William Bronchick talks with us today about what land trusts are and how they can be a benefit for a real estate investor with multiple properties.
Land trusts can provide anonymity when the trust is named after the property address which can help discourage litigation.
Mike: Welcome back to the FlipNerd.com REI classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Bill: Hi. I’m attorney Bill Bronchick with the REI Classroom. And in this lesson, we’re going to talk about the five benefits of using a land trust.
Mike: This REI Classroom real estate lesson is sponsored by uglyopportunities.com
Bill: First, let’s talk about what is a land trust. A land trust is not like an LLC or a corporation that you file with the state. It’s not an entity. It is a contract, like all trusts. It is a living trust, meaning created while you’re alive. It is a revocable trust, meaning you can change it or terminate it. So it is a revocable, living trust. But most of us think of something for estate planning when we hear “revocable living trust.”
Now, there are many types of revocable living trusts. It just means created while you’re living and you can revoke or change it or terminate it. So there are types of those for estate planning and then there is a specific type for holding title to land.
So why would you do that? Well, the idea is to have a different trust for each property. And it’s created by an agreement between the parties to the agreement – the creator of the trust, that’s you, the grantor, the trustee who’s going to manage the trust property and for the beneficiary, for whose benefit. So there are only two people who actually sign the contract, the grantor and trustee for the benefit of the beneficiary. If you create a trust where you’re the beneficiary and you’re also the grantor, then there are only two parties and it’s called a self-settled trust, which a land trust typically is.
You put each property titled in a separate land trust. And that way, you get anonymity about ownership because, unlike a corporate entity, which is filed with the state, there’s no public place you can look up who the true owner of the trust is. Now, most people who do estate planning with a revocable living trust would use a name for the trust, like the Jerry A. Jones Family Living Trust. And there’s no surprise as to who owns that.
But if you name the trust the property address, like “123 Main St. Trust, care of” someone with a different last name than yours, like a friend or relative, at a PO box out of state, there’s no public place they can look up who the beneficiary, the true owner is. They could write to the trustee, but the trustee is going to ignore them, not going to respond. Corporations or LLCs must have a registered agent, a physical address in the state where the property is so they could be served with papers. A trust doesn’t have that requirement so it could be a PO box out of state. Very difficult to serve that person because they’re at a PO box. Very difficult to find out information. That’s the beauty of it.
Now, a land trust gives you protection from judgments. If you had an IRS lien against you or a judgment against you personally, the property that is not titled in your name but titled in a trust is protected from judgment. So if someone recorded a judgment or lien in the county, it won’t attach to a property that’s in a trust name. It’s not in your name so the lien does not attach.
Number two, that’s number two. First was privacy, second was protection from judgments. Three is it discourages litigation because most people who are going to go try to sue you, like a tenant, they’re going to go to these, what we call proverbially an ambulance chaser lawyer, which is technically someone who works on a contingency, meaning they don’t get paid unless they win and collect. And it’s not just win, it’s win and collect.
So if someone goes to an attorney like that and there’s no obvious deep pocket like an insurance policy and they look up the owner as being a trust, PO box, trustee out of state, they write a letter and the trustee refuses to disclose who the beneficiary is, the lawyer is probably not going to want to take that case on a contingency. Maybe by the hour, but not on a contingency.
So if that person who’s going to the lawyer can’t get the “free” lawyer, they’re out of luck. And that will discourage at least the frivolous stuff. If someone really is injured badly, they might try a little harder or they might sue you or be willing to pay by the hour. But if they can’t afford by the hour, they can’t play the game and then we win the game by default. It’s like taking out their quarterback. If they don’t have a quarterback, they forfeit the game. And that’s why it’s so powerful. It discourages litigation.
It also protects you from HOA liens. Now, many of you don’t know this, but if you take ownership of a property in an HOA community, whether it be a townhome, a condo or even a house that has an HOA, you not only are responsible for dues, assessments and fines on your property but they don’t have to just file a lien on the property. They could sue you personally for that. Many people have found that out the hard way because they didn’t pay HOA dues and then they got sued personally.
So if you own a property in a land trust instead of your own name, they could put a lien on the property. They could sue the land trust, but they can’t sue you personally, nor can they sue the trustee, other than to name the trustee as a necessary party to get jurisdiction over the trust itself. But that will help. If you had a property that, let’s say, was your own and you were fighting some sort of HOA assessment or you wanted to walk away from the property, you would be liable if it were in your own name, but not if it was in a land trust. Very, very powerful.
And the last thing: code enforcement. In my jurisdiction, if you are a landlord and you have more than two notices of violation, and it could be a dead tree, garbage on the lawn, overgrown weeds, simple things like that, if you get more than two notices in a six-month period, you’re a repeat offender and the third one, you have to go to court and answer to a judge, who could potentially call you a slum lord, fine you, throw you in jail if it’s bad enough.
Well, if you have six properties, it’s pretty easy to get three notices. But if you have six properties in six separate land trusts, that’s six separate landlords. First, the county doesn’t know who the true owner is. It’s just the trustee at a PO box out of state, which local municipal courts may not have jurisdiction over so they can’t drag him into court. They can’t drag you into court because they don’t know you exist under there. You may still have a lien on your property if you don’t respond to the allegations or the fine, but at least there’s no ability for them to cross-reference.
This happened to a client of mine who owns several properties and he got a bunch of violations on one. He was trying to keep up with those and then the city inspector looked up his name and said, “Oh, he owns all these other properties,” and started slapping fines on those because he thought he was a slum lord. He couldn’t keep up so they dragged him into court several times and the judge ultimately threw him in jail for not fixing these things that he just didn’t have the money or time to fix. If he’d had them in separate trusts, if the code enforcement inspector went and looked it up, he couldn’t have found the other properties because each one is in a separate named trust.
There are so many more benefits and great things about land trusts. You should get to learn how to use this very simple but effective device. I hope you’ve enjoyed this discussion about land trusts. I hope you go ahead and use them too and I’ll see you in the next lesson.
Mike: HomeVestors, the “We Buy Ugly Houses” folks, is a franchised system of hundreds of real estate investors that have purchased over 65,000 houses. If you’d like to learn more about the most powerful real estate investing system in existence, whether you’re a pro looking to take your business to the next level or whether you have no experience at all, but a burning passion to be successful in real estate investing, please visit FlipNerd.com/ugly to learn more.
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