Drawbacks to Land Trusts

Drawbacks to Land Trusts

In previous posts, we've learned all about Land Trusts and how to form them. By now, you may be thinking that Land Trusts are the greatest thing to come along since sliced bread. And Land Trusts offer many benefits. But nothing in this world is all good. Land Trusts have some disadvantages too.

This week, we're going to review some of these drawbacks.  Next week, we'll go back to the positives.  But there are limitations to Land Trusts that are important to consider.

There is no such thing as “100%” Protection for Any Asset

No asset can be completely protected, and of course, this applies to real estate in a trust as well.  Let's face it.  We live in a litigious society where anyone can sue for anything they want.  People often go so far as to hire investigators to uncover hidden assets they can possibly attach for judgments.  While Land Trusts make it more difficult to find the assets, and protect them from being found in a cursory search, a skilled investigator will work to find the beneficiaries of the trust.  

Again, this is why many people choose to put their assets, including real estate, into an LLC. However, if the LLC is sued, real estate  WILL be considered a part of that LLC's assets.  Likewise, if an individual is listed as beneficiary, the properties in a trust can be considered to be amongst that person's assets.  While putting real estate into a trust makes it more difficult to find the beneficiary, Federal Regulations ensure it is not impossible.  This is especially true for assets in a revocable trust, which is why Land Trusts should be formed as irrevocable, whenever practical.

Assets Held in Trust are NOT Exempt from Financial Disclosure Requirements

Oftentimes, an individual is deposed, under oath, during the course of legal actions. You may be deposed as part of a lawsuit or during a legal separation.  You may be asked for a list of ALL assets during the deposition process.  If so, you MUST disclose assets held in trust, Land Trusts included. Failure to disclose your Land Trust assets can be considered perjury.  

Timing Can Be Important

The timing related to developing the trust can matter too.  If you have pending litigation or are contemplating separation from a spouse, it is not a good time to be putting assets into trust.  You must avoid the appearance of impropriety.  Should your spouse file for divorce close to the time the trust is formed, you could be charged with hiding assets.  Similarly, if you form a trust while legal or financial action is pending, you could be accused of fraud for attempting to hide assets. Thus, it is important to plan proactively, and to form the trust before you are in the middle of such issues.

Insurance and Financing Can Be More Difficult

Many insurers, lenders, and mortgage companies are reluctant to get involved with Land Trusts.  It can also be harder to refinance real estate held in a trust.  Some mortgagers will require you to take the real estate out of the trust before they will consider refinancing.  This will require additional fees and paperwork.  Of course, you can always put the property back into trust after refinancing, but again, there will be additional fees and paperwork.  It may also be more difficult, or even impossible to get a traditional equity loan on property held in a Land Trust.

Requirements Can Be Different in Different States

Because few states have their own Land Trust Statutes, mistakes can be made when forming the trust that do not become apparent for years.  Additionally, because trusts are often formed in a different state than where the real estate property is held, multiple state statutes may apply.  This is especially true if the trustee and beneficiary live in different states.  Great care must be taken when forming the trust to avoid such mistakes.  And case law from the applicable states must be carefully considered.  

For example, the State of California requires the Trustee to have specific duties and obligations.  It requires a more active role than the traditional Illinois model usually includes.  The State of Texas requires a trustee to be licensed and bonded for the trust to be considered valid.  

This is where working with a skilled attorney is especially important.  You do not want to go through the work and expense of creating a Land Trust, only for the courts to find it invalid.  (Here at the Law Offices of Heath D. Harte, we carefully research the requirements and precedents set in EVERY STATE involved with the Land Trust to avoid these types of issues. However, not all so-called Real Estate Attorneys have this type of expertise.  If your Land Trust involves multiple States, your choice of attorney is even more crucial.)

It May Impact Homesteading

Many States have Homestead Exemptions for a primary residence to reduce your tax obligations.  If you have such an exemption, it is important to investigate if putting your property into a Land Trust will effect that exemption.  Again, this differs according to locality.  In some states, you are able to put your primary residence into trust and maintain your homestead exemption.  In others, this is not true.  

Again, your lawyer will be able to advise you if this will impact your situation.  But this is an important point to research if you are considering putting your home into a trust.  It is not a concern for real estate investment properties that do not qualify for homesteading.

