If the thought of a real estate trust makes you imagine a complicated morass of legal jargon and attorneys, have no fear. While all trusts have value, they are usually far more complex that what is needed in a common real estate trust scenario. Let's go over some trusts and see which ones you need as a real estate investor.
Disclaimer: I am not an attorney or CPA. The content herein is merely opinion, and should in no way be considered legal or financial advice. Please seek professional legal and financial advice for your specific situation.
Trust Basics
First let’s go over some trust basics. While there are several different types of trusts, the basic structures are either revocable or irrevocable.
Revocable Trusts
Revocable trusts are created while the trust maker is alive and can be modified or revoked by the maker. Sometimes these are referred to as a living trust.
The trust maker transfers the title of a property to a trust, serves as the trustee, and could remove the property from the trust during his or her lifetime.
Revocable trusts are good for avoiding probate. Property owned by the trust at the time of the trust maker’s death usually will not be subject to probate.
Irrevocable Trust
An irrevocable trust is one which cannot be modified or revoked. Once a property is transferred to an irrevocable trust, no one, including the trust maker, can take the property out of the trust.
The Land Trust
A more simple and common form of real estate trust is the Land Trust. Its simplicity makes it easily utilized by the lay person.
Once a person acquires a complete and properly formatted set of trust documents (created by an attorney), it is common that they copy and reuse the documents for all future transactions.
Most investors only change the name and date of the trust, and the legal description of the property being placed into that trust.
This simplicity leads most investors to create a separate trust for each property.
A Little History
Records show that land trusts date back to at least the Roman era and are well documented in England in the 1500’s where they were used to hide land ownership to avoid military service. Henry VIII even passed a law in 1536 trying to stop the abuse. It became prevalent in the 1900’s in Chicago, IL. There city officials used land trusts to hide ownership of property so that they could vote on city projects. The Illinois supreme court upheld the use of land trusts later.
The Mouse and the Land Trust
Probably the most famous use of land trusts to hide ownership happened in central Florida in the 1960’s. Walt Disney started buying up vast areas of farmland near Orlando.
To ensure that no one knew he was behind it, and try to block him for their own gain, he used land trusts. It wasn’t until November 15, 1965 that he announced his plan, and by then the buying was done.
Today the Land Trust is used in thousands of real estate transactions. Florida enacted the Florida Land Trust Act in 2006 to legitimize and control the use of the trust. The current version of the law is located here. http://www.leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&URL=0600-0699/0689/Sections/0689.071.html
Several other states created laws regarding their use, so check your state. If your state does not have a law on the books, it doesn’t mean that it’s unlawful to use one.
Some attorneys will say that it is, merely because it’s not in their best interest for you to use one. Much better for them that you pay them to create a custom trust. (Probably better for you as well, but that’s a discussion you need to have with a licensed attorney.)
Why I like the Land Trust
I like using the land trust because;
- It keeps my name out of public records. Once you acquire a lot of rentals, having your name in public record as owner of the properties makes you a target for nuisance lawsuits. Any slip and fall attorneys are going to research your name before deciding whether it’s worth their time to file a contingency fee-based suit. It’s not a foolproof system, but it helps.
- The ownership interest becomes personal property when in a Land Trust.
This means that ownership can be transferred without disclosure in the local courts. Any state taxes or fees due for the transfer are still due but are payable on the state level without local disclosure. This sets up #3. - Ownership can be transferred in private. Once a land trust is set up, the trustee has rights to lease, sell, or encumber the property, and is listed on the deed and in public record. However, the ownership of the property lies with the beneficiary, who is hidden. A good land trust will mention the beneficiary as being listed in an attachment to the trust. (Such as “Appendix A”). This document is kept separate from the trust and not disclosed.
- Also, the transfer of beneficial interest is not required to have a notary stamp, as it is not recorded in court records. I’m not going to discuss it, but if you think this through, you may come up with some instances where being able to play the “shell game” with ownership rights and transfer dates might come in handy.
