Answers to All Those Questions You Forgot to Ask About Land Trusts
by Mike Butler
It’s amazing to still see many investors who aren’t using land trusts at all,
along with investors using them improperly. On top of this, there’s a boatload
of investors who are victims getting abused with every property purchased.
Somewhere out there, somebody knew somebody who had a friend who did this or
that and the investor becomes a victim. Although hard to believe, some investors
go to their local veteran attorney and amazingly have been told they’ve never
heard of a land trust.
What Is A Land Trust?
A Land Trust is a simple fill-in-the-blank document to “hide” or keep the real
owners name off public records. It’s nothing more than 6 pieces of paper
detailing an agreement between the “trustee” and the “beneficiary”. Plain and
simple, it’s an “instrument” (piece of paper) to hide or shield from public view
the “beneficial interest” (you or your entity). A land trust does not have a Tax
ID number. The “beneficial interest” has the tax id number. The Land Trust name
or agreement has absolutely nothing to do with your taxes. The beneficiary of
the land trust agreement reports all of the taxable events involving the
property. Many times bankers and attorneys get land trusts confused with perhaps
estate planning trusts and insist or demand each land trust must have it’s own
tax id, it’s own bank account, and must file it’s own tax return. Wrong. They
want to sell you more stuff. That is NOT the right kind of trust. This is the
simple Land Trust started in Illinois with the intent to simply hide the real
owners from public record.
Okay, let’s try it another way. Picture this in your mind. A whole bunch of nosy
farts including ambulance-chasing attorneys, nosy competitors, nosy family
members, co-workers, and so on. Many folks become very curios when they learn
you are a “real estate investor.” They want to see what you own and control. In
today’s high tech world, there’s a world of information available to anybody if
they find the right website. It’s scary to see how much personal info is
available letting your fingers do the walking.
Perhaps I’m a tad bit overkill on this privacy issue due to my previous life as
a undercover cop doing long term serious investigations. A public record paper
trail leading to me, my residence, or my family was absolutely forbidden.
Initially, the concerns were safety and privacy. As your wealth grows, asset
protection strategies became part of these concerns too. My bottom line was to
have nothing in my name personally. This method allows me to control everything
and own nothing. Some may argue it’s overkill. That’s their opinion and we can
agree to disagree. Ultimately, you’ll have to make this decision and you should
have all of the information available to make your decision wisely.
To wrap up what is a Land Trust. It’s about 8 pages long spelling out the
details of responsibilities, duties, and fees of all parties involved. The
parties involved are basically the trustee and beneficiary (grantor). The
Trustee has full authority to act on or for behalf of those who have a
beneficial interest in the property. The Trustee has full power of sale.
The Land Trust agreement identifies the name and address of the trustee and the
name, address, and the percent of beneficial interest of each of the
beneficiaries. Don’t let this blow your mind. If you are the Beneficiary by
yourself, then you become the Beneficiary with 100% interest. If you’re married,
and you have a single member llc, and your spouse has a single member llc, you
could have two beneficiaries naming your llc with 50% interest and your spouse’s
llc with 50% beneficial interest. Depending on how your local public records are
set up will determine how you name your trust and who is the trustee. For
example, in my town, there is only one field in the public records computer for
the owner of record. Therefore on all of my deeds, the owner of records will
read in the following order:
“The (Land Trust Name) With (Trustee’s Name) As Trustee With Full Power of
Sale”
This forces the data entry person to enter it in this same format shown above
and the trustee’s sometimes never makes it into the field because the name of
the owner is so darn long. Years ago the owner’s name field accepted only 32
characters so many of my properties never had room to enter the trustee name
because it was Aafter the land trust name. Some towns like Birmingham, Alabama
have an additional field in their public records just for a Trustee. If your
town’s public record system is set up in this manner, you need to be careful
here and create a battle plan just for this situation. Here’s a couple of ideas.
How about using your real estate attorney as Trustee? Odds are, they’re trustee
on a lot of other stuff anyway and your stuff would be mixed up in their stuff
on any search by some nosy person. This is good.