Likewise, the US Government still has a homesteading program.  Most of us think of “Little House on the Prairie” when it comes to homesteading.  Today's homesteading program usually applies to derelict properties in urban areas.  Many real estate investors look at this homesteading program as an avenue to acquire housing.  Since homesteading requires BOTH residency and renovation to acquire title to the property, homes acquired through this program cannot be put into trust.  

There are Costs and Fees Associated With Land Trusts

There will always be annual costs and fees for any Land Trust.  And these costs apply throughout its life.  Most trustees receive compensation for their services.  In states that require Trustees take a more active role, the fees will be higher.  Of course, we strongly believe that the benefits outweigh the costs.  But there will always be ongoing costs and fees associated with maintaining the trust.  

Summary

This week, we discussed some of the drawbacks of Land Trusts, as well as things to consider before putting real estate property in to a Land Trust.  Although a Land Trust enhances your privacy, ownership can be determined through comprehensive investigation.  A Land Trust can help to protect your assets, but in certain circumstances, these assets can still be attached.  Insurance, financing, and refinancing can be more onerous, and it may involve taking the property out of trust. Putting your primary residence into trust may effect homesteading, in certain states, and state requirements for trusts may be confusing.  Finally, there are ongoing costs involved with running the trust.

However, as we've discussed in previous posts, the benefits outweigh the drawbacks in many cases. We will continue to highlight these benefits in our next post.

We truly believe in the utility of land trusts at The Law Offices of Heath D Harte.  We are real estate property investors ourselves, and we have found our Land Trusts to be helpful in many ways.  If you are considering your own Land Trust, you do not have to wait until this series is over to contact us. We are here to help you with all of your Real Estate Law needs, Land Trusts included.

We invite you to send your questions to us by visiting www.HarteRealEstateLaw.com and using the contact us form.  You may also follow our Land Trust series on Facebook, Twitter, & G+ by selecting the respective icons on the bottom of our web page.  www.HarteRealEstateLaw.com

Setting up a Land Trust, Part 2

Setting Up a Land Trust, Part 2

Our last post detailed the steps you need to take to set up a Land Trust.  As promised, we are continuing this week with some specific examples.

Land Trust Agreement Samples

Now you know what a Land Trust is, as well as what goes into forming one, it's time to see some samples.  Land Trust Agreements are filled with legal boilerplate, as are most legal documents.  However, their contents boil down to what we've discussed already.  Again, we cannot stress the importance of consulting with an attorney when drawing up your own trust.  These samples are not meant to be "do it yourself forms" in any way, but rather, are provided as concrete examples of what goes into a Land Trust.  They are provided for informational purposes only.  They may also be helpful for organizing your information so you will be prepared when you meet with your own lawyer.

ATG Trust Sample Trust Agreement Sample

ATG Trust Trustee Deed Sample

Emarquette Bank Trust Outline Sample

Emarquette Bank Trust Agreement Sample

First Midwest Trust Agreement Sample

Investor Insights Trust Agreement Sample

Sample Trustee Deed

Chicago Land Trust Company Trust Agreement Sample

Again, these samples are being provided for reference purposes only.  They are NOT supposed to represent any type of "Do-it-Yourself" type kit.  We strongly suggest you consult with a skilled attorney when trying to create your own trust documents.  

We have provided a zipped folder with copies of these samples, if you prefer to download them to read.  This file is stored on our Google Drive.  

Summary:

This post was a continuation of last week's post.  Last week, we discussed all of the steps in developing your own Land Trust, including how and when to consult with your lawyer along the way.  This week, we examined some specific Land Trust Samples, to help make this topic a little more concrete for our readers.  These included sample Trust Agreements, as well as sample Deed Agreements.  Most of these samples were full of legal boilerplate type language.  Your attorney will probably have similar boilerplate forms to be used when developing your own trust.  However, these samples can be valuable in helping you organize your information so that you can be prepared during your own consultation with your attorney.  

Next week, we will continue our series on Land Trusts.  Future posts will delve into the pros and cons a little further, as well as discuss some "real life examples" in which Land Trusts are being used.

As always, The Law Offices of Heath D Harte is here to help you with all of your trust-related and real estate legal needs.  Feel free to contact us at any time to discuss your own trust needs.

