Land Trusts


#1

This is my response to some points made in favor of Land Trusts elsewhere, though it might stir up a bit of discussion.

Just for the record, I am very familiar with land trusts. I asked the question to see why they were being used in this specific circumstance. It was something of a leading question, because land trusts are, in my opinion, grossly overused, oversold and misunderstood. My opinion is based on years as a tax lawyer/accountant with a real-estate-investor-only practice, and some modest investment of my own. Day in and day out, I see what small-medium REI are doing


#2

John,

Thanks for the " expose’ " on land trusts. Some questions;

  1. Is there any real “Bullet Proof” way to protect your a$$ets?

  2. We used to hear much about “Nevada Corporations” and “Offshore Corporations” like Cayman Islands etc is there any protection, or benefits there?

  3. What are YOUR recommendations regarding the best way to protect personal, & business assets? (I realize that it depends)

Thanks,

Ricky Lee


#3

John,

I just can’t resist - LT’s have been around for 500 years, but in your post and even though you hint that they do have valid uses - none where disclosed to the group. But, first things first - I really do like your write-up. The post seems geared towards another particular string, maybe here or somewhere else, which would be nice to reference for context. Even without I enjoyed reading your thoughts and agree there are ways that LT’s are misrepresented and/or misapplied just like any other tool.

I too am very familiar with LT’s - not as a “guru” but as an active investor who finds them to be an invaluable tool - second only to option contracts. I’ll share with you and the group the reasons I like them (especially in FL) in almost every deal. Regarding your various remarks about “gurus” - I think we can agree that CAVEAT EMPTOR should be employed regarding all forms of information (including both of our input on this subject matter).

Why use a LT’s? Because in specific situations, as outlined below, it is the premier tool for handling “other peoples money” (OPM). I’m blessed that my current sweet spot starts somewhere around $3M and goes up from there - too big for most mom/pop investors yet too small (more likely the projects simply comes with too many problems) for a REIT. Before playing in this market I cut my teeth using the same LT strategies on $15,000 wholesale H/L projects - especially if I was using a “silent partner” for equity.

Use #1 - The main purpose of LT’s is to provide PRIVACY: I like to work with accredited passive investors and they surely benefit from the privacy that LT’s provide (especially in FL where we have an excellent LT statute). It does not matter if I raise 10K or $3M from a passive investor, it is important for me to ethically and legally do my best to keep their identity out of public records as much as possible. All investors have choices - if a money partner purchases 1000 shares of Apple the public has no way to “see” this transaction - if I’m truly a professional REI/syndicator then if at all possible my deals should be the same. LT’s allow me to keep my clients PRIVATE for a minimal amount of paperwork and cost.

To be VERY clear - I’m only talking about PRIVACY, not ASSET PROTECTION - I encourage all my investors to talk with their advisors about holding their beneficial interest in the LT with a simple instate LLC. Unfortunately, there are times when an investor has to do business “personally” - as is the case if “Mr. Smith” sold a triplex and now wants to 1031 exchange into (all or a piece) of one of my projects. As you know, since “Mr. Smith” needs to do the exchange - so must his replacement property be titled the same way.

So, LT’s gives me and my investors = PRIVACY and LLC’s provide the ASSET PROTECTION. Used together this is a powerful tool for anyone who wants to learn how to employ OPM.

Use #2 MULTIPLE PARTNERS: There are times one might need to put multiple investors together who live all over this great country. Since the Trustee signs all legal documents, all the beneficiaries need to do is direct the trustee to sign. The direction documents are very simple, can be faxed, and do not need to be witnessed or notorized. In one of my projects my investors and I sold over 40 individually deeded lots to our tenants by remote control! I was out of state, my investors where literally across the country, and the project is in FL - none of us had to go to any of the closings and the title company simply used email for HUD statements and snail mailed us our checks. SWEET!

#3 alone is worth the price of admission! 1031 exchanges: Another practical benefit of LT’s is that I can put multiple 1031 exchange participants into the same deal (and price the investment to outperform TICs)! And (if needed) I can have other participants who are not 1031 exchanging all involved in the SAME project! This is absolutely a HUGE benefit if you want to be a real pro at using OPM.

The above are some very real reasons to use LT’s. Since we are using the LT for the above reasons the rest of these benefits are simply bonuses that come with proper use of LT’s:

#4 MANAGING LEGAL DOCUMENTS: With the beneficiaries direction a LT allows all recorded documents including security instruments to be signed by ONLY the Trustee. Any additional guarantees (by the beneficiaries) can usually be handled outside of public records (if they are even needed at all).

