Land Trust Benefits & Disadvantages
If you own property, you’re likely looking for a simple, legally effective way to maintain your privacy and protect your assets. While there are many ways to reach this goal, the simplest strategy is establishing a Land Trust.
When establishing a revocable Land Trust there are several fine points that real estate investors commonly fail to consider or misunderstand. Make sure you understand the pros and cons of creating a Land Trust and get the most out of your investments.
What is a Land Trust?
A Land Trust is a tool many real estate investors use to protect their assets and maintain privacy. Land Trusts allow the property owner, or grantor, to transfer legal ownership and title of investments to a trustee. That trustee then holds the legal title for the grantor and the trust beneficiaries.
A Land Trust differs from other asset protection strategies in that it is completely anonymous (you do not have to file your trust with any state or federal agency). At no point is the grantor or the trustee legally required or encouraged to disclose personal information with state or federal agencies.
Benefits of a Land Trust
A Land Trust allows for the separation of the legal title from the trust beneficiaries. That means that the title to a property is held anonymously by one party while another party benefits from all income associated with that property. Because the beneficiary remains private, real estate investors are more likely to retain anonymity and protect their interests.
In addition to privacy concerns, Land Trusts allow investors to protect themselves from liens. A lien is a legal document that temporarily transfers ownership of property to a third party until a debt is paid. With a Land Trust, any property under that trust is not subject to a lien, protecting the beneficiary.
Land Trusts protect beneficiaries by creating a layer of distance between the owner of a piece of property and the individual benefiting from that property. In many cases involving real estate lawsuits, those pursuing legal proceedings against an owner will spend a significant amount of money in establishing ownership and identifying beneficiaries. If the trustee lives out of state and out of the court’s jurisdiction, it can be nearly impossible for successful legal action to