Setting Up a Land Trust: Steps and Samples

Setting Up a Land Trust: Steps and Samples

Now that we understand the concept of Land Trusts, it's time to make things a little more concrete. Today we'll discuss the specific steps you need to take to develop your trust.  We'll also look at some sample templates that you can use to develop the trust.  As always, you really should consult with a qualified attorney when taking these steps.  

How To Set Up a Land Trust: Steps

Step 1: Draft A Trust Agreement

The second part of this post contains some sample trust agreements so you can see what a typical agreement looks like.  Although these samples are being provided to give you an idea of what a trust agreement contains, it is extremely important that you work with an attorney on this step.  Your attorney will know the specific verbiage needed in the state you want to establish the trust.  In fact, your attorney will help you to complete all of the steps described hereafter.  But it is important to know what the steps are so that you can bring the proper information and paperwork to your attorney. The next couple of steps talk about what you need to help your lawyer "fill in the blanks."

Step Two: Designate the Grantor and the Trustee

This is important: who is putting the land into the trust, and who will be the trustee? Now you may ask, aren't I the grantor?  Possibly.  However, investors often ask the seller to put a piece of real estate in trust when they contract to purchase.  When the property closes, the investor just amends the trust, naming himself/herself as beneficiary.  You personally may never take title to a property.  Rather, the property is moved into a trust pre-purchase, and the trust is amended upon closing.  In this case, the grantor is the current deed holder, rather than you.

The trustee is a very important decision.  Many entities can act as Trustee.  And the fees differ significantly according to who you appoint.  There are companies whose entire business revolves around being paid trustees for a Land Trust.  Banks, property managers, lawyers, and Investment Managers are other possible choices.    One of the biggest choices is will you use an institutional or a private trustee.  Institutional trustees usually have set fee structures, and these are usually higher than those charged by private trustees.  Costs are more negotiable with private trustees as well.

When meeting with your attorney to discuss developing the trust, you may want to inquire if s/he ever acts as a Trustee.  If the answer is yes, ask about his/her fee structures for doing so.  If the answer is no, ask who the attorney recommends you appoint as trustee.  If your attorney can neither suggest possible trustees nor personally acts as a Trustee, you may NOT have selected the appropriate attorney to develop your trust.  In this case, you may want to interview other attorneys before proceeding further.  (You can always contact us, The Law Offices of Heath D Harte.  We can help you with all your Land Trust needs.)

Remember, the trustee is the administrator or manager of your trust.  The trustee needs to be someone you can trust yourself, hence the name.  In addition, if you appoint a private Trustee, it should be a person with a different last name.  Your attorney will advise you whether the place you are setting up the trust requires that the Trustee be in the same State.  We cannot emphasize the importance of selecting the RIGHT Trustee enough.

Step Three: Name The Trust

Again, consult with an attorney while completing this step.  Ideally, you want to keep your name out of the trust.  However, in some jurisdictions, it is easier/preferable to use the beneficiaries' name(s) in the name of the trust.  If you are trying to keep ownership private, it is best to leave your name out of the trust's name.  A "classic" Illinois Land Trust generally uses a generic trust name.

Step Four: Determine Type: Revocable or Irrevocable

This is another crucial step, and will depend on your intents and purposes.  Most trusts are set up as irrevocable.  However, an irrevocable trust cannot be amended in any way.  You cannot change any of the terms until the trust expires or all its assets have been removed.

You may amend a revocable trust.  You may change beneficiaries, trustees, etc.  So if you think you're going to want to change anything at all, the trust must be set up to be revocable.  

We previously discussed the example of an investor asking a seller to put a property into trust before going to closing.  In this case, you would need a revocable trust.  However, in most cases, Land Trusts are set up as irrevocable.  Your attorney will advise you on what is appropriate for your specific situation.

Step 5: Name the Beneficiary

Again, this may not be as straightforward as it seems.  Depending on your intents and purposes, you may be the beneficiary, a corporation or LLC may be a beneficiary, or the beneficiary may be a number of people.   

The Chicago Land Trust Company has put together a sample list of "Beneficial Interest Designations" that show the types of beneficiaries a Land Trust may have.  It is embedded below:

As you can see, naming a beneficiary can be quite complex.  But a skilled attorney can help you match your named beneficiaries to your overall intents.