#5 QUIET transfer: I have already eluded to this - LT’s can keep the acquisition “quiet” from anyone’s prying eyes including the property tax assessor and yours (just like buying shares of Apple is quiet from public records). So, the property appraiser is less likely to reassess the project because a DEED was recorded, which potentially defers a large hit to the P/L statement. Now, we do plan on the fact that P. Taxes may reassess at any time. And I do work out a better deal with the seller if it is possible because the net income will likely change. But, we are happy that the P. tax assessor must value the property on his/her own without pointing a big fat arrow at the deal by using a conventional deed.

#6 LAYERS: When my LLC leases my passive investors LT property I guarantee them INCOME. I create the cash flow to pay the investors by being the sole entity to engage the public. We now have a very legitimate business that provides a very tangible benefit to my investors. My investors are now one step removed from the public and a tenant or other party should have a hard time laying blame on my investors for any potential tort issues that may arise.

#7 EASE OF TRANSFER: If I need to have one passive investor buy out another, LT’s are simply the least complicated and least expensive way of handling this.

So this is seven real world ways to properly use a LT. Regarding some of the particular negatives you presented I have some practical knowledge in this area to share:

You state, “1) LT often ATTRACTS attention, as opposed to deflecting it;”

I have not found this to be true at all - if anything it is the complete opposite in my practical experiences - especially when I record a long term NNN lease in public records with my LLC.

You state, “2) Improper use (which seems to be the rule, not the exception, where gurus are concerned) creates serious legal liability;”

I was taught these legitimate uses from “gurus” - the point as mentioned above is that all investors need to be careful about information and the proper use of these tools no matter the source. Any tool can be misused, but applied properly LT’s have been a very valuable tool (see doing deals in FL from anywhere in the world without one mail away closing).

"3) Is it included as insured under policy? If not, insurance may not cover it. If so, there is often a certain amount of hassle or monetary cost involved.

I have had little to no problems with insurance. My experience is that our rates and terms are the same whether we insure a LLC or LT or both.

"There will be a hassle factor in terms of properly running trusts (I love to read posts on


#4

This is what makes this forum so great. I learn a lot from people with more knowledge and experience than me. Keep up the good work !


#5

Karl

I really enjoyed your post but I have a question about point #3, 1031 exchanges. If you mean the LT can sell its property & exchange into more properties, fine. If you mean that investors can exchange (real) property into the LT, does this not mean they are trading real property for personal property in the beneficial shares? Could you elaborate on this a bit more?

Tks

Dennis


#6

Dennis,

Great question. First some words of caution: The rules regarding 1031 property exchanges are complex and many of the concepts have developed over time and through IRS Private Letter Rulings. Undertaking any exchange without the council of a competent tax advisor and a Qualified Intermediary is flat out foolish. I am neither a tax advisor or QI - some might say that I may not even be a competent investor :slight_smile:

Now to answer your question, the short answer is YES - one of the benefits of LT’s is that investors MAY exchange their real property gain (or loss) into a PROPERLY structured Land Trust thereby owning the beneficial interest of the LT in the same taxpayer name as their exchange!

This is a wonderful tool that (as far as I know) is unique to LT’s. Now, the Land Trust documents are very important as they must mirror an ILLINOIS style land trust. Beyond how I practically use LT’s including this benefit, I am not qualified to explain the WHY - maybe John Hyre will chime in as he should be able to articulate this as a “professional tax attorney/CPA.”

If you’d like to read more about this particular benefit - below is a link to an actual IRS ruling on this very issue. According to the (IRS) author these benefits are available in ANY STATE,

“Several states in addition to Illinois, including, for example, California, Florida, Hawaii, Indiana, North Dakota, and Virginia, have laws that statutorily or judicially sanction arrangements that are similar to the Illinois land trust arrangement described herein. The holding in this revenue ruling also applies to an interest in a similar arrangement created under the laws of any state, pursuant to which (1) the trustee has title to real property, (2) the beneficiary (or a designee of the beneficiary) has the exclusive right to direct or control the trustee in dealing with the title to the property, and (3) the beneficiary has the exclusive control of the management of the property, the exclusive right to the earnings and proceeds from the property, and the obligation to pay any taxes and liabilities relating to the property.”

Enjoy the link below!

Karl

http://www.taxlinks.com/rulings/1992/revrul92-105.htm


#7

one of the clauses you inserted into my Option for buying my Park was in the final two years of my seven year lease when I can excercise my Option, I can either convey ownership thru deed and title or , at my expense place all into a LT and convey like that, doc stamps saved over 10K.

At Tony’s bootcamp in NC there was a very gifted attorney/investor speaker that stated LT’s are only legal in 17 states…Is this correct?

