How a Land Trust Works

[mtnwizard]

Many people have written asking how the land trust process works.  It is actually a Very Simple Process.

IN THE BEGINNING

1.  A (title-holding) land trust is created in the name of the current owner (the settlor) who holds a 100% beneficiary interest.  No one else is involved, only the owner and his/her trustee.  Always use a non-profit corporation with experience as Trustee.

2.  Escrow is opened to facilitate the assignment, in the existing land trust, of beneficiary interest to co-Beneficiary.  Title to the property is deeded to your Trustee.

NOTE:  Once your Trustee takes title, he owns the real property, YOU OWN PERSONAL PROPERTY, NOT REAL ESTATE.  ALL DOCUMENTS CREATED WITHIN THE TRUST REMAIN LEGALLY UNRECORDED AS THEY ARE PRIVATE PROPERTY AND YOU ARE PROTECTED, EVEN FROM THE IRS.  


3.  A Beneficiary Agreement is created between beneficiaries wherein the property's Mutually Agreed Value (MAV) is established in order to determine settlor beneficiary's beginning Beneficiary Contribution (equity and/or any non-recurring closing costs, etc.).  This documentation also reflects all co-beneficiary contributions (equity contribution and/or non-recurring costs).  The trust remains revocable, but now has two (or 3) owners and it takes a unanimous vote to revoke it.

4.  A Possession and Occupancy Agreement (triple net lease) is executed between the trust and the Resident co-beneficiary.  The right to do this is provided in the Garn-St. Germain Act of 1982, is a legally unrecorded event, and is exempt from the DOSC.

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You own a beneficiary interest in a trust which is categorized by the IRS as securities and listed under stocks and bonds.  Your Trust is not covered under Mortgage Law, but under the Uniform Commercial Code.

MORTGAGE LAW VS. U.C.C. REGULATION (ART. #9)   “Mortgage law" would rarely, if ever, govern a security interest in a beneficiary’s land trust interest."

The Uniform Commercial Code, adopted by all 50 states, characterizes interest in an Illinois-type land trust as Personal Property. However, for federal income tax purposes, the beneficiary/ies of land trusts are treated as if they owners of real estate. Because local laws view a land trust’s beneficiary interest as personal property rather than real property (except in Louisiana and Tennessee who treat such beneficiary interest as realty), it is UCC regulation (i.e., Article #9), rather than mortgage law, which governs the interest of the parties.

Many of the naysayers on this forum say that this is fraud or concealment.  They don't understand that it is PRIVATE PROPERTY and not subject to public scrutiny, and the very reason that wealthy individuals have been using land trusts for over 115 years.

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AT THE END

1.  The property is either sold by the trustee at FMV, or purchased and refinanced by co-beneficiary, who has first right of refusal to purchase at FMV .

2.  All loans are retired (out of the proceeds of the sale or refi).

3.  Costs of disposition are paid (e.g., escrow, re commissions, etc.).

4.  The settlor beneficiary then is refunded its beneficiary contribution (beginning equity and non-recurring startup costs).

5.  The co-beneficiaries are refunded their beneficiary contributions (non-recurring startup costs, equity contributions, escrow fees, any part of commissions paid at inception, etc.)

6.  ALL remaining (net) proceeds are distributed among beneficiaries in proportion to their respective percentage of interest held.

I hope this makes the process easy to understand for all.

Da Wiz

[Mohegan]

Thanks alot.. It was alot to understand but excellent.. Are you currently doing these..? what is necessary in order to set on up, or have seller put into land trust..? Doc, attny etc..?

Mohegan

[shawinvestments]

how is a land trust taxed. what are the pros/cons of trust vs. LLC. I have a one time deal with partners. I am trying to limit liability and taxation, but I found out that in Texas there is a franchise tax that an LLC would have to pay. What would you do if you have already purchased land to flip, and held title with all three people in your own name and wanted to deed it to an entity for protection till you sell it.

[TMCG]

What would you do if you have already purchased land to flip, and held title with all three people in your own name and wanted to deed it to an entity for protection till you sell it.

no offense intended here - but listen to that again.

IN THE BEGINNING

1.  A (title-holding) land trust is created in the name of the current owner (the settlor) who holds a 100% beneficiary interest.  No one else is involved, only the owner and his/her trustee.  Always use a non-profit corporation with experience as Trustee.

2.  Escrow is opened to facilitate the assignment, in the existing land trust, of beneficiary interest to co-Beneficiary.  Title to the property is deeded to your Trustee.

NOTE:  Once your Trustee takes title, he owns the real property, YOU OWN PERSONAL PROPERTY, NOT REAL ESTATE.  ALL DOCUMENTS CREATED WITHIN THE TRUST REMAIN LEGALLY UNRECORDED AS THEY ARE PRIVATE PROPERTY AND YOU ARE PROTECTED, EVEN FROM THE IRS. 


3.  A Beneficiary Agreement is created between beneficiaries wherein the property's Mutually Agreed Value (MAV) is established in order to determine settlor beneficiary's beginning Beneficiary Contribution (equity and/or any non-recurring closing costs, etc.).  This documentation also reflects all co-beneficiary contributions (equity contribution and/or non-recurring costs).  The trust remains revocable, but now has two (or 3) owners and it takes a unanimous vote to revoke it.

