Land Trusts – Reasons NOT to Use Them
As you know by now, I am a strong proponent of the use of a Land Trust (LT) to hold title to your real estate investments. However, there are some situations (mostly when dealing with your personal residence) when you might not want to use a LT to hold title to a property. Here are some possible problem areas when using a LT.
Possible loss of Redemption rights
When you buy real estate under a mortgage and fail to make payments, you can lose the property through foreclosure. There is a provision in the law though, that permits you to “redeem” the property within 12 months (this time period varies state by state). This means that you can “get the property back by paying the amount paid by the purchaser at the foreclosure sale plus costs. If you buy the property using a land trust with you as the beneficiary, you have no redemption rights…because your interest is Personal Property not real property. However, the Trustee of the land trust DOES retain redemption rights in the property unless such rights are waived in the mortgage.
Loss of Homestead Exemption.
If the property held in a land trust is used as a personal residence, the usual homestead exemption ($15,000 in Illinois, unlimited in Florida) is lost to the beneficiary because recorded title is in the name of the Trustee and the exemption is not applicable to personal property (the interest of the beneficiary). This exemption has to do with bankruptcy and debtor's rights.
Possible loss of the Homestead Real estate tax exemption
Most counties across America offer a break on the assessed valuation of owner occupied single family homes ($6,000 in Illinois). Some counties will not allow this exemption on owner occupied homes held inside a LT. Always check with the county in which the property is located prior to putting your personal residence in a LT. Most counties WILL allow the homestead exemption even if the property is in a LT but they may require special language on the deed to Trustee to allow this exemption.
NOTE: If you are transferring your personal residence that is currently titled in your name to a LT, be sure to ask your county recorder's office for the “transfer tax exemption” language for the Deed to Trustee. Otherwise you will end up paying a Transfer Tax once the Deed to Trustee is recorded ($1.00/$1,000 of value in my county).
Revoking the Trust Agreement may create a tenancy in common
The Grantor (person who creates a land trust) typically retains the authority to revoke the Trust Agreement (TA) if the TA is not irrevocable. If after creating the TA the Grantor/Beneficiary transfers (for value or a gift) some of his beneficial interest to others, those beneficiaries must consent before the Trustee will convey title to a new owner (this assumes that the Grantor did not retain the full power of direction over the Trustee).
If everyone agrees to revocation, or if the trust is revoked under some procedure that has been placed in the TA (or by operation of law), the original owner/Grantor and the new beneficiaries become Tenants in Common, according to their interest in the trust. Therefore, if the Grantor had irrevocably given or sold half of his beneficial interest, upon revocation he would own the real estate in Common with the other beneficiaries.
Not being able to qualify for a secondary market loan
If you are trying to obtain financing for your real estate in the secondary market the guidelines will not allow you to close the transaction using a LT. This will put your name in the chain of title for one day as you can always transfer the title out of your name the day after closing. This is a personal decision that you will have to make based upon the terms of the loan (typically much better than non-conforming loans), privacy issues and the number of loans you currently have outstanding. Most secondary market lenders limit you to four loans and beyond that it is a moot point (you will have to deal with portfolio lenders).
The bottom line to all of this conjecture is that sometimes you MAY not want to use a Land Trust. But, my 40+ years of real estate experience tells me that MOST of the time, you DO want to use a LT if for no other reason than PRIVACY of ownership. I have written a short booklet called, “50 Reasons to Use a Land Trust.” Send me an email at [email protected] and I will send it to you for free!