http://www.realestateforprofit.com/blog/Landtrust Blogen-usSat, 04 Feb 2012 03:24:19 EST http://www.realestateforprofit.com/blog/comments.aspx?b=101 What Is The Liability Of A Land Trust Trustee? As you know by now, I recommend using individuals as Trustees of your Land Trusts. This not only saves Trustee expense but offers more flexibility in administering your trusts. The problem is finding individuals that will agree to serve as your Trustee. Oftentimes I am asked, Is my trustee going to be personally liable for being my trustee? Since most Land Trust legal decisions follow Illinois Land Trust case law and Statute Law (and there is over 100 years of Illinois Land Trust legal history), I will first address this issue from Illinois statute law. A judgment against a Trustee is enforceable by an execution against the trust property only ( Ill.Rev.Stat., c. 110, 12-103 ), enacted in 1981. The relevant portion of the statute provides as follows: A judgment entered against a person solely because he or she is the holder of title to property as trustee of a specifically identified trust shall be enforced only against the property held in the particular representative capacity . Oftentimes legal advice regarding the issue of Trustee liability is given incorrectly because of the misunderstanding between Land Trusts and other conventional type trusts. Conventional type trusts (where the Trustee retains all the incidents of ownership) are treated different under the law than Land Trusts. The difference is that in a Land Trust the incidents of ownership are divided between the Trustee and the Beneficiary. Additionally, the Trustee of a Land Trust will exculpate him/herself from all personal liability (when signing as Trustee). Consequently, this action adds responsibilities on the trust property and the beneficiary. Legal decisions dealing with Land Trust controversies have recognized these distinguishing characteristics. To recap: A Land Trust Trustee is NOT personally liable for the debts, obligations, or liabilities of the Trust. However, the Trustee could be liable IF the Trust Agreement provided for this, but most Land Trust Agreements do not. Additionally, a Land Trust Trustee could be personally liable if she/he acts negligently or without direction from the beneficiary (holder of the power of direction). In the state of Florida (which also has a Land Trust Statute) Section 689.071 (7) was added to the statute to overrule a court decision that held a Trustee personally liable ( Taylor v. Richmond s New Approach Association, Inc. 351 So. 2nd 1094 (1977 )). A Trustee IS personally liable for contracts for attorney s fees to which he agrees, and for such statutory obligations as property taxes. At the Federal level, Congress has also taken action to protect Trustees. The Asset Conservation, Lender Liability, and Deposit Insurance Protection Act provide that the Trustee s liability does not exceed the assets of the trust. The Act can be read in Subtitle E of Public Law 104-208, Sections 2501-2505. So, next time you ask someone to be your Land Trust Trustee, show them the above information to put them at ease. To learn more about Land Trusts go to this link: www.realestateforprofit.com/landtrusts.aspx Randy Randy http://www.realestateforprofit.com/blog/comments.aspx?b=101 Sat, 04 Feb 2012 12:00:00 EST http://www.realestateforprofit.com/blog/comments.aspx?b=100 Land Trusts - Reasons NOT to Use Them As you know by now, I am a strong proponent of the use of a Land Trust to hold title to your real estate investments. However, there are some situations (mostly when dealing with your personal residence) when you might not want to use a Land Trust to hold title to a property. Here are some possible problem areas when using a Land Trust. Possible loss of Redemption rights When you buy real estate under a mortgage and fail to make payments, you can lose the property thru foreclosure. There is a provision in the law though, that permits you to redeem the property within 12 months (this time period varies state by state). This means that you can get the property back by paying the amount paid by the purchaser at the foreclosure sale plus costs. If you buy the property using a land trust with you as the beneficiary, you have no redemption rights because your interest is Personal Property not real property. However, the Trustee of the land trust DOES retain redemption rights in the property unless such rights are waived in the mortgage. Loss of Homestead Exemption. If the property held in a land trust is used as a personal residence, the usual homestead exemption ($15,000 in Illinois, unlimited in Florida) is lost to the beneficiary because recorded title is in the name of the Trustee and the exemption is not applicable to personal property (the interest of the beneficiary). This exemption has to do with bankruptcy and debtor s rights. Possible loss of the Homestead Real estate tax exemption Most counties across America offer a break on the assessed valuation of owner occupied single family homes ($6,000 in Illinois). Some counties will not allow this exemption on owner occupied homes held inside a land trust. Always check with the county in which the property is located prior to putting your personal residence in a land trust. Most counties WILL allow the homestead exemption even if the property is in a Land Trust but they may require special language on the deed to Trustee to allow this exemption. NOTE: If you are transferring your personal residence that is