4.  A Possession and Occupancy Agreement (triple net lease) is executed between the trust and the Resident co-beneficiary.  The right to do this is provided in the Garn-St. Germain Act of 1982, is a legally unrecorded event, and is exempt from the DOSC.

now find a seller who understands this (when you don't quite fully understand it yourself).

i don't mean to bust chops mtn.  you know your business.  it's just my opinion that this whole thing (land trusts) gets people who are actually interested in learning about real estate investing all caught up in analysis paralysis so badly that after a few months their brain is overloaded with FEAR.  rather than useful information.

when i made a decision to stop dwelling on the "perfectly safe" way through "ultimate asset protection" to acquire real estate - when i stopped considering even thinking about land trusts - i, personally, really learned about real estate - how it all works and how to acquire it.

but that's me.  IF YOU'RE NEW TO REAL ESTATE - AVOID LAND TRUST CONVERSATIONS.  they will only work to bog you down.

S I M P L I F Y...

[shawinvestments]

Great i love to simplify. problem is this is a deal that is complicated and difficult. Good news is it will also be lucrative. I just want to know the best way to hold the property so that if one partner is sued , the asset is not lost or clouded. LLC seems to work, but I can't get straight answer on Texas franchise tax. my attny said 4% but did'nt know how it is calculated...the SOS website says .575 % if I read their legalese right. I can handle the latter, but 4% of profit on this deal is just too much, I hope my attny is wrong...wait that means I have to find a new one . waiting for answer from CPA. hell mabey we just roll the dice.

[aak5454]

these are fairly simple questions.

Typically a land trust is a dis-regarded tax entity; however, in your situation you man want to use it as a general partnership vehicle.  Then you will need to get an EIN number and will have to file a 1065 fed tax return.  If you do an LLC, it pretty much the same from a tax standpoint, unless you elect to taxed a corporation.

as for pros and cons of trust vs. LLC, read some of the old post this is covered in extreme detail in the past.  if you are interested in trust I would recommend Mark Warda's on land trust book (available on amazon) or perhaps send some time at www.foreclosureforum.com (not my website) has a lot of great info.

how is a land trust taxed. what are the pros/cons of trust vs. LLC. I have a one time deal with partners. I am trying to limit liability and taxation, but I found out that in Texas there is a franchise tax that an LLC would have to pay. What would you do if you have already purchased land to flip, and held title with all three people in your own name and wanted to deed it to an entity for protection till you sell it.

[TMCG]

don't waste your time reading about land trusts.  trust me.  unless you've got years of experience in rei - and this isn't your first deal - don't bother visiting any other website or reading any past posts on it and don't bother trying to figure out land trusts. 

mtn is an expert at it.  he's experienced at it. 

yes we've all got to "start" somewhere - but starting by trying to figure out land trusts is a joke.  do i understand them?  sure.  but THE REST of the reality of acquiring real estate using them is an ENTIRELY DIFFERENT STORY.

this is just my opinion - reading up on land trusts and how to use them to acquire real estate prolongs and promotes IMMENSE ANALYSIS PARALYSIS.

trust me.  find a PRACTICAL WAY to do this deal, or just walk.  forget the land trust "studying".  "studying" doesn't earn you CASH. 

[trustpro]

Maybe I can help.  Here is what I say to the Seller:

If you are willing to wait up to 3 years for most or all of your equity, and remain on your loan for 3 years,  I am prepared to legally assume 100% of the responsiblility for all mortgage obligations, maintenance and repairs, management and upkeep of your FOR SALE, or FOR RENT OR LEASE property. As a real estate investor, I make this proposal in the hopes of obtaining income tax benefits relative to mortgage interest and property taxes. I will agree to pay 100% of your equity in 3 years and reserve the right to sublet the property, while fully guaranteeing the performance of a pre-screened party re payments, insurance, taxes, maintenance, etc.

During my tenure in our agreement I ask only that you continue the existing mortgage financing in place, and that the property be held in a bonafide land trust in your name (at my expense). I require only that you name me a co-beneficiary of the trust, and a triple-net lease tenant in the premises. You are not obligated to transfer the property's title to me until I have fully retired your existing mortgage and repaid current equity.
 
At the time of signing the land trust, a triple net lease is created where we place a partner into the property. I work with good people who just can't qualify for standard mortgages. They can be new in the state, on the job, or self-employed. I fully guarantee their performance until they sell or refinance and pay off the mortgage. They are our responsibility. If they miss a payment, we make it up and serve them notice. If they damage the property in any way, that's our responsibility at our cost. If they default, we evict them and replace them.

What is your assurance that I will keep my end of the deal?
 
