It's amazing to still see many investors who aren't using land trusts at all, along with investors using them improperly. On top of this, there's a boatload of investors who are victims getting abused with every property purchased. Somewhere out there, somebody knew somebody who had a friend who did this or that and the investor becomes a victim. Although hard to believe, some investors go to their local veteran attorney and amazingly have been told they've never heard of a land trust.
What Is A Land Trust?
A Land Trust is a simple fill-in-the-blank document to “hide” or keep the real owners name off public records. It's nothing more than 6 pieces of paper detailing an agreement between the “trustee” and the “beneficiary”. Plain and simple, it's an “instrument” (piece of paper) to hide or shield from public view the “beneficial interest” (you or your entity). A land trust does not have a Tax ID number. The “beneficial interest” has the tax id number. The Land Trust name or agreement has absolutely nothing to do with your taxes. The beneficiary of the land trust agreement reports all of the taxable events involving the property. Many times bankers and attorneys get land trusts confused with perhaps estate planning trusts and insist or demand each land trust must have it's own tax id, it's own bank account, and must file it's own tax return. Wrong. They want to sell you more stuff. That is NOT the right kind of trust. This is the simple Land Trust started in Illinois with the intent to simply hide the real owners from public record.
Okay, let's try it another way. Picture this in your mind. A whole bunch of nosy farts including ambulance-chasing attorneys, nosy competitors, nosy family members, co-workers, and so on. Many folks become very curios when they learn you are a “real estate investor.” They want to see what you own and control. In today's high tech world, there's a world of information available to anybody if they find the right website. It's scary to see how much personal info is available letting your fingers do the walking.
Perhaps I'm a tad bit overkill on this privacy issue due to my previous life as a undercover cop doing long term serious investigations. A public record paper trail leading to me, my residence, or my family was absolutely forbidden. Initially, the concerns were safety and privacy. As your wealth grows, asset protection strategies became part of these concerns too. My bottom line was to have nothing in my name personally. This method allows me to control everything and own nothing. Some may argue it's overkill. That's their opinion and we can agree to disagree. Ultimately, you'll have to make this decision and you should have all of the information available to make your decision wisely.
To wrap up what is a Land Trust. It's about 8 pages long spelling out the details of responsibilities, duties, and fees of all parties involved. The parties involved are basically the trustee and beneficiary (grantor). The Trustee has full authority to act on or for behalf of those who have a beneficial interest in the property. The Trustee has full power of sale.
The Land Trust agreement identifies the name and address of the trustee and the name, address, and the percent of beneficial interest of each of the beneficiaries. Don't let this blow your mind. If you are the Beneficiary by yourself, then you become the Beneficiary with 100% interest. If you're married, and you have a single member llc, and your spouse has a single member llc, you could have two beneficiaries naming your llc with 50% interest and your spouse's llc with 50% beneficial interest. Depending on how your local public records are set up will determine how you name your trust and who is the trustee. For example, in my town, there is only one field in the public records computer for the owner of record. Therefore on all of my deeds, the owner of records will read in the following order:
“The (Land Trust Name) With (Trustee's Name) As Trustee With Full Power of Sale”
This forces the data entry person to enter it in this same format shown above and the trustee's sometimes never makes it into the field because the name of the owner is so darn long. Years ago the owner's name field accepted only 32 characters so many of my properties never had room to enter the trustee name because it was Aafter the land trust name. Some towns like Birmingham, Alabama have an additional field in their public records just for a Trustee. If your town's public record system is set up in this manner, you need to be careful here and create a battle plan just for this situation. Here's a couple of ideas. How about using your real estate attorney as Trustee? Odds are, they're trustee on a lot of other stuff anyway and your stuff would be mixed up in their stuff on any search by some nosy person. This is good.
Here's the simple version. Suppose you own a rental house at 123 Main St. The owner of record is your unique land trust name with you as trustee. A nosy person could get on the internet and find the owner of 123 Main St. If the owner of record lists your land trust as the owner followed by the trustee name in the same field, you're probably okay. In Birmingham, you'll see an additional field for the trustee name. The nosy person could then enter a search the Trustee Name to see what other properties list the same name as trustee. This is the bad part. Therefore, in this situation, you should perhaps come up with different trustee names or the best method would be to use your real estate attorney name as trustee. If you're doing your real estate closings with your attorney and referring other investors to them, your attorney should do this for free as an added benefit to you for your business. This would be perhaps the #1 recommended solution. If you have just a few properties, (say less than 10), you may simply jumble up different versions of your names and initials and do the same with your spouse if married. You should be able to create 10 unique names tied to yourself to use as trustee.
Who Does the Land Trust?
You prepare your own land trusts. It's a fill-in-the-blank form.
When to Do the Land Trust?
Each and every time after you buy a property, you prepare your new land trust agreement for each property at the same time you enter your closing statement.
Where Is the Land Trust and Where Does It Go?
Keep it on your computer or make copies and have them ready to go just like a rental application or a rental agreement. Once completed properly, your land trust agreement should be placed in the same file folder with your deed, your closing statement and your purchase and sale agreement. It should never leave your office. It never gets recorded. This would defeat the whole purpose of the land trust. The only way for anyone to find out who has the beneficial interest in the land trust is to travel to your office and find the land trust agreement in your folder in your file cabinet.
TIP: If you live in Birmingham or a town where you can search by a trustee name, take your land trust agreement to the closing so your attorney can sign as trustee and get it notarized with the least amount of inconvenience to you. Do not leave the land trust agreement with your attorney. It never leaves you. You take it back home or to your office.
Why the Land Trust?
I recall several years ago, a local real estate attorney thought my use of land trusts was overkill. In fact, he told investors asking about land trusts they really offered no protection. His exact words were “land trusts are just a bunch smoke and mirrors. LLCs and good insurance are your best protection.”