currently titled in your name to a Land Trust, be sure to ask your county recorder s office for the transfer tax exemption language for the Deed to Trustee. Otherwise you will end up paying a Transfer Tax once the Deed to Trustee is recorded ($1.00/$1,000 of value in my county). Revoking the Trust Agreement may create a tenancy in common The Grantor (person who creates a land trust) typically retains the authority to revoke the Trust Agreement if the TA is not irrevocable. If after creating the TA the Grantor/Beneficiary transfers (for value or a gift) some of his beneficial interest to others, those beneficiaries must consent before the Trustee will convey title to a new owner (this assumes that the Grantor did not retain the full power of direction over the Trustee). If everyone agrees to revocation, or if the trust is revoked under some procedure that has been placed in the trust agreement (or by operation of law), the original owner/Grantor and the new beneficiaries become Tenants in Common, according to their interest in the trust. Therefore, if the Grantor had irrevocably given or sold half of his beneficial interest, upon revocation he would own the real estate in Common with the other beneficiaries. Not being able to qualify for a secondary market loan If you are trying to obtain financing for your real estate in the secondary market the guidelines will not allow you to close the transaction using a Land trust. This will put your name in the chain of title for one day as you can always transfer the title out of your name the day after closing. This is a personal decision that you will have to make based upon the terms of the loan (typically much better than non-conforming loans), privacy issues and the number of loans you currently have outstanding. Most secondary market lenders limit you to four loans and beyond that it is a moot point (you will have to deal with portfolio lenders). Randy Randy http://www.realestateforprofit.com/blog/comments.aspx?b=100 Sat, 21 Jan 2012 12:00:00 EST http://www.realestateforprofit.com/blog/comments.aspx?b=99 Land Trusts and Limited Liability Companies Real estate investors who are concerned about privacy of ownership and asset protection have long used the Limited Liability Company (LLC) as a beneficiary to their Land Trusts. The smart investor never takes title to real estate in their own personal name, but uses a Land Trust (or similar type title holding trust) to take title unbeknown to the general public. There are a multitude of reasons to hold title in a Land Trust (I have written a report called, 50 Reasons to Use a Land Trust Please contact me if you want a FREE copy), but this article will address only one reason; to allow an LLC to be the beneficiary. In the old days the truly paranoid investor would establish a separate LLC as beneficiary of each separate Land Trust. It is smart (easy and inexpensive) to put each property into a separate Land Trust, but it is difficult (complicated and expensive) to establish a separate LLC for each Land Trust. Enter the Series LLC. Originally conceived and enacted in Delaware in November of 1999, the Series LLC is suppose to allow different assets (beneficial interests, businesses, bank accounts, etc.) to be held inside a single LLC within separate cells. These cells (if certain conditions are met) are suppose to be insulated from each other when it comes to liability exposure. In other words, a lawsuit against one cell would not effect the other cells (preventing the need for multiple LLC's as beneficiaries of multiple Land Trusts). The advantages of using an LLC for real estate became even more pronounced following the issuance by the Internal Revenue Service of the favorable ruling that allows LLC's to be treated as Partnerships. The advantages are not enough, however, to support an unequivocal endorsement of the LLC as the title holding entity of choice for a real estate enterprise that plans frequent transactions (or even long term holding positions). Cautionary signals appeared at an early stage concerning title issues affecting real estate owned directly by LLC's. In practice, title insurance companies have added requirements in their commitments that encumber considerably the ease of administration that LLC proponents foresaw. While the LLC gives tremendous tax treatment flexibility and marginal asset protection, they do not provide the privacy and ease of transferability that the Land Trust provides. By combining the LLC with the Land Trust, the investor can obtain the best of both worlds. While much more can be written on this subject I will end this article on two notes of caution. First, to my knowledge, there have not been any state supreme court decisions upholding the purported asset protection benefits of the Series LLC. Until this happens, you may or may not be as protected as you think by using the Series LLC. My second concern relates to the temptation to put a business (not rental real estate) inside an LLC (whether a Series LLC or regular LLC). The problem relates to getting profits out of an LLC. If your business produces profits and you take distributions out of your LLC you will pay ALL withholding taxes on those distributions. However, if you establish your business as a C Corporation or Sub-S Corporation you will have the opportunity to take a salary for part of your compensation and dividends for the remaining amount. Why is this important? Read on Serf! Dividends are not taxed for Social Security, FICA, FUTA and SUTA. This will