Your property is never at risk. It is held in a special land trust in your name alone, until your loan is retired and you receive all the money due you. By utilizing this asset management strategy, you are using THE SAFEST and MOST SECURE means of transfer of ownership interest. You never have to worry about anyone's legal or personal problems attaching to the property, such as tax liens or creditor judgments. Even the IRS cannot penetrate the trust in order to get the property.  Each of us will have attained our objectives. At no time will the property or its title be sensitive to potential threats of bankruptcy, lawsuits, creditor judgments or litigation in marital dispute. Under the terms of our agreement, the lender's Due on Sale admonition will not be compromised.
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To my Tenant Buyer:

HERE'S THE DEAL

I buy a home and place it in a land trust.  I need someone to live in the property, make the payments on time, and be responsible for maintenance and repairs on a 3-year, triple net lease.  I want you to treat this house as if it were your own.  I ask for no down payment -- you will only pay closing costs (Only 5% plus 1st month... Moves You In!)

There will be no bank or credit qualifying.  If you agree to this and keep your end of the bargain, I'll give you the house.  How?  When you sign the lease and pay the closing costs and advance lease payments, I will immediately assign you a Beneficiary interest in my trust.  You will (although only leasing) acquire IMMEDIATE home ownership benefits and are allowed by the IRS to write off the monthly mortgage interest payments and property taxes.  You will also share in the future appreciation of the home on a 50/50 basis.  At the end of three years, if you want to buy the property, you can do so at Fair Market Value.  If you choose not to, there is no obligation or penalty. 


The process is simple.  The documents are complex but there are far fewer than a refinance.

[BLL]

There are 2 trusts here. Trustpro and mtn are describing a way to do a sub2 using a land trust. The more common use of the land trust is for estate planning. Some people assign the beneficial interest of that trust to an LLC for asset protection purposes.

[trustpro]

BLL is exactly correct.  A land trust is merely a title holding instrument.  I always have my personal residence in a land trust for privacy and asset protection.

When holding property, a land trust is used in combination with a triple net lease and equity sharing to attain the desired goal.  Because the land trust has converted real property to personal property, it can easily be used instead of a lease option, land contract, sub 2, etc., to avoid the usual drawbacks of each, such as the DOSC, equitable interest, privacy concerns, liens and encumbrances, etc.

[Dave T]

There are 2 trusts here. Trustpro and mtn are describing a way to do a sub2 using a land trust. The more common use of the land trust is for estate planning. Some people assign the beneficial interest of that trust to an LLC for asset protection purposes.

BLL,

I have heard it said that a stronger asset protection structure is for the LLC to own the property and for the trust to be the sole member of the LLC.

I can see that this structure may not easily conform to the sandwich lease option arrangement described by trustpro, but what about for property you would otherwise own in your own name?

Your thoughts?

[BLL]

I have heard it said that a stronger asset protection structure is for the LLC to own the property and for the trust to be the sole member of the LLC.

I never heard of that one, Dave. It would be OK if the LLC manager and the trustee and beneficiary are not all the same person, but the trust would not be a land trust since it doesn't own property. The LLC/trust combination I see most often is title in the name of the land trust and the LLC with the beneficial interest. I prefer to hold title with a trust because it is more private with less hassles. There are no filing requirements, no annual fees, and no public records like an LLC. Keep in mind this set up does trigger the due on sales clause, but a bank's calling the loan is almost non-existant.

An alternative to the LLC is a business trust (aka common law trust or MA business trust). It has some of the benefits of an LLC without the public disclosures and formalities. It is appropriate for states with high LLC costs and/or taxes.

I always have my personal residence in a land trust for privacy and asset protection.

Good point. Folks should also research the qualified personal residence trust to hold a personal residence. There are situations when it is superior to a traditional land trust.

[trustpro]

The differences between a qualified personal residence trust and the land trust are significant.  With a QPRT, the trust owns the property;  with a land trust, the Trustee owns the property.  All transactions with a QPRT are public record and covered under mortgage law.  Because the property in a land trust is converted to personal property, the UCC governs these transactions which are all legally unrecorded and private.  QPRT trusts do provide tax benefits for the rich.
 

[Dave T]

trustpro,

Last week my wife and I visited an attorney to discuss estate planning, orderly transfer of wealth upon death, probate avoidance, and asset protection.  Whatever strategy we implement needs to preserve step up in basis for surviving spouse and heirs, capital gains tax treatment for capital assets, and ability to participate in 1031 exchanges when appropriate.

This attorney recommended a QPRT for our primary residence.  He did not explain the rationale and I was not sufficiently aware of the differences among the different trust vehicles to ask questions.  To round out the rest of the estate plan, the attorney recommended pour-over wills, individual revocable trusts, and at least two LLCs for our investment rental property.

Can you explain how a QPRT may be more advisable to me than another form of trust for our primary residence.  I don't consider myself rich, though, the attorney was specifically concerned with asset balancing since our combined net worth this year exceeds the unified credit for estate taxes.

[TMCG]

this is great discussion, lots of info.  just want to reiterate my point - that this all EXCEEDS the knowledge capability of a noob investor and only works against their efforts to actually go out and acquire real estate.  that i'm totally convinced of.

u want to do a few deals - using a business entity and the like for asset protection (and because it's just good business), THEN work your way toward learning more about land trusts and the like, then fine, but all noobs should avoid the topic at every turn.