Step Six: Name the Director

Think of the Director as the CEO of the trust.  The Director is the person who dictates how the trusts' assets are handled.  Typically, the beneficiary is named as Director.  If the beneficiary is an LLC, typically the director of the LLC would act as the Director for the trust.  This is probably the most straightforward step in the process, and the one that requires the least amount of consideration.

Step Seven: Name Successor Beneficiaries

As we saw in step 5, naming beneficiaries can be quite complex.  Adding to the confusion is the question of successor beneficiaries.  Successor beneficiaries can be thought of contingencies, should a "main" beneficiary die.  For example, an aging parent might name a child as a beneficiary, to help that child avoid paying Estate Taxes and probate costs.  That child's child may be named as a successor beneficiary, should something happen to the original beneficiary before the trust expires.

With a revocable trust, successor beneficiaries may be changed at any time.  However with an irrevocable trust, successor beneficiaries must stay the same throughout the period the trust runs.  Thus, this is another area requiring careful thought and consideration.  And it is another area that warrants thorough discussion with your attorney, particularly if you are using a Land Trust to help structure your estate.

Step Eight: Name Successor Trustees

Just as with the beneficiaries, you want a "Plan B" in place, just in case something happens to the trustee.  A primary trustee might become ill, retire, or just up and quit.  You need a plan in place should that happen.  This is especially crucial if you choose a Private (rather than Institutional) trustee.

Again, with a revocable trust, things can be changed later.  It is much easier to replace a trustee after a trust has been formed.  But things are more set in stone with irrevocable trusts.  You cannot amend the trustee once the trust has been established.  Even with an institutional trustee, you need a sucessor named.  Companies go bankrupt or out of business; you do not want your trust to go up in smoke just because the trustee does.

An attorney can be especially helpful when it comes to finding and naming successor trustees.  This is absolutely a step in the process that cannot be overlooked.

Step Nine: Designate the State

Your particular needs will dictate in which state the trust is formed.  It is not necessary in all cases to establish the trust in the state the property is located.  In many cases, it is advantageous to set up your trust in a different state.  And of course, the state in which the trust is established will form the basis for the statutes upon which it is based.

If all the land in the trust is in one state, it may be best to establish the Land Trust in that state.  If there are properties from different states in the trust, the issue becomes more complex.  Many investors choose to set up trusts in Illinois with institutional trustees.  Investors also prefer to set up their trusts in states with clear statutes.  Some states require the trust be established in the state where the land is physically located.  This is another area in which your attorney is key.  A skilled Land Trust Attorney should make the recommendation to you, once you have presented him/her with the parcels to be included in the trust.

Step Ten: List the Trust Assets

Finally, it's time to list the real estate that will form the Land Trust.  Some people prefer to set up individual Land Trusts for each parcel of real property.  Others include multiple properties in their trust.  The decision to set up one vs. many Land Trusts will, of course, depend on your purposes.  If your primary purpose is tax management, you will want to confer with both an accountant and an attorney before finalizing any trust agreements.  If it is more for estate management reasons, consulting with an attorney will suffice.

Step Eleven: Finalize the Paperwork

The process is finally reaching its end.  Once you have drawn up the agreement, named the Trust, appointed a Trustee, named successors, designated beneficiaries, named successors, designated a Director, listed the supporting state statutes, and listed all the assets, you should have the Trust Agreement in hand, ready to be executed, as well as the Deed of Trust.  (The Trust Agreement should be dated BEFORE the Deed of Trust.)  Now it is time to get everything signed and notarized. (Of course, always read the documents through thoroughly BEFORE signing the final papers.)

Now that the paperwork is signed, it's time to record the documents.  ONLY the Deed of Trust gets recorded.  The Trust Agreement remains private, locked up in the file cabinets of you, your attorney, and the Trustee.

Step Twelve: Insure the Properties

This is the final step in the Land Trust process, and a step that many people overlook: insure the properties.  Placing a property in a trust does not negate insurance obligations.  You have done this much to protect yourself and your assets; don't forget this important final step.

Land Trust Agreement Samples

Next week, we will continue this post.  Check back to see several examples of Land Trust Deeds and Agreements.  Again, we cannot stress the importance of consulting with an attorney when drawing up your own trust.  And remember, here at the Law Offices of Heath D Harte we are Land Trust Experts.  Contact us if you want to discuss your Land Trust plans.

As always, please use the comments section below to ask any questions.  You may also contact us through Twitter or Facebook.