save you about 20% (depending on your state's tax rates) on each dollar you receive as a dividend and not a salary (earned income). Consult your tax adviser before setting up your entities. But, do not expect your accountant or lawyer to know anything about a Land Trust (and the many benefits of using them). I will be glad to answer your Land Trust questions if you cannot find accurate information on your own. Randy Randy http://www.realestateforprofit.com/blog/comments.aspx?b=99 Sun, 25 Dec 2011 12:00:00 EST http://www.realestateforprofit.com/blog/comments.aspx?b=98 IRS Section 121 and The Land Trust Beneficiary For years I have taught real estate investors to put their investment property into a Land Trust for a multitude of benefits. The next question always becomes, who should be the beneficiary? The answer depends on your individual situation and what you are trying to accomplish. You may choose an Individual, LLC, Corporation or even the Trustee of another Trust (perhaps a Personal Property Trust). The degree of your paranoia will dictate the number of entities that you want to layer as beneficiaries. I am often asked whether a real estate investor should put his/her personal residence into a Land Trust and the short answer is generally yes. The investor will realize all the same benefits of a Land Trust whether the property is for investment for a personal residence. However, there can be a problem with qualifying for IRS Code Section 121 ($250,000 capital gains tax exclusion for individuals and $500,000 for married filers) if you make an entity the beneficiary of your Land Trust (instead of you personally). In order to qualify for the capital gains exclusion on your principle residence, ownership must: 1. Be held directly in your name or in the name of a qualifying trust or certain single-owner entities; 2. You must have resided in the property for a cumulative 2 out of 5 years prior to selling What is a Qualifying Trust? Under Treasury Regulation 1.121-1? Property held in a Land Trust can qualify for Section 121 exclusion if the trust is a Grantor Trust under IRS Sections 671-679 and is a Disregarded Entity under Treasury Regulation 301.7701-3. Since a Land Trust is a type of Living Trust and a typical traditional revocable living trust qualifies (the trust cannot be an Irrevocable Land Trust) under Section 672 you CAN use a Land Trust to hold title to your personal residence and still qualify for Section 121 treatment. For those of you out there that like reading dry IRS code sections, it is even possible to qualify for Section 121 without direct ownership of a property via remainder interests. See IRC 121 d 8. Regarding making a single-member entity (i.e. an LLC) the beneficiary of a Land Trust, while this may still qualify under the exemption referred to above, I have not in the past recommended use of the single-member LLC because of its lack of asset protection benefits. Many recent court decisions have penetrated the single-member LLC to the benefit of creditors. HOWEVER, on June 6th, 2011 Nevada Senate Bill 405 passed and amended the Nevada Revised Statute 86.401 to specifically provide single-member limited liability companies charging order protection as the exclusive remedy for a judgment creditor. The bill became law on October 1st, 2011. In part this new law reads, On application to a court of competent jurisdiction by a judgment creditor of a member, the court may charge the member's interest with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of the member's interest. It goes on to say, Provides the exclusive remedy by which a judgment creditor of a member or an assignee of a member may satisfy a judgment out of the member's interest of the judgment debtor, whether the limited-liability company has one member or more than one member... You gotta love Nevada! Maybe you should consider making the beneficiary of your Land Trust a Nevada Limited Liability Company. Just be careful as Nevada asks a lot of personal questions on their formation questionnaires and Franchise Tax annual renewal forms. You will have to think carefully and creatively to avoid giving the State of Nevada information you should not want them to have. Good Luck! Randy Randy http://www.realestateforprofit.com/blog/comments.aspx?b=98 Sun, 11 Dec 2011 12:00:00 EST http://www.realestateforprofit.com/blog/comments.aspx?b=97 Joe Paterno and The Land Trust By now, everyone on Planet Earth knows the potential problems that Joe Paterno faces with the Penn State sex scandal. A huge lawsuit against him personally could wreck him financially (after 60 years of high earnings and a life time of wealth accumulation). Evidently, Joe learned about asset protection too late in life. Last July Joe transferred his interest in his personal residence to his wife for $1.00 plus love and affection to a trust. Sorry Joe...too late! There is a little thing in state and federal laws called Fraudulent Conveyance (transfers of assets with the intent to defraud, hinder or delay creditors) and it is designed to prevent people from doing exactly what good old Joe did. You have heard me say this a hundred times...old and cold matters! Think about asset protection before the wolf is at the door. Let Joe Paterno's ineptness serve as an example that you never know when trouble will strike you. In other words, it is too late to buy insurance on your home if your house is already on fire! Randy Randy http://www.realestateforprofit.com/blog/comments.aspx?b=97 Sun, 20 Nov 2011 12:00:00 EST