10 Reasons to Use Land Trusts to Buy Real Estate
by Alex Everest
Land trusts are very effective tools used by savvy real estate investors. They offer numerous advantages and few drawbacks. Some people find the concept of land trusts to be complicated or confusing, but they are actually pretty simple to setup and use.
A trust is simply an arrangement in which someone holds something of value for the benefit of another party. For example, you want to set up a trust for your son (referred to as a beneficiary). So, you place $100,000 into an account at your local bank and appoint the bank as trustee. The bank administers the property according to your wishes and "for the benefit" of your son.
Likewise, a land trust is an arrangement in which a trustee holds title to real estate for the benefit of another party. The trustee actually has no duties except to sign deeds and mortgages at the direction of the beneficiaries. The trustee holds legal and equitable title while the beneficiary has the right to the proceeds of the trust. The beneficiary is considered the true owner for tax purposes.
Here are 10 reasons why you should use land trusts to buy real estate:
1) Privacy of Affairs
Since only the trustee (or the trust name) appears on title, the beneficiary remains private. This level of privacy offers numerous advantages including the ability to conduct business without making your affairs known to the world. Walt Disney used land trusts when buying up tracts of land in order to build Walt Disney World. If people knew that Walt Disney was buying up land, then prices would have certainly skyrocketed.
2) Avoiding Lawsuits
We live in a country obsessed with litigation. When you title your real estate holdings in land trusts, you appear broke to the public. This discourages contingency-based attorneys since they believe they probably won't collect anything from you even if they did obtain a judgment.
3) Avoiding Judgments and Liens
Judgments and liens against individual beneficiaries do not attach to property held in a land trust (First Federal v. Pogue, 389 N.E. 2d 652 (1979)). As a result, a person may convey the property (or their beneficial interest in the trust) even though they may have several judgments in their name. This even includes IRS liens.
4) Ease of Transfer
The interests in a land trust are considered personal property, not real property. As such, a transfer of an interest in a trust can be done effortlessly with an “Assignment of Beneficial Interest.” There is also no need for a notary, witness, or any type of public recording.
5) Ease of Control
In situations where multiple parties own interests in a property, it is often difficult to get every person who has an ownership interest to sign and execute contracts, deeds, and mortgages. If the owners live in multiple states, this is even more challenging. When you own property in a land trust, only the trustee needs to sign and execute documents. The beneficiaries may simply draft direction letters to the trustee without the need to have them notarized or witnessed.
6) Avoiding Probate
Property owned in trust does not go through the probate process when a person passes. Probate is the statutory process in which a court decides how a decedent’s property shall be distributed. Avoiding probate reduces legal fees and lengthy delays caused by the court system. The trust document can easily be setup to name “contingent beneficiaries” upon the death of the original beneficiary.
7) Sales Price Privacy
When a property is sold, a deed is recorded in the county recorder’s office where the property is located. Most states require the payment of a deed tax. This is often noted on the deed and is usually based on the sales price of the property. This information is then filed in the public tax records for the world to see. However, if you sell a property you own in a land trust, you can simply sell the “beneficial interest” in the trust without making any transfer information available.
8) Keeping Assessments Lower
Tax assessors often watch for properties to be sold so they can increase taxable values. In many states, there is a significant increase in property taxes after each sale. However, when an "Assignment of Beneficial Interest" is sold, one avoids any public record of the sale or the price paid.
9) Avoiding Transfer Taxes
In some parts of the country, transfer taxes alone can cost thousands of dollars on each sale. When a beneficial interest in a trust is sold (rather than the property itself), the real estate is not actually being conveyed. Thus, using a trust avoids costly transfer taxes.
10) Buying Bank-Owned Properties
Banks often have clauses in their contracts prohibiting buyers from “assigning” their contract to another party. They simply don’t like investors profiting from “flipping” their contracts and making a profit. When you enter into a contract to buy properties from banks in a trust, you can simply assign your beneficial interest in the trust instead of assigning the contract itself.
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