A Land Trust for Land Lords

[williell]

This article was re-printed from the Denver Post, dated July 13, 2008 by Tom LaRoque.

Landlords incur risks from all sides. They are often seen as wealthy, particularly by the people who write them monthly checks. Their tenants have ample opportunity to develop grievances, real or invented.



The risks call for self-protection, said lawyer William Bronchick. Among all professions, landlords face the greatest threat of being sued, he said.



An active real estate investor and president of the Colorado Association of Real Estate Investors, Bronchick sells do-it-yourself software to help savvy property owners protect themselves with the right legal structure. It is one of several products sold for that purpose.



The right legal structure, he said, often includes a land trust. Such an agreement allows one party, called the trustee, to hold ownership of property for the benefit of another, called the beneficiary.

Land trusts offer several advantages to property owners under the broad headings of privacy, protection from liability, and tax minimization, according to Bronchick.

Want a land trust?

There are many books and software programs that help real estate investors learn the ins and outs of land trusts.


Some lawyers contend that the liability benefits are illusory. When push comes to shove in court, they say, a land trust will provide no real protection.


In an age when anyone can determine property ownership using public databases, owners sometimes find themselves targeted by private investigators or plaintiffs’ attorneys. Municipal code-violation enforcers as well as journalists may have interests in tracking down property owners.



“Lawyers want to sue people with money,†Bronchick said.
The best defense is to hide your assets, he said. “Make it look like you’re broke.â€
An investor with several properties can place each one in a separate trust, making them hard to link together, according to Bronchick. All the trusts in turn may be held by a single corporation.



The choice of corporate structures varies, depending on individual considerations such as taxes. For someone with a total annual income of less than $100,000, for example, a C-type corporation is taxed at a lower rate than an S corporation. Another option is a limited liability corporation, or LLC.



When property is controlled by a corporate entity with limited liability, the landlord enjoys a degree of protection, Bronchick said. Forming a corporation requires legal and tax counsel. Canned software such as Bronchick’s product for land trusts is no substitute, he said.



Denver real estate investor Chris Yates of CM Yates Inc. has often used land trusts for privacy and protection of assets, he said. But tighter lending requirements are making it harder to do.


“In the past, a land trust was often part of creative deal structuring,†he said. “Now when they see a trust in the chain of title, it’s a red flag. They’re more nervous than in the past, and they may think a buyer using a trust is engaged in some sort of fraud.â€
Buying property from a trust is generally not a problem, said lender Sean Bennett of Moncor Inc. But lenders may look askance at someone proposing to buy property from a trust that they themselves control as the beneficiary, he said.



The dark side of land trusts, critics argue, is that they enable bad behavior on the part of landlords by allowing them to operate anonymously. A slumlord can escape accountability by using corporate smoke screen.



Denver lawyer John Head, who has represented plaintiffs in many real estate cases, has another take. He doesn’t believe anyone, by using land trusts, effectively escapes liability or pursuit by attorneys.


“There is no legitimate reason for someone to set up a land trust purely for investment reasons,†he said. Trusts do have legitimate purposes, such as when a trustee is assigned to act as the caretaker of a property, he said.



Whether a property is held in a trust or not, debt financing can be a big deterrent to someone hoping to sue. If there’s little equity to recover, the plaintiff’s attorney may pass on the case, Bronchick said.

Trusts can protect against title claims. When a property is sold, typically sellers sign a warranty deed saying there are no liens against the property, dating back to its origin.
If a past lien is discovered later, the seller may still be held liable, Bronchick said. This surprises many sellers who thought they were indemnified by title insurance. If the property had been held and then sold by a trust, normally the trust would now have no assets to recover in a lawsuit.

Do you think that you need a Land Trust?

 

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[NoMoneyDown]

I don't get the protection aspect of using Land Trusts unless the beneficiary is an entity, or if they mean it takes another minute or two to dig up. I mean if sued and the judge asks the Trustee for the beneficary's name/etc., what are they going to say - no?

Now, I have heard of Land Trusts being a (supposedly) good way of transferring ownership "underneath the covers", but I don't know of anyone personally who has done it.

 

[phlgirl]

As I understand it, land trusts add – what is viewed by some as – an additional layer of protection.

I really think it depends on the type of business you are operating, the volume of said operation and your perceived risk. The concept is to avoid the ‘ambulance chasers’, which, unfortunately are far too common in today’s society. An ambulance chaser isn’t going to pay an attorney out of pocket, they are going to hire an attorney who will work for a cut of the proceeds. Consequently, these attorneys tend to chase only in the direction in which they can find assets.

