice. The problem is that attorneys do not get much (if any) land trust education in law school. Therefore, it is only those attorneys that take it upon themselves to learn all about land trusts that can give you accurate advice. The problem is not that land trusts are hard to understand but that you must research (and preferably use them on a daily basis…like we do) them to understand the true benefits. All humans are ego driven and attorneys are no different. If your attorney does not truly understand how land trusts work AND the practical benefits they provide, he/she will likely not recommend their use. Attorneys are taught in law school to think in a linear fashion. This is good for many legal confrontations. However, linear thinking does not help much when you are chasing someone running in a zig zag pattern. For example, most attorneys would not think to use an out-of-state Land Trust to hold title to property in your state (and why this makes good asset protection logic). Furthermore, most attorneys would not think to make an LLC or Personal Property Trust the beneficiary of a Land Trust (for additional privacy and asset protection benefits). The bottom line is that finding accurate Land Trust information and guidance is difficult. This is why (after 30+ years of using Land Trusts) I have written two Land Trust home study courses (Basic and Advanced). My Land Trusts Made Simple “Basic” home study course builds a solid foundation of understanding. The Land Trusts Made Simple “Advanced” home study course expands the student’s knowledge with specific Land
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Trust terminology and asset protection techniques. Both courses are designed to help the student craft the best Trust Agreement for their situation with forms and bibliographies.

2.

Q. Can I use a Land Trust in my state?

Answer!
 
I get calls all the time asking if land trusts are legal in a particular state. The answer generally is yes. Six states, Illinois, Florida, Indiana, Virginia, North Dakota and Hawaii have land trust statutes or case law allowing the use of land trusts to hold title to real estate (and real estate related interests like...options, agreements for deed, leases, property rights, etc.). With the exception of Louisiana, real estate that is located in any of the 49 states and the District of Columbia can be held in a land trust pursuant to the law of ANY OF THE STATES mentioned above so long as the Trustee, the property or the beneficiary of the trust is domiciled there. California, Nevada, Colorado, and Missouri have trust laws that enable a Trustee to hold title to property for a NAMED TRUST (JUST A TRUST...NOT A LAND TRUST); so there should be no problem putting real estate into a land trust regardless of where you or it is situated.

I believe that you could actually form a type of land trust in Louisiana (and get the job done), but would need the help of a local knowledgeable attorney to help you comply with the unusual old French Civil Laws that still dominate that state. Be sure to check with your local jurisdictional people (recorders office, title company & or knowledgeable attorney) to make sure that you

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Randy Hughes, Land Trust Expert

comply with all local customs. Also, keep in mind that laws change often and are open to different interpretations.

3.

Q. Who should I use as my Trustee?

Answer!
 
I devote an entire chapter to answering this question in my “Basic” Land Trust home study course. The fundamental answer is that you may have an individual, entity or institution serve as your Trustee. There are specific reasons why you would want to have each of these selections (i.e. an individual might not charge you a fee). The answer probably lies with your individual situation and should be tailored to your need when constructing your Land Trust Agreement. Some of the other considerations for picking your Trustee are: integrity, trustworthiness, ease of accessibility, liability insurance coverage and maturity (to name just a few). You may want to use an individual as your Trustee to save on trust fees and because they do not close on evenings and weekends. On the other hand, you may not know any trustworthy individuals and want to opt for using an institutional Trustee (i.e. bank or Title Company) who has experience and liability insurance protection. Then again, you may feel more comfortable designating your attorney as Trustee (especially if he helps you with your estate planning). When considering individuals, you cannot beat a daughter who is married and lives out-of-state! This keeps the Trust close to the family but does not give away your last name (in the court house records). Out-of-state Trustees are also hard to find and VERY hard to serve (especially when their address is a P.O. Box). Furthermore, there is great benefit to getting your children involved in the Land Trust process. The

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more your kids know about what you are doing and how you are trying to accomplish privacy and asset protection, the better off everyone will be.

4.

Q. Do I have to file a separate tax return for my Land Trust?

Answer!
 
The short answer is no. The IRS website says: “The Land Trust has no special distinction in the Internal Revenue Code and would be a simple, complex, or grantor trust depending on the terms of the trust instrument. Filing requirements would depend on the type of trust.” A basic Revocable Land Trust is considered a “pass thru” entity by the IRS and requires no tax return. The beneficiary reports all the results of the trust (income, expenses and depreciation) on their personal 1040 tax return. The fact that no tax return is required is one of the many benefits of using a Land Trust (and no separate bank account need be opened since all of the proceeds of rents or sales should go directly into the account of the beneficiary). The beneficiary’s identity is hidden from the general public without the requirement of filing a separate tax return (required for other entities like corporations, LLC’s and partnerships).

