Despite the hype surrounding land trusts perpetuated by a lot of real estate investment “gurus,” the fact is that, for the vast majority of real estate investors, land trusts are simply not a viable or trustworthy vehicle in which to hold title to property.
Let’s take a quick look at land trusts. A land trust is a vehicle for holding title to real estate that exempts the real estate from probate. There are advantages and disadvantages to land trusts. The primary advantage is privacy. When a land trust is set up, an investor can purchase property in the land trust’s name. A public record search will only reveal that the property is held by “X” as trustee of the trust's name. Land trusts protect the identity of the true owner of the real estate, except in certain limited situations.
The primary advantage of a land trust is privacy
One disadvantage of land trusts is that state law usually requires that they be administered by commercial trustees, such as banks or trust companies. This means that an investor doesn't have total control over the trust. Another disadvantage is that, while an investor could purchase property in his or her own name and then convey the property to the land trust, that transfer defeats the privacy protection. It won’t take a rocket scientist to figure out what was done and who did it.
Despite the few disadvantages, land trusts are attractive. They offer privacy at a reasonable cost. Although investors must generally pay trust administration fees, the fees are not exorbitant. Best of all, the bank or trust company sets up the land trust for the investor and provides all of the necessary forms to ensure that they are legal. So, there’s no need to pay an attorney—or anybody else—to create the trust or to provide the documents.
So, why do I believe these entities are more hype than help for real estate investors? The reason is that land trusts do not exist in most states by statute or case law.
Unfortunately, only a few states recognize land trusts as valid entities. Illinois was the first state to create land trusts and is the reason other states sometimes refer to such trusts as "Illinois land trusts." Florida and Indiana are among the other states that recognize land trusts. If your state does not specifically recognize land trusts, then their validity is highly suspect at best. For this reason, I do not recommend them to my clients unless the property in question is in a state where these trusts are valid.
So why don’t most attorneys just draft the documents anyway for clients who want them? Well, most people want these trusts for asset protection, but unless the attorney can be sure that the land trust can’t be voided for invalidity, to create a land trust as an asset protection vehicle would amount to malpractice since we have no way of ensuring our clients that the protection sought can really be achieved. There is no statute or case law in most states that recognizes land trusts as a valid title-holding entity, much less as an asset protection mechanism. Quite frankly, without that recognition, an attorney would probably have little trouble having your land trust invalidated if his or her client wanted to sue you.
Those investors who favor land trusts usually rely on the fact that land trusts haven’t been challenged in their state yet, so no one says you can’t use them. I don’t know about you, but I discourage my children from using that kind of logic, so I definitely don’t recommend it for investors who are serious about their investing business.
Finally, a word of caution about asset protection. Generally speaking, asset protection must be done with a business purpose in mind. Hiding assets to avoid creditors is not a legitimate business purpose. It has been well settled for hundreds of years in the United States that a person cannot defeat creditors by putting property into a trust where the person/debtor is the beneficiary.
If you intend to transfer property into a land trust, I suggest that you take your documents and your business plan to a licensed real estate attorney in your state to ensure that they all comply with state law and will accomplish what you intend them to accomplish. But don’t be surprised if the attorney you call won’t help with those documents.