DO YOU REALLY NEED A LAND TRUST?

First, what does a land trust do? It allows the recording of land title anonymously using a 3rd party trustee, thereby providing some protection from being discovered as the true owner of the land. However it should be noted a 3rd party paid trustee must disclose the identity of the trustor/settlor and beneficiaries under a court order which generally happens when litigation against the property held in trust is commenced and the discovery phase begins. The heretofore private trust agreement will need to be turned over under a discovery request and there goes all that privacy once considered so valuable by the land owner. This process of going behind the trust will not add any addition expense to a plaintiff’s attorney so a plain land trust arrangement will not likely provide any deterrent factor.

Any ways around this? Certainly, some states, including Texas allow the recording of a deed into trust without using the name of the trustee. There is no guarantee that such a deed will be recorded but generally this method of recording has been highly successful. It should be mentioned that this method of recording won’t change or help the owner very much since there are other ways of discovering who the owner of a given property is, including the tax assessor, county licensing administration, the tenant may know or have information, the seller, lender, etc. You can be sure if the case is potentially big enough, the owner will be found out through various discovery requests and subpoenas. Furthermore, recording in such a manner will likely require a re-recording upon sale of the property because title companies may object to a recorded deed that does not bear the trustee’s name as a chain of title problem. Therefore, generally two deeds must be obtained from the first seller if this method is to be used, with the second deed-which includes the name of the trustee-being recorded at the time of the second sale, if necessary.

Remember that a land trust provides zero limited liability to any parties; it is an arrangement created by private agreement. Some attorneys strongly advocate the land trust and have made big bucks pushing it to clients. A work around the liability situation that is generally used is by making the beneficiary a limited liability company, which essentially makes the trust owner an LLC, and of course adds significant additional fees for a client. So the problem here is that this tactic could actually backfire in that once a lawsuit is filed and it’s discovered that the trust owner is an LLC it might actually be too late to back out and the plaintiff may press on against the property and any other assets it may hold in an attempt to get a settlement. The point is to discourage litigation in the first place and since it is unknown that an LLC owns the trust the plaintiff may assume there is no LLC and file a lawsuit. There is not much upside to this asset protection method.

Why go through the trouble of creating land trusts and then a separate LLC, assigning the property interest or multiple interests, and hoping no one will sue or the only defense you have would be to break out the LLC certificate and proclaim that your assets are safe? Why not just use an LLC to begin with to forewarn potential claimants that the property is already protected? There are ways to form a holding LLC, in conjunction with a basic inter vivos trust, so that the members are nowhere disclosed publicly, creating an anonymous company with built in limited liability which should not held secret. Or better yet, a double LLC structure provides even more protection, and even more so using an offshore LLC in this process, in certain cases.

In most instances, property insurance will handle most claims against a property; therefore, be sure you buy it. For anything over and above coverage limits, you will want the LLC to provide full protection of your personal assets, which means that the LLC must be treated as a separate entity and all financial records must be well kept. Of course, it goes without saying that the property holding company should not enter into any agreement which may result in liability, but a minimally capitalized management company should be used for this purpose.

Generally speaking, a land trust is not a very useful entity except in rare cases where liability is highly unlikely and using it along with an LLC would actually be overkill. Remember the point of asset protection is to discourage litigation by ensuring that your liability is limited from the get go; there is no point in hiding the existence of a statutory entity. If you’re going to use an LLC with a land trust, just go with the LLC, every time; that’s how professional investors do it.

By | 2017-11-12T17:10:02+00:00 November 12th, 2017|Categories: asset protection, Real Estate|Tags: , , |0 Comments