5.

Q. Can someone other than me be the beneficiary of my Land Trust?

Answer!
 
Yes, but you need to be careful. If you (the Grantor) set up a revocable Land Trust and make someone other than yourself the beneficiary, you may have gifted the equity (from the property that you placed into the land trust) to the beneficiary. This could generate a gift tax for any value above the $13,000 standard gift tax exemption (as of 2011). Most revocable Land Trusts are set up by a Grantor who also becomes the beneficiary (or an entity that the Grantor owns becomes the beneficiary). In this event there is no gift tax problem and no requirement to file a tax return.
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6.

Q. Are Land Trusts more for PRIVACY or ASSET PROTECTION?

Answer!
 
Land Trusts were originally designed for privacy purposes. They hide ownership and keep the beneficiary’s name out of the chain of title. This is the first line of defense regarding asset protection. The less people know about you, the less of a target you are for a lawsuit. Some so-called “experts” state that the privacy aspect of a Land Trust is not legitimate. They point out that several states require full disclosure of the beneficiaries of a trust for a transfer of title to be valid. While it is true that some states require beneficiary disclosure, this is a simple problem to solve. All one needs to do is make a Personal Property Trust the beneficiary of the Land Trust and the ultimate beneficiary is still not revealed! These same “experts” also state that it is easy to track the ownership transfer from an individual to the Trustee of a Land Trust (assuming the property is titled in the individuals name initially). Therefore, the true beneficiary is known even though the property has been placed into the Land Trust. While it is true that following the chain of title would lead someone to assume that the previous owner is now the beneficiary of the Land Trust, it is not guaranteed. Furthermore, we tell our students to NEVER TAKE TITLE to a property initially. When making the original purchase the student should have the title transferred DIRECTLY from the seller to the Trustee. This procedure will also help you if a creditor ever tries to claim you made a subsequent

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Randy Hughes, Land Trust Expert

Fraudulent Conveyance. You cannot make a fraudulent conveyance of a property in which you were never in title. NOTE: A conveyance made with actual intent to defraud either present or future creditors is fraudulent as to both present and future creditors. There are two types of fraudulent transfers: 1) those made with actual intent to defraud and 2) those made under circumstances that constitute "constructive fraud." It is obvious what actual intent means (i.e. the transfer of an asset immediately after entry of a judgment against a debtor). What is not so obvious is the concept of constructive fraud. The conditions establishing constructive fraud are much more objective than those involved in showing actual fraud. Thus the creditor is freed from the burden of proving the transferor’s actual intent. categories of constructive fraud, as follows: 1. Transfers made when the debtor is insolvent or will be rendered insolvent as a result of the transfer; for example a debtor who transfers a family residence to his spouse during business difficulties and has a negative net worth as a result of the transfer; 2. Transfers made when the debtor engages in a transaction or is about to do so with unreasonably small assets, as when an individual transfers most of his assets immediately before engaging in a risky business venture; and 3. Transfers made when a debtor intends to incur or believes that he will incur debts beyond his ability to pay such debts; for example, when a debtor transfers assets immediately before entering a program of business expansion that will
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There are three

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require substantially more capital than the debtor will have after the transfer. NOTE: ALL CATEGORIES OF CONSTRUCTIVE FRAUD REQUIRE THAT THE TRANSFER BE MADE WITHOUT FAIR OR ADEQUATE CONSIDERATION!!! Constructive and actual fraud often compliments each other. For example, if a transfer is made with the actual intent to defraud a specific creditor, it will be voidable regardless of the transferor’s financial condition and regardless of whether the transferee paid fair and adequate consideration. Conversely, where the elements of constructive fraud are established, the transfer will be voidable regardless of the transferor’s intent. HINT: If the property is already in your name you can transfer title to a friend, relative, corporation, etc. FIRST. Then, transfer again to the ultimate Trustee that you want to use. Of course, the issue of transfer tax vs. privacy will have to be taken in to consideration prior to this type of “re-transfer.” Land Trusts can be strengthened to be more of an asset protection tool via creative thinking and special protective devices placed in the Trust Agreement. For example, if you form an Irrevocable Land Trust you have a much stronger structure that judges are less likely to attempt penetration. Since Irrevocable Land Trusts can have some adverse tax consequences, most people form Revocable Land Trusts. A Revocable Land Trust does not have the strength that an Irrevocable Land Trust has (think: Curtain versus a Wall) but, nonetheless a Revocable Land Trust can be “beefed up” to have some protective elements.