The Trustee
One of the best pieces of advice I have ever heard is “Have a Trustee you can trust.”
In a real estate trust of any kind a "trustee" is named to oversee the assets of the trust. In most land trusts the trustee has full power of sale or encumbrance, and it is usually stated on the deed. This allows the trustee to sell the property without producing the trust and a directive from the beneficiary.
Does this scare you? Well, it should.
Imagine if you made your cousin Larry the trustee of your trust. Everything rocks on nicely until one day you find out that Larry was arrested for buying drugs. Wow, he had kept it hidden and no one in the family even suspected. What he had also kept a secret is that he had borrowed money on the house and spent that money on his habit. Don’t laugh, it can happen. And now the beneficiary (you) will have to sue and let the court figure it out.
Shaky Advice
A lot of gurus will tell you that you need a trustee that is out of state or living under a rock. Their thought is to keep the trustee from being discovered. They will say that it’s good “asset protection.”
They say that if you get sued, they will have track down your trustee to serve the subpoena. While that is going on, they say you transfer the trusteeship to someone else.
In the real world it doesn’t quite work that way. I’ve never met a judge that liked playing games. When faced with the possibility of jail time for contempt of court, your trustee, Aunt Mable is going to spill her guts and tell everything she knows.
The other concern with distant and disconnected trustees is the question, “Who’s collecting the money?”
The first question that an attorney is going to ask the tenant/plaintiff is “who did you see on a regular basis?” Those are the people who will be subpoenaed, and deposed. If you show up and manage the property, the finger is going to point at you, no matter how much you try and hide. Being charged with perjury wouldn’t be much fun.
Then come the issue of rent collections. Most people pay rent with a check, and to do business you will need a checking account to cash those checks and pay for repairs or expenses. Banks don’t like opening accounts in the name of a blind trust. They want to know all the parties involved. If you have to disclose the beneficiary to get a checking account, you have created that paper trail that the attorney is going to be looking for.
Another issue is insurance. I have spoken to multiple insurance companies, and I can’t find one that will issue an insurance claim payment check in the name of the beneficiary. They all say they issue to the trustee.
So how do you get around all these problems and still hide in the shadows? You Don’t.
Your Corporation as Trustee.
I’m not an attorney or CPA, so this isn’t legal or tax advice, but I can say that this is what I do.
Forget about the shell game. Make your life simple and start operating in the sunlight.
When I asked my attorney what the best asset strategy was, he said…
“Have good insurance, a corporation, and don’t do stupid shit!”
By creating a corporation to act as your trustee, you can bypass a lot of day to day issues.
- Income and expenses
As an officer and employee of the corporation, you can handle the day to day operations. You can collect funds, manage the property, and whatever else you need to do. All income and expenses are held separate from your other properties. If the corporation is properly structured by a legal professional and properly maintained, the corporation should offer protection to your other assets. (Please check with your attorney for best structure) - Receiving income without a paper trail to you as beneficiary.
The IRS likes to see individuals that receive income have a balanced portion of it in the form of payroll income. By making yourself an employee of the corporation, you can receive profits and have a good excuse for doing so. If not, how do you justify receiving compensation from the trust? As a property manager? Are you licensed as a property manager?
Obviously, there are ways around it, but why bother? - How can you maintain anonymity?
If you’re a nervous Nelly, you could maintain some level of cloak and dagger by using a Delaware, Wyoming, or New Mexico corporation. These states do not publish the names of members of the corporation. Are they bulletproof? Of course not. But they will keep the average person from looking you up. For a more thorough breakdown, check out this Regular LLC versus Anonymous LLC breakdown. Are they automatically suspect? Probably.
Disclaimer: I am not an attorney or CPA. The content herein is merely opinion, and should in no way be considered legal or financial advice. Please seek professional legal and financial advice for your specific situation.