So someone in the rental business, who owns hundreds of units and is bound to have some disgruntled tenants from time to time, might be more at risk than a person who wholesales properties, doesn’t often work with the public. The idea is that once an attorney is called to take a case, when deciding whether or not to do so, they often do research on their potential defendant. If, at first glance, the defendant has no assets to pursue, the chances of their wasting their time, are slimmer. Not zero, just slimmer. On the other hand, if they go out to the public record and see your (or your company’s) name on hundreds of properties, they might think the odds are in their favor. Chances are greater that they would get some type of settlement.

As for how well hidden a trust can keep your assets, you might be surprised. I have seen level upon level. Trusts which have a beneficiary of a shell company, a trusted 3rd party (great aunt Sara) or even another trust. The asset should move directly into the name of the trust, ideally. Otherwise, you leave a trail with your name (or company’s name) as a one time owner.

Banks don’t love seeing a trust (it causes them more work) but I have never seen it prevent a closing.

To use or not to use - all depends on your perceived level of risk measured with any other precautions you are taking to protect your assets.

 

[rcardin]

I have one property that was bought in a land trust. My dad has a few properties that are held in a trust.

For example:

His trustee is my brother in law who is a lawyer in Florida. Say someone decided to sue him over getting hurt on his property. They would first have to find the trustee. Since we only use first initial last name as the trustee it becomes a little difficult to find them. Under the trustee contract he is not supposed to disclose the beneficiary of the trust without a court order.

This is where it gets interesting. Say the person that got hurt goes to an attorney who will take the case on commission (not the right word but I can't think of the right one), this attorney now finds that the trustee lives in Florida. Not an easy case to crack. The attorney will probably ask for a retainer to pursue the case. What are the chances that the person hiring the attorney are going to give up 2-5k for a retainer? It should stop pretty much stop there. Bottom line is it will cost them money to pursue a law suit.

From my understanding a Land Trust is just another entity to hold property.

It is a good way of transferring ownership "under the covers" via "subject to" acquisitions. The owner becomes the beneficiary then signs a paper conveying all beneficial rights to you. none of this is ever recorded and the mortgage company only knows that the property is in a trust but never knows who the beneficiary of it is.

Anyone can put their property into a trust "for estate planning purposes" and the mortgage company can't say anything. Your trust gets its own EIN?/TIN? number form the IRS. It is now its own entity. If set up correctly the property can now pass to the secondary beneficiary without probate should the first beneficiary pass away. Completely by-passes probate.

I am no expert so don't take my interpretation as law

 

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[^eagle^]

I have one property that was bought in a land trust. My dad has a few properties that are held in a trust.

For example:

His trustee is my brother in law who is a lawyer in Florida. Say someone decided to sue him over getting hurt on his property. They would first have to find the trustee. Since we only use first initial last name as the trustee it becomes a little difficult to find them. Under the trustee contract he is not supposed to disclose the beneficiary of the trust without a court order.

This is where it gets interesting. Say the person that got hurt goes to an attorney who will take the case on commission (not the right word but I can't think of the right one), this attorney now finds that the trustee lives in Florida. Not an easy case to crack. The attorney will probably ask for a retainer to pursue the case. What are the chances that the person hiring the attorney are going to give up 2-5k for a retainer? It should stop pretty much stop there. Bottom line is it will cost them money to pursue a law suit.

From my understanding a Land Trust is just another entity to hold property.

It is a good way of transferring ownership "under the covers" via "subject to" acquisitions. The owner becomes the beneficiary then signs a paper conveying all beneficial rights to you. none of this is ever recorded and the mortgage company only knows that the property is in a trust but never knows who the beneficiary of it is.

Anyone can put their property into a trust "for estate planning purposes" and the mortgage company can't say anything. Your trust gets its own EIN?/TIN? number form the IRS. It is now its own entity. If set up correctly the property can now pass to the secondary beneficiary without probate should the first beneficiary pass away. Completely by-passes probate.

I am no expert so don't take my interpretation as law

I just took a couple of workshops for land trusts and LLCs and this is exactly what the instructor said. He even went further as to cloud title by some very interesting means. I cant wait to get all this info into action.

 

[hatterasguy]

My attorney said LLC is the best way to hold rentals, although I think some of my uncles are in an S or C corp, not sure how that works.

Trusts are good though, my family usually puts everything into a trust later in life so they are poor when they die, and uncle sam gets jacked on the estate taxes.:great:

I highly recommend forming trusts for your estate if its over $500k or whatever the limit is now. (which really isn't much if you think about it with property values these days.)

 

[^eagle^]

But each LLC costs a couple of hundred bucks to maintain. where as a trust is maybe $20 one time fee. Its mainly for predator protection and if your trustee is out of state (say an out of state LLC) then a predator has to get a retainer to cross state lines. So you fight the predator with their check book.\

Predator: $2k for a retainer? I'm outta this hole!

buh bye!

 

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