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Not only can the verbiage of the Trust Agreement have teeth placed into it but, by combining the Revocable Land Trust with other entities (i.e. Personal Property Trusts, LLC’s and Corporations) and other legal jurisdictions you can get benefits that most people do not comprehend. There is also tremendous benefit to using an out-of-state Land Trust to hold title to property in your state. We cover all of the details and logic behind this technique in our Land Trusts Made Simple series of home study courses (offered at our website: www.realestateforprofit.com).

7.

Q. Should my Land Trust be Revocable or Irrevocable?

Answer!
 
As mentioned above, most Land Trusts formed by individuals to hold title to their real estate are formed as Revocable. This gives you the flexibility to change the Trust Agreement at will but, does not give as much asset protection benefit as the Irrevocable Land Trust. A Revocable Land Trust is generally considered a Grantor Trust and is considered to be a “disregarded entity” by the Internal Revenue Service. The Beneficiary (whether it is an individual, corporation, LLC or personal property trust) of a Revocable Land Trust does not have to file a special tax return (a trust tax return). However, if an Irrevocable Land Trust is formed a trust tax return may be required. BE CAREFUL! The income tax rates for trusts are much higher than for individuals. Seek competent advice if you are going to form an Irrevocable Land Trust. While it is true that an Irrevocable Land Trust has much more asset protection value than the Revocable type, the Grantor should be careful not to create a “gift” to the beneficiary (assuming the Grantor is not the Beneficiary) as this would create a taxable event.
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Randy Hughes, Land Trust Expert

8.

Q. Do I need to “register” my Land Trust?

Answer!
 
This is one of the areas where Land Trusts really shine. Most entities (i.e. corporations, LLC’s and some partnerships) MUST be registered with a governmental agency. The registration process divulges the owners and exposes them to public scrutiny. This is one of the main reasons that we advise using a Land Trust as the FIRST entity in a line of barriers to confound your adversaries. The laws vary from state-to-state, but generally the answer is no (you do not need to register your Land Trust). The key to this is making sure that you use a properly worded Deed to Trustee when setting up your Land Trust. When you record a conveyance indicating the powers of the Trustee and Beneficiary as well as the rights of ALL Beneficiaries, it usually is not necessary to also record the Trust Agreement.

9.

Q. How do I insure property held in a Land Trust?

Answer!
 
Smart investors take the time to learn all that is necessary to manage their real estate portfolio using Land Trusts. During the process of learning the essentials about Land Trusts the question arises, “How do I properly insure my land trusts?” This question provokes some sound thinking. Insuring your Land Trusts is the same as insuring the properties that are held in your personal name, an entity, or another trust. Sometimes investors become so busy with other operations of their investment portfolio that they forget to address the updates necessary to keep the property insured accurately with the insurance company.

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Randy Hughes, Land Trust Expert

So, form a routine in your real estate investment operation to follow these simple steps when a change occurs with a property. 1) When you buy a property, form a new Land Trust, For example: Robert Smith, Trustee, under trust #1YK2 dated 3-1-11 and all named and unnamed trustees and beneficiaries 2) Call your insurance broker or agent and report that exact name in writing via fax or email. 3) Then mark your calendar for receipt of the policy endorsement (30 days) 4) Make sure all insurance policies insuring this property (the basic and umbrella policies) are changed to reflect the exact name of the trust. 5) Anytime during the policy year that you change trustees or beneficiaries you will not have to endorse the policy with that change. Just for safety though, we recommend that every time you change trustees that you go through the above procedure to inform your insurance company. It is better to have a paper trail on all changes that occur so there is no question of coverage at the time of a loss. 6) There will be other important information to report to your insurance Broker, agent, and insurance company, but the named insured is very important at the time of a claim. If the exact name of the land trust is not reported to the insurance company then they can deny the claim when a covered loss

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occurs.

