Friday, June 10, 2016

Land Trust Basics

Many investors have considered using a land trust in which to purchase investment real estate. A land trust can be a convenient and inexpensive way in which a buyer may take title to a property. The cheapest form of privacy for a real estate investor is to use a land trust to hold title to their investments.

"Land trust" means any agreement where a use or trust is declared of any real property, for the use or benefit of any beneficiary, under which the title to real property, both legal and equitable, is held by a trustee.

"Beneficial interest" means any interest, regardless of how minimal, in a land trust, held by a trustee for the benefit of beneficiaries of such land trust. "Holders of the power of direction" have the authority to direct the trustee to convey, execute a mortgage, distribute proceeds of sale or financing, and execute documents related to the land trust. These "holders" may be person(s) with a beneficial interest in the trust.

The first Land Trust in the United States was formed by Chicago Title Company over 100 years ago to help develop a subdivision in Chicago, Illinois.

Land trusts are considered by many to possess distinct advantages over other methods of ownership of real property.  Land trusts are especially helpful when the privacy of the beneficiaries is to be protected, or kept as confidential as possible. The interests of beneficiaries may not be disclosed without a court order.

It is simple to transfer beneficial interest. And they are a good way to transfer title by adding or changing beneficiaries of the trust, without having to apply for new loans which are typically due on sale with the transfer of title (although my Seattle attorney disagrees with this interpretation).

Personal judgments against the beneficiary do not become liens on the trust's real estate. Financing is facilitated, either by the trustee obtaining mortgage loans secured solely by the trust property, or by the beneficiary pledging his beneficial interest as personal property, and both trustee and beneficiary can be kept free from personal liability. 

In addition there are estate plan advantages to ownership of beneficial interests in real estate held in a land trust rather than the real estate itself. The beneficiary may distribute his interest by a gift, sale or by testamentary disposition without affecting trust title to the real estate or partition of the real estate. 

Not all lenders will lend to a business trust when purchasing a property, so good to ask your lender about this in advance of taking title to a property this way. Of course, you may always quit claim it to a land trust after you purchase.

Chicago Title's Bruce Andrus tells me, "I know we have concerns here in Washington with regards to insuring land trusts due to the multiple beneficiaries and the ability of the beneficiaries to sell their interests without actually selling the property. Because Washington does not have any statutory provisions for Land Trusts, in most cases we will decline to insure title to property in which a land trust is involved. It creates significant marketability and insurability problems when the investors remain off-record."

What about transferring into a Land Trust after taking title to the property? "a transfer post-closing would affect the title insurance policy. A voluntary conveyance of ownership would terminate the owner’s policy. The only way to continue coverage would be with an endorsement to the policy. And in most cases we would not be in a position to issue an endorsement to a land trust."

 Real estate investor Bob Malecki responds: "I've never had any issues with title insurance but I've always used First American so I would think that shopping a few title companies for their policies on land trusts would be one of the steps in the process."

To create a Land Trust, you need a Deed in Trust (similar to a Warranty Deed) and a Trust Agreement, which is a contract between the Trustee and the Beneficiary. The deed to the property is held in the name of the Land Trust Trustee and the Trust only. The Trust Agreement is the heart of the Land Trust.

Land Trusts are "Beneficiary Driven" meaning that the Beneficiary makes all the decisions about the assets inside the Trust. There is NO recorded document identifying the Beneficiary.

I am not an attorney, and this should not be construed as legal advice. Always seek the assistance of a legal professional, if you are putting together a land trust agreement. 

Happy Investing!

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