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