WHAMMO! – check this out and see what you think. Before speaking at a big investor conference last fall, we attended a nice dinner banquet for all attendees and speakers. I had the opportunity to be seated at the same table with an attendee that had this amazing story. He proceeded to describe how after implementing many ideas picked up from attending one of my weekend boot camps, his real estate business was booming back home. This guy was rocking and rolling and loving it. He discovered true wealth grows with ownership, and not just wholesaling and retailing properties. Ownership = tenants. Here comes his nightmare.
John Doe investor goes on to tell everyone seated at our dinner table he should've implemented what he learned from Mike about land trusts; however, he never got his “round 2 it”. His tragic story begins with a tenant moving out of a rental unit. They both did the move out inspection properly and a disagreement over the dollar amount of repairs resulted. John held firm to his position of money owed for repairs. The ticked off tenant proceeds to track down one of those free attorneys and files a lawsuit to get their security deposit money returned.
John gets his summons to go to court and as a real world investor, he's prepared for the worst and hoping for the best. He takes his checkbook to court with him. As expected, the tenant friendly judge makes a judgment in favor of the tenant. John loses. No need to drag it out and make it more painful, John chooses to settle up, write a check for payment in full on the spot and get back to business. Put this one to bed. John returns to his growing real estate business and has several deals pending across the board, including several refinances on properties. Now keep in mind, John is an aggressive real estate investor. He's pretty active and has several closings each week. John already had plans for the money he was to receive from his pending refi's to pay cash for purchase contracts pending in his pipeline.
Here comes John's bomb. A day or two before the scheduled closing of his pending refi's, he gets a phone call. Bad news. His lender has cancelled his loans. Why? His credit score took a nosedive. Perfect credit, never missed a payment, what's the deal? John was devastated and went into the panic mode. He needed the cash from the refinances to buy the houses he promised to pay cash for next week. His reputation as a strong cash buyer, his word, all are in jeopardy. What's going on?
Here's the deal. John's credit score took a nose dive because of the lawsuit and judgement against John. John explained the entire story to the lender; however, the story didn't fix the problem. When the judge made a final decision to see who wins, it's called a judgement. The judge ruled in favor of the tenant and against John, this becomes public record. Therefore, John had a judgement against him in the public records. It showed up like it should on his credit report. It doesn't matter that it's paid in full. It's still a judgment against John. Ouch!
John's damage now includes a lower credit score. He can't qualify for good rates for his refinances and is stuck with higher priced B and C lender products for his investing business. Lesson learned for John. On his rental property deeds, his personal name was listed as owner of record. John had his own property management company managing his tenants and collecting the rents. (this was good for the number of units John is driving). The attorney for the tenant did their job properly and named John's property management company and the Owner of Record of the rented property. Because John had his personal name on the deed as owner of record, he was named in the lawsuit. When he was named in the lawsuit personally and he lost, he got a judgment against him personally.
If John had used a land trust for the owner of record, the tenant's attorney would have named John's property management company and the land trust as defendants or parties of the lawsuit. John would not have been named personally and when he lost the case, the judgment would have been against the land trust, not John personally. Perhaps a bit more powerful than “smoke and mirrors?” This true real life story is proof of just one of the many powerful benefits for investors. John immediately got the ball rolling to make sure the owner of record on every deed was an individual land trust for each property he owned.
A Shorter War Story, What Not To Do
Donna heard about land trusts and discovered this was a great tool she needed to incorporate into her investment program. She failed to gather all the specifics from a competent expert and for some unknown reason, chose to follow up on specifics of using land trusts with her local banker. Her banker listened to Donna, was a little dumbfounded, and had to check with his bosses to see how they could “help” Donna.
After a week or so, her banker called her back with “great news for Donna”. His boss “approved” Donna's request or application for using land trusts for her properties and invited her to schedule an appointment to go over the details. Donna was actually excited and was looking forward to implementing this newly found asset protection and privacy tool into her investment program. Long story short, they set up her on a program with her bank as trustee charging $300 per land trust along with forcing her to have a bank account with small monthly fees for each land trust. Looks like the bank wins here.
How To Use The Land Trust?
STEP 1: After you capture a deal meaning you have an agreement to buy a property, contact your closing attorney or title company and tell them to make the owner of record on your deed to read:
“The (Land Trust Name) with (Trustee's Name) as Trustee with full power of sale” of
STEP 2: Attend your closing, buy the property and return to your home or office with a copy of your deed and closing statement. Enter your closing statement properly in your Investor Books made. Next, is your land trust. If you don't have a computer, you could use your land trust agreement just like your rental agreement.
Fill in the blanks for:
1. Address of the property
2. Name of the Land Trust
3. Trustee Name
4. Beneficial Interest (1 or more persons or entities)
5. Legal Description of property (easiest way is staple a copy of your deed to the land trust agreement)
6. Notarize Trustee and Beneficiary signatures.
STEP 3: Hide it in your filing cabinet with your closing statement and deed. You're done.
STEP 4: Let your insurance agent know the Owner is your land trust. Your policy will list insured as your land trust name c/o Trustee or your property management company name at your mailing address.
If you're pretty good on computers, you could have your land trust agreement in your computer as a Microsoft Word document and fill in the blanks and hit the print button. (this just looks prettier instead of handwritten fill in the blank.) I promote doing things right, but at the same time you should have all the information. There are many investors who never fill out a land trust agreement. Many investors simply take title to property using a land trust and sell property the same way and never fill out a land trust agreement unless they need one to sell. I'm not telling you this to encourage this tactic. I'm only trying to show you how simple they are in your investing program. Please do properly complete a land trust agreement for each property you purchase for the peace of mind for you and your family. Imagine the mess you'd leave behind if you shot from the hip.