Here’s the simple version. Suppose you own a rental house at 123 Main St. The
owner of record is your unique land trust name with you as trustee. A nosy
person could get on the internet and find the owner of 123 Main St. If the owner
of record lists your land trust as the owner followed by the trustee name in the
same field, you’re probably okay. In Birmingham, you’ll see an additional field
for the trustee name. The nosy person could then enter a search the Trustee Name
to see what other properties list the same name as trustee. This is the bad
part. Therefore, in this situation, you should perhaps come up with different
trustee names or the best method would be to use your real estate attorney name
as trustee. If you’re doing your real estate closings with your attorney and
referring other investors to them, your attorney should do this for free as an
added benefit to you for your business. This would be perhaps the #1 recommended
solution. If you have just a few properties, (say less than 10), you may simply
jumble up different versions of your names and initials and do the same with
your spouse if married. You should be able to create 10 unique names tied to
yourself to use as trustee.
Who Does the Land Trust?
You prepare your own land trusts. It’s a fill-in-the-blank form.
When to Do the Land Trust?
Each and every time after you buy a property, you prepare your new land trust
agreement for each property at the same time you enter your closing statement.
Where Is the Land Trust and Where Does It Go?
Keep it on your computer or make copies and have them ready to go just like a
rental application or a rental agreement. Once completed properly, your land
trust agreement should be placed in the same file folder with your deed, your
closing statement and your purchase and sale agreement. It should never leave
your office. It never gets recorded. This would defeat the whole purpose of the
land trust. The only way for anyone to find out who has the beneficial interest
in the land trust is to travel to your office and find the land trust agreement
in your folder in your file cabinet.
TIP: If you live in Birmingham or a town where you can search by a
trustee name, take your land trust agreement to the closing so your attorney can
sign as trustee and get it notarized with the least amount of inconvenience to
you. Do not leave the land trust agreement with your attorney. It never leaves
you. You take it back home or to your office.
Why the Land Trust?
I recall several years ago, a local real estate attorney thought my use of land
trusts was overkill. In fact, he told investors asking about land trusts they
really offered no protection. His exact words were “land trusts are just a bunch
smoke and mirrors. LLCs and good insurance are your best protection.”
WHAMMO! – check this out and see what you think. Before speaking at a big
investor conference last fall, we attended a nice dinner banquet for all
attendees and speakers. I had the opportunity to be seated at the same table
with an attendee that had this amazing story. He proceeded to describe how after
implementing many ideas picked up from attending one of my weekend boot camps,
his real estate business was booming back home. This guy was rocking and rolling
and loving it. He discovered true wealth grows with ownership, and not just
wholesaling and retailing properties. Ownership = tenants. Here comes his
nightmare.
John Doe investor goes on to tell everyone seated at our dinner table he
should’ve implemented what he learned from Mike about land trusts; however, he
never got his “round 2 it”. His tragic story begins with a tenant moving out of
a rental unit. They both did the move out inspection properly and a disagreement
over the dollar amount of repairs resulted. John held firm to his position of
money owed for repairs. The ticked off tenant proceeds to track down one of
those free attorneys and files a lawsuit to get their security deposit money
returned.
John gets his summons to go to court and as a real world investor, he’s prepared
for the worst and hoping for the best. He takes his checkbook to court with him.
As expected, the tenant friendly judge makes a judgment in favor of the tenant.
John loses. No need to drag it out and make it more painful, John chooses to
settle up, write a check for payment in full on the spot and get back to
business. Put this one to bed. John returns to his growing real estate business
and has several deals pending across the board, including several refinances on
properties. Now keep in mind, John is an aggressive real estate investor. He’s
pretty active and has several closings each week. John already had plans for the
money he was to receive from his pending refi’s to pay cash for purchase
contracts pending in his pipeline.
Here comes John’s bomb. A day or two before the scheduled closing of his pending
refi’s, he gets a phone call. Bad news. His lender has cancelled his loans. Why?
His credit score took a nosedive. Perfect credit, never missed a payment, what’s
the deal? John was devastated and went into the panic mode. He needed the cash
from the refinances to buy the houses he promised to pay cash for next week. His
reputation as a strong cash buyer, his word, all are in jeopardy. What’s going
on?
Here’s the deal. John’s credit score took a nose dive because of the lawsuit and
judgement against John. John explained the entire story to the lender; however,
the story didn’t fix the problem. When the judge made a final decision to see
who wins, it’s called a judgement. The judge ruled in favor of the tenant and
against John, this becomes public record. Therefore, John had a judgement
against him in the public records. It showed up like it should on his credit
report. It doesn’t matter that it’s paid in full. It’s still a judgment against
John. Ouch!
