Land Trusts

Mike: Welcome back to the FlipNerd.com REI Classroom, where experts from across the real estate investment industry teach you quick lessons to your business at the next level. And now, let’s meet today’s expert host.

Bill: Hi, I’m attorney Bill Bronchick, one of the instructors for REI class as well as the host of the popular website, LegalWiz.com.

Mike: This show was sponsored by PassiveRental.com.

Bill: In this video lesson, we’re going to cover a very powerful technique known as a land trust. Now, what is a land trust and what can it do for you? A land trust is a trust, like a living trust, like the one you might have done for estate planning. A land trust is not a corporate entity like an LLC.

It doesn’t file with the state. What a land trust or any trust is for that matter, is just a contract. It’s just an agreement on paper where parties agree to do certain things. So we have the parties to the agreement are the beneficiary of the trust. That’s basically whose benefit it is and then the trustee of the trust, the one who’s going to manage the trust assets.

So you could set up a trust where you have a friend or relative, who’s got a different last name than you, which I’ll explain why in a minute, who will be the trustee and you can be the beneficiary. And you both sign a trust agreement that outlines that. Now, what are the benefits of a land trust?

Well, if you buy and sell real estate in your own name, or even in a company name like an LLC, it’s not very private because in most states, someone can go to the Secretary of State website, look up who’s the true owner and you probably have your name all over that.

Also, if you have multiple properties in that way, I’ll give you an example of how it could be a problem. In my jurisdiction where I have a lot of rental properties, if you get a code violation, like overgrown grass, garbage on the lawn, that kind of thing, if you get more than two as a landlord in six months, you’re a repeat offender. You’re like the guy at the post office with his picture on the wall. What it means is you have to go to court and then answer to a judge.

Now, if you’re an LLC and you’ve got seven properties, it’s really easy to get two notices on all seven properties. Whereas each separate property is titled in a land trust, then it’s difficult for each particular land trust to have two violations in a six-month period because, technically, there are several different owners or six different owners. Does that make sense?

So you would use the land trust to hold title. And the reason that we don’t use a living trust is because your living trust is usually your family name all over it. No, we use a very generic name, such as the property address, 245 Oak Street Trust, care of the trustee, your friend or relative with a different last name than you.

So it’s very difficult for a tenant or anybody who’s poking around to look up on record who the owner is. The owner is the trust, care of a trustee, P.O. Box.1234 in another state, maybe, or in the same state, or far away.

And since the trust agreement is not recorded publicly like an LLC, there’s no way for anybody to figure out who is the true owner, i.e. who is the beneficiary of that trust. They can write a letter to the trustee at a P.O Box, but they’re not going to get an answer because you can instruct your trustee not to respond to anything like that.

So a land trust gives you anonymity, gives you privacy, it gives the ability to separate ownerships so people can’t cross-reference names of properties to figure out how many properties and where you have them. And you might be thinking, “Well, I have an LLC that I own the properties.” You’re saying, “Should I use a land instead?”

And actually, no, I’m saying to use both. I said you could set up a trust between you as a beneficiary and your pal as the trustee. But the beneficiary can actually be an LLC or corporation, etc. So you still get the liability protection and tax treatment of an LLC with the anonymity layer of the land trust.

Now, some people, when they approach this, they’re a little bit confused about the details. But just imagine the poor SOB attorney on the other side trying to unravel what you’re doing. They don’t see underneath the trust. It’s a complete cloak of anonymity because the trust agreement is not publicly recorded anywhere.

Does this change anything for tax purposes? No, a trust is ignored for tax purposes. So the beneficiary, in this example, let’s say it’s your LLC, transfers six properties to six land trusts and remains the beneficiary for tax purposes.

It’s still the LLC, still the owners that report as if they owned it. Even though down at the county, it shows up as land trust one, land trust two, land trust three etc. So this is a great way to give you a layer of anonymity with a very inexpensive way to do it because the only fee is the filing fee to put the deed from whoever’s name it is now, your name, your LLC into the land trust, and record it down at the county. That’s it. There’s no annual fee. There’s no tax return. There’s no bank account. There’s no tax ID and it gives you complete anonymity.

And what’s really great about that, if you’re dealing with tenants directly one on one, as the manager, and they look up the ownership as either being you individually or an LLC, which is public information, which is i.e. you the owner of it, now they don’t know that. So you’re dealing with them as just a property manager and they don’t know you’re the owner. It’s a different dynamic entirely when you’re dealing with tenants one on one with that layer of anonymity.

A very easy to set up, very cost effective and really not a lot of work to set it up. Talk to your attorney and/or tax advisor about setting up a land trust. I hope you’ve enjoyed this discussion. This is Bill Bronchick for REI Class.

Mike: PassiveRental.com is your source for turnkey done-for-you rental properties. If you’d like to be an investor and not a landlord, please visit PassiveRental.com to learn how to purchase cash flowing, professionally manage rental properties in the hottest rental markets across the country. We can also help connect you with financing for your next property. Invest the easy way today and get started by visiting PassiveRental.com

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