Greg


#8

Karl,

I appreciate your post. You are correct that my post was geared to a separate set of comments. I posted it here to elicit discussion. Fortunately, you took some time to formulate a response, one obviously based on experience. I look forward to the discussion.

As you noted, I am not completely against LT. Rather, I think that the device is over-used, over-sold and misunderstood. As is their tendency, some gurus have a tendency to exaggerate benefits and minimize expenses of LT (and other devices as well). Investors usually learn the truth by


#9

Karl,

I agree that from IRS standpoint, LT (aka “Grantor Trust holding RE” in tax parlance) is the same as “real esate” for 1031 So an investor can 1031 straight into RE or into a LT that owns the RE, and IRS will treat the transactions the same. What is benefit of presence of LT? You do mention TICs…I would agree that from admin standpoint, LT is easier than a full-blown TIC, though they’d be the same thing from IRS standpoint, as long as LT were carefully drafted to not be deemed a partnership amongst beneficiaries (i.e. drafted to mean TIC requirements).


#10

John,

We agree on a lot so let’s jump straight to it keeping this in mind - I am an advocate of LT’s in dealing with OPM:

#1, Privacy: I agree with you that LLC’s should provide the asset protection and that they can provide in most states SOME privacy for everyone except the MANAGER/ORGANIZOR. The context to focus on is this - my investors and I never own the same “entity” together - I want them one step removed from the “action”. I have never felt comfortable raising 2nds - I want my investors to actually own the property without me. I then control both of our cash flow via a lease and both of our equity positions via an option. If I do not do what I say I will do its a simple eviction and option foreclosure for them - no partnership fighting or 2nd position weakness. So since I’m not part of their entity you actually hint in your post a potential solution when you mention a nominee. I simply don’t know how to find nor structure a LLC “Manager” or “nominee” for my investor who is:

1: a true third party;

2: willing and reliable enough to take title in their name (where does this leave ownership for the investors LLC?);

3: willing and reliable enough to handle mail, building code violations, notice of lawsuit, etc.;

4: willing and reliable enough to sign their name on all the important documents relating to the property (deed, lease, option, etc.);

5: any person who is an investor in the LLC that provides this for the group looses their privacy;

6: and do this all for $100 per trust per year.

Regarding the reliability issue you suggest a potential LLC solution that if I could find a Manager or nominee for my investors that could do all of this just like a trustee (except take title of course since the LLC needs to own the property) - we would still need to document (similar to how a LT documents) the handling of these duties. But how do we document this in the LLC’s DEED which the publics first glance at the property? Sounds like some hybrid LLC w/ a nominee who acts like a trustee or something. If this is even possible this will surely cost more money then a simple LLC whereby the public knows who the Manger is (just like owning an LLC that owns the bene in a LT costs more $ then simply holding title in the LLC).

So why not use each tool for their respective purposes? For me I’ve found nothing simpler and cheeper. My conclusion: Since I want my investors removed from dealing in anyway with the public (read SAFE), LT’s work better for my investors “entities” then an LLC w/ a nominee :slight_smile:

#2, Ease of Paperwork with Many Partners: Same answer to #1 - where do multiple partners find a THIRD PARTY “manager” to do all of the above for only a $100 a year?

Regarding possible fraud - we both know fraud is fraud but you would get no complaint from me or my investors if we “notarized certain trust docs such as transfer of beneficial interest.” It’s still easier for my investor to go down to the local bank while skiing in Colorado and sign the direction docs to trustee in front of a notary - send it by fax - and then let the trustee do business while their on run #6 of the day.

My conclusion - LT’s are designed for this purpose and in my practice of RE I have not attended - nor have any of my investors had to attend - a lease, or buy or sell closing in hundreds of deals. BTW we all love this feature :slight_smile:

Regarding “smaller investors who essentially ARE the company, the ease of admin with multiple investors is a moot point”.

I totally agree. But for the small investor, telling a tenant that once he signs the lease you will have to send it to the Trustee in order to make it valid certainly helps a small investor use 3rd party negotiating from a position of TRUTH! And who better to learn this stuff then the little guy who wants to be a real player in the future - especially when they are competent in using LT’s ethically and they come across a nice $2M deal and need to raise a little money in order to advance their portfolio!

#3 1031: I think you have already answered this point from your later post. In my practice as an investor LT’s and 1031’s go together like peanut butter and jelly. I believe (that you have confirmed) that LT’s are the only “(disregarded) entity” that allows beneficial interest to be part of a RE exchanged.