Make sure the name of the Land Trust is an exact

duplicate of the named insured on your insurance policy. In summary, every time you do any of the following you will need to endorse your insurance policies to reflect the change: 1. 2. 3. 4. 5. 6. Buy a property Sell a property Change trustees Add personal property (furniture, appliances, equipment) Increase Rents (if you do not have coverage) Increase building limits to reflect increased cost of construction i.e. replacement cost coverage. Make sure you have Building Ordinance coverage to reflect the new building requirements of your municipality when a loss occurs. 7. Delete any property or equipment due to a sale, loss, or reduction in limits needed. * All notices to your broker, agent or insurance company should be in writing with an endorsement returned from the insurance company reflecting the order, change, or request given. “Actual Loss Sustained”

BONUS THOUGHTS FOR THE READER You should have the following basic coverage on a rental property: 1. 2. 3. 4. 5.
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Real Property – building Personal Property – contents, furniture, tools, equipment, etc. Loss of Rents – to replace rental income at time of loss Building Ordinance Endorsements – meet the local code requirements Liability – both primary and contingent amounts (umbrella liability) 12
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Top Ten Questions About Land Trusts

Randy Hughes, Land Trust Expert

6. 7.

Worker’s Compensation – if applicable in your state Non-owned & Hired Auto Liability – for subcontractors and employees

* The above is only a partial list of the insurance coverage that you may need for your real estate investment property. Take the time to sit with your professional insurance broker/agent and have him or her advise you of all the insurance protection that is necessary for your real estate investing operation. This report does not have the space to advise you of all the potential insurable risks you have in your real estate investing operation. You need to counsel with your insurance professional.

10.

Q. Do I really need a Land Trust?

Answer!
 
Many lawyers and other “practitioners” will tell you no. But do they really know what they are talking about? Do they use Land Trusts daily in their lives? Do they study the case laws? Do they REALLY understand the benefits of using a Land Trust in their investment lives? I think not! I have discussed with many hardened litigation lawyers whether they would “take on” an out-of-state Land Trust with an unknown location of the Trustee, Beneficiaries and Director. This situation could be further complicated by an out-of-state entity as the beneficiary (or possibly multiple out-of-state entities as beneficiaries). The reaction is always the same from the litigation lawyers: Give me a $10,000 retainer and I will “see what I can do.” While it is true that some people with deep pockets or maybe a government agency might cough up the money to start chasing you (and your Land Trust), most will
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Randy Hughes, Land Trust Expert

not. Most frivolous lawsuits will be stopped in their tracks once the plaintiff realizes that this is not going to be easy (or cheap). The more a Land Trust is used to accomplish the many goals that an investor seeks, the more convinced the investor will be (that a Land Trust is the best initial entity). I am not saying that Land Trusts are bullet proof or that they are singularly the only asset protection devise you need. What I am saying is that if you start with a Land Trust for each property that you own (insulating each property from the other) and structure your assets from this basis, you will build a structure that is hard to beat. Part of the issue here is when to begin your asset protection planning? Some “advisors” tell their clients they do not need to worry about asset protection planning or using Land Trusts until they accumulate substantial net worth. I disagree. The first step in asset protection is privacy. Even before you have many hard assets (you at least have your future income to protect) you can benefit from being more private with your personal information. Learning NOW how to use a Land Trust (even if you only have one property) can save you lots of trouble in the future. Additionally, you will be learning as you invest and get better at structuring your deals. Waiting to learn is never good advice. (Hidden benefit of using a Land Trust: Public recordings related to your property will show up on your personal credit report, thereby lowering your credit score and access to credit. If you hold title to property in a Land Trust, any liens relating to your property will not report to your personal credit report. This allows you time to work out the problem

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Randy Hughes, Land Trust Expert

more favorably with your creditor since it does not appear on your credit reports). This report was not meant to explain all the benefits of using a Land Trust. There are many more uses and benefits listed in our “50 Reasons to Use a Land Trust” report which can be obtained for free at: http://www.realestateforprofit.com Randy Hughes is a full time investor in real estate. He purchased his first house in 1969 and has been buying, selling, managing, rehabbing and optioning single family homes for investment every since. After being involved in over 200 house transactions (using Land Trusts), Randy has developed a solid real life understanding of Land Trusts. He uses a Land Trust in every Land transaction. Trust Randy teaches Land on Trust his courses website: throughout the United States and writes a Land Trust Blog and BiMonthly Newsletter www.realestateforprofit.com His Land Trust courses are also offered as Home Study Training and can be downloaded from his website. To find quality researched and reliable Land Trust information including case law and statutory documentation, rely on the NUMBER #1 source of Land Trust information in America at www.realestateforprofit.com. If you are serious about Land Trust knowledge, then go to my website and subscribe to my bi-monthly newsletter or call me at 1-866-696-7347. You can also join my Land Trust University for high definition Land Trust knowledge.

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Remember, success comes from planning first, then taking action!

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