Myths About Land Trusts
By: Mr. Land Trust®, Randy Hughes
I write and teach a lot about the many benefits to using a Land Trust to hold title to real estate investments. There is a lot of misinformation in the marketplace about Land Trusts and a lot of bad advice given regarding these title holding trusts. After using these trusts for over 40 years, I have found that the myths outnumber the facts. In this article I will dispel some of the myths that I hear over and over.
MYTH: Only bare land can be put into a Land Trust
TRUTH: Any real estate (or real estate related asset) can be titled in a Land Trust
MYTH: My lender will not let me close my deal using a Land Trust (LT)
TRUTH: This depends on if you are using borrowed funds from a lender that must qualify you in the secondary market. If you must meet secondary market guidelines it is true that you must close the deal in your name, but you can put the property into a land trust the day after closing. Once you have 10 secondary market loans (the maximum allowed) you must use a portfolio lender and they will let you close using your land trust.
NOTE: Bank of America WILL let you close four secondary market loans using a land trust to take initial title. However, you must use an Illinois Land Trust and the property must be in Illinois.
MYTH: Do I have to get a tax ID number for my LT?
TRUTH: The answer is no. Nor do you have to register your Trust Agreement with anyone.
MYTH: You can’t do a Short Sale using a LT
TRUTH: False. You can and I have and there are many advantages to using a LT for this type of transaction.
MYTH: Is it true that I must record my Trust Agreement to make it valid?
TRUTH: No, and 99% of the time you would not want to record your trust agreement. However, there is that 1% reason that you might want to record. More on that in another article.
MYTH: My attorney says Land Trusts are illegal in my state
TRUTH: This is probably not true. Almost all states recognize the validity of a LT or a similar type entity (Title Holding Trust, Common Law Trust, etc.). My experience is that a vast majority of lawyers do not understand Land Trusts and therefore do not recommend them. Too bad for their clients.
MYTH: If I use my LLC as the beneficiary of a Land Trust I must register the LLC in the state where the property (held inside the Land Trust) is located.
TRUTH: Wrong! Many accountants will tell you this, but they are incorrect. The beneficiary of the Land Trust is not “doing business” in the state where the property is located . . . the Land Trust is . . . and the Land Trust is not required to register.
NOTE: California has a law that says if you transfer more than 49% of ANY entity that owns property in CA or is the beneficiary of a Trust that owns property in CA, they have the right to tax you.
MYTH: Land Trusts are expensive to set up and maintain
TRUTH: Not true. If you follow my advice to put each of your properties into a separate Land Trust and you hire an attorney to do this for you, it WILL get expensive. But you do not need to do this. You can learn how to set up and administer your own Land Trusts (as many as you need/want) for only the continuing cost of recording each deed.
MYTH: Land Trusts must have incorporation papers and the State notified
TRUTH: Wrong again! Land Trusts are not registered like corporations and LLC’s on a state-by-state basis (In fact, they are not registered at all . . . anywhere!). This is one of the many reasons to start your estate planning with a Land Trust for each property you buy.
MYTH: I was told that my Land Trust must open an account at a local bank
TRUTH: Not true. Since Land Trusts are “pass-through” entities in the eyes of the IRS you do not need a separate bank account for each Land Trust you form. You can set up an account but you do not have to and you will not have a tax ID number to use so you will have to use your own social security number (or, if your LLC is the beneficiary you might use your tax ID # for your LLC).
MYTH: It is illegal to hide the ownership of property
TRUTH: I love this one. WRONG! It is not illegal to hold title to your real estate in a Land Trust to conceal the ownership (I call this being private about your business). Former President of the United States, Barack Obama, owns his home in Chicago, IL in a Land Trust with his attorney serving as the trustee. If it is good enough for our former president, it should be good enough for you!
MYTH: Can I buy the Beneficial Interest in a LT without buying Title Insurance
TRUTH: Yes, you can, but I would not advise doing this. I would always get a title policy and have the proper “search” done prior to transferring any funds. You want to make sure that the Trustee has clear title and there are no unknown liens or judgments against the property. You should also obtain a copy of the trust agreement and make sure the Trustee acknowledges EVERYTHING!
This is certainly not a complete list of misconceptions about Land Trusts, but is enough to digest for now.
For more Land Trust knowledge, you may e-mail me at [email protected] Be sure to mention the name of the real estate association or group to which you belong!