THE ADVANTAGES AND DISADVANTAGES OF LAND TRUSTS
While land trusts are not the only strategy for creating privacy with regard to the ownership of real estate, it is important to understand all the advantages and disadvantages of owning real estate in a land trust as opposed to individually, in a revocable trust and/or in a business entity such as a limited liability company.
Enhanced Privacy: Land trusts provide enhanced privacy in the ownership of real estate because the beneficial owners who retain a beneficial interest (a “beneficial interest”, pursuant to the land trust act, means any interest, vested or contingent and regardless of how small or minimal such interest may be) in a land trust are not disclosed in the public records.
Ability to Improve Real Estate Purchase and Sale Negotiations: The inability of the public to know who the beneficial owner of a land trust is allows for the facilitation of an arm’s length purchase and sale transaction. For example, if a prospective buyer knows an individual is well off, they may not offer as high of a price for a particular real estate because the prospective buyer may believe that the seller does not need the money. With a land trust, the buyer and seller are on a fairer playing field as the buyer and/or seller, as the case may be, do not know who the other individual is. The same may occur where an individual is purchasing real estate in their land trust. The seller in this instance may not accept a lower offer if they are aware that the buyer is high net worth or said purchase is strategic for a bigger plan/development.
Probate Avoidance: Like your typical revocable trust, any real estate held in a land trust avoids the burden and expense of probate administration.
Creditor Lien Avoidance: Any beneficial interest pursuant to a land trust is considered personal property and is not subject to the liens of creditors (at least in the State of Florida).
No Asset Protection: While an individual who has a beneficial interest in a land trust is considered to own personal property and is not subject to the liens of creditors (at least in Florida), such beneficial owner is still subject to civil judgements and IRS federal and local tax liens.
Additional Tax Return Filing Requirements Imposed on the Land Trust Upon the Death of the Beneficial Owner: When the beneficial owner of the real estate held in a land trust passes, the IRS requires the trustee of the land trust to obtain an employer identification number (if not already obtained) and to file tax form 1041 each year. This may be burdensome in some cases.
Reduced Privacy Upon Adding Homestead to Real Estate Held in a Land Trust: While land trusts provide enhanced privacy in the ownership of real estate generally, when an individual
decides to claim a homestead exemption on real estate held by the land trust, the exemption holder’s name is usually still displayed on the property appraiser’s website in the county where the real estate is located. there are a limited number of exceptions where such personal ownership information may be redacted, however, the circumstances are limited. for example, the owner must either be a current/past public defender or prosecutor; a registered guardian; government employee in some cases; a victim of violent crime; law enforcement professional; as well as several other situations as determined by the Florida statutes.
WHY IS USING A LAND TRUST FOR YOUR REAL ESTATE A BAD DECISION?
Land trusts are increasingly popular for real estate investors who want anonymity as an extra layer of protection. The property in trust isn’t directly connected to the owner through the public records. However, privacy, not Asset Protection, is then the land trust's major advantage. The beneficial owners’ name is not in the public records because the property is titled to the trustee. However, there are three disadvantages with land trusts: First, they do not offer great Asset Protection. Second, they are costly to prepare and administer. Lastly, financing and managing the trust properties is also more cumbersome.
The land trust can own any type of real estate, including the family home, but usually it's used to title investment properties. A bank is normally the trustee. How well the land trust protects the beneficiaries' interest in real estate depends mainly upon whether the trust contains spendthrift and anti-alienation provisions. As with any entity, the land trust must be properly drafted. As the trust beneficiary, you don’t directly own the real estate, the trustee does. You would own only a beneficial interest in the trust but owning only a beneficial interest in a land trust doesn't sufficiently protect you. Your personal creditors can usually seize this beneficial interest.
To sufficiently protect yourself you need added protection. To achieve this in a land trust you would title your beneficial interest to a limited partnership, LLC, or irrevocable trust. You and your spouse can also own the beneficial interest as tenants-by-the-entirety if your state recognizes this form of ownership.
As with LLCs, it's also best to use separate land trusts for each property. One limited partnership or LLC can be the beneficial owner for multiple trusts. However, a common strategy that would offer better protection would be to have each property owned by an LLC.
By itself the land trust only provides you with a level of anonymity which is a form of protection, but for real protection you must also add the strategies mentioned above.
Read part one of the blog here.
The Presser Law Firm, P.A. can integrate an Asset Protection Plan with your existing Entities and Estate Plan or work with you to create a new one. Contact us today for a complimentary consultation regarding your Asset Protection options.
The Presser Law Firm, P.A.
6199 N. Federal Hwy.
Boca Raton, FL 33487
(800) 999-9992 or e-mail Info@AssetProtectionAttorneys.com