Let’s chew on this a minute - lets say I’m doing a nice little deal and need $30K down and have arranged non recourse seller financing for 270K (believe it its a true story). Mr. Smith has a 1031 exchange in his PERSONAL NAME and he’s in for 10K - don’t ask why its in his personal name, it happens - Mr. Jones who owns ABC, Corp needs to 1031 exchange in ABC Corp’s name and because of the debt in this deal he will do a partial of 10K - and Mrs. Moneybags simply has 10K in her IRA. All would be happy making 18% return with no management responsibilities. They are also all happy making their 18% - 5% cash flow and 13% growth.

See where I can go with this because I understand LT’s? One Land trust (owned 33% by Mr. Smith personally, 33% ABC CORP., 33% to the lovely lady’s IRA), one sandwich lease signed by their trustee to my LLC, and one appreciating option signed by their trustee to my LLC (or Roth IRA?) later I’m done.

Now tell me how to do this in one LLC that includes me as an owner that gets 100% of the upside over 13% and 100% of the cash flow after their lease is paid? And what happens when Mr. Smith needs out AND wants to do another exchange? God bless the lowly LT :slight_smile:

Like I mentioned above - I want my equity partners to OWN which is the only way I know that they can actually complete a 1031. I do not raise 2nd mortgages and put my investor behind the “bank”. I want them to have only one tenant - ME - and I will deal with the public (yes their trust will still be insured). There will be no partnership disputes with me or their other partners - my office cuts 3 rent checks directly to each partner - when I perform on all clauses of the lease they will get what they are promised - professional property management, cash flow, and appreciation. A LT is simply the premier tool for me because their risk is on my shoulders without me being part of their group. I prefer that they own their bene as an LLC but that is their business with their advisors and some simply do not have a choice - Mr. Smith is Mr. Smith and the IRS is clear that to 1031 exchange he must be a titleholder - the LT is the only way I know to do this.

If you can show me how an LLC by itself can do this then gr8t! It will save us all a little money (and at least in FL with a professional trustee it really is just a little bit of money).

One last point for our gentle readers. A third party TRUSTEE is a very very big deal (in its power and in its risks). With all the benefits of having someone else do this for you or your investors it comes with the fact that this trusted person REALLY OWNS your property in their (or their entities) name. I do not ever take this lightly and I am very very particular in who provides trustee services. I can not express this strong enough - one must really TRUST your TRUSTEE or someone might really find themselves in a mess.

Anywho - enough for now.

Karl

Regarding your “other” attorney friend - I’m sorry for him that he is so close minded. Keeps the competition down for the rest of us LOL.


#11

Greg,

You know me well but for the group it must be said that I’m an investor - I’m not an attorney or CPA, I DO NOT play one on TV, I can’t nor do I want to give you or anyone else any legal or tax advice.

So, regarding LT legality in every state (for my purposes), I simply don’t have a clue. I research each state as deals present themselves to me and only if a LT is needed or would be helpful do I consider setting one up.

Now, according to Mark Warda (who’s Jack Shea’s attorney, I think you know Jack, he’s a 1031 QI), Mark has published a book for many years covering all 50 states. He says LT’s are legal, that some states are better then others, and that Trustee’s duties and some duties change from state to state.

Some states have statutes and others have case law. Interpreting case law is complicated so no one person (attorney) should ever be relied on to be an expert in all 50 states. From state to state things can get complicated, people are unfamiliar with LT’s as John has correctly pointed out (FL is the best for familiarity), there are uncertainties, costs, you need a real person you can trust as Trustee, they can mess up homestead exemptions, there may be fiduciary obligations, some liability to the trustee, environmental issues, security laws, and other things that go bump in the night. Don’t get me wrong, I love Illinois LT’s for what they are but some states have it easier then others, but I would never just rule a state out because one attorney says that they are only good in a couple of states. Especially knowing how powerful a tool they have become in my business!

Please also keep this in mind - I like LT’s no matter what state to only do business with ME as an instate LLC - this is the safest way to do business since I can then have my LLC engage the public!

For more info from Mark check out : http://www.warda.net/LTSC-3.html

No matter what state, the IRS also wants to be noticed regarding “illinois type land trusts”. That form is called Form 56-A "Notice concerning fiduciary relationship Illinois type land trust (IRS code section 6903).

Maybe John could get this other attorney to explain his position more thoroughly. It would be nice to get another opinion so we can individually research it to see if it makes any sense or not (caveat emptor).

Regarding the future doc stamps if (or when) you exercise your option - if it was me I would still pay the doc stamps - you don’t need to pay it on the deed though which will help keep the “sale” quiet. Since you are in FL use a FL Department of Revenue - DR 228 form “doc stamp tax return for non-registered taxpayers’ unrecorded documents”. Section 3 is titled - Transfers of Interest of Real Property and/or unrecorded deeds. Your attorney may tell you otherwise but better safe then sorry.

Hope you are well,

Karl