John’s damage now includes a lower credit score. He can’t qualify for good rates
for his refinances and is stuck with higher priced B and C lender products for
his investing business. Lesson learned for John. On his rental property deeds,
his personal name was listed as owner of record. John had his own property
management company managing his tenants and collecting the rents. (this was good
for the number of units John is driving). The attorney for the tenant did their
job properly and named John’s property management company and the Owner of
Record of the rented property. Because John had his personal name on the deed as
owner of record, he was named in the lawsuit. When he was named in the lawsuit
personally and he lost, he got a judgment against him personally.
If John had used a land trust for the owner of record, the tenant’s attorney
would have named John’s property management company and the land trust as
defendants or parties of the lawsuit. John would not have been named personally
and when he lost the case, the judgment would have been against the land trust,
not John personally. Perhaps a bit more powerful than “smoke and mirrors?” This
true real life story is proof of just one of the many powerful benefits for
investors. John immediately got the ball rolling to make sure the owner of
record on every deed was an individual land trust for each property he owned.
A Shorter War Story, What Not To Do
Donna heard about land trusts and discovered this was a great tool she needed to
incorporate into her investment program. She failed to gather all the specifics
from a competent expert and for some unknown reason, chose to follow up on
specifics of using land trusts with her local banker. Her banker listened to
Donna, was a little dumbfounded, and had to check with his bosses to see how
they could “help” Donna.
After a week or so, her banker called her back with “great news for Donna”. His
boss “approved” Donna’s request or application for using land trusts for her
properties and invited her to schedule an appointment to go over the details.
Donna was actually excited and was looking forward to implementing this newly
found asset protection and privacy tool into her investment program. Long story
short, they set up her on a program with her bank as trustee charging $300 per
land trust along with forcing her to have a bank account with small monthly fees
for each land trust. Looks like the bank wins here.
How To Use The Land Trust?
STEP 1: After you capture a deal meaning you have an agreement to buy a
property, contact your closing attorney or title company and tell them to make
the owner of record on your deed to read:
“The (Land Trust Name) with (Trustee’s Name) as Trustee with full power of sale”
of
STEP 2: Attend your closing, buy the property and return to your home or
office with a copy of your deed and closing statement. Enter your closing
statement properly in your Investor Books made. Next, is your land trust. If you
don’t have a computer, you could use your land trust agreement just like your
rental agreement.
Fill in the blanks for:
1. Address of the property
2. Name of the Land Trust
3. Trustee Name
4. Beneficial Interest (1 or more persons or entities)
5. Legal Description of property (easiest way is staple a copy of your deed to
the land trust agreement)
6. Notarize Trustee and Beneficiary signatures.
STEP 3: Hide it in your filing cabinet with your closing statement and
deed. You’re done.
STEP 4: Let your insurance agent know the Owner is your land trust. Your
policy will list insured as your land trust name c/o Trustee or your property
management company name at your mailing address.
If you’re pretty good on computers, you could have your land trust agreement in
your computer as a Microsoft Word document and fill in the blanks and hit the
print button. (this just looks prettier instead of handwritten fill in the
blank.) I promote doing things right, but at the same time you should have all
the information. There are many investors who never fill out a land trust
agreement. Many investors simply take title to property using a land trust and
sell property the same way and never fill out a land trust agreement unless they
need one to sell. I’m not telling you this to encourage this tactic. I’m only
trying to show you how simple they are in your investing program. Please do
properly complete a land trust agreement for each property you purchase for the
peace of mind for you and your family. Imagine the mess you’d leave behind if
you shot from the hip.
Bio:
Mike is a focused, aggressive real estate investor, who takes pride in avoiding
banks to buy investment property.
Mike realized early on he MUST have a strong foundation to grow quickly and
safely. Mike has reviewed many property management software programs only to
discover they fell short of what he needed. Mike has spent thousands of hours
tweaking and researching Quicken and QuickBooks Pro. His method is getting the
results that he needs.
In May 2002, Mike was invited to be a featured speaker at a regional conference
of CPAs and the rest is history. His simple laid-back street level teaching
style is easy to understand and benefits all levels of investors, from the
beginner to seasoned veteran.
Successful investing utilizing tenant tracking and effective property management
and bookkeeping techniques enabled Mike to retire in March 2000 after 13 years
as a Louisville Police Detective.
He was featured in Money magazine, June 2001, in the article “Can Real Estate
Make You Rich?”. Mike Butler is a Kentucky licensed real estate broker, a
realtor, member of KREE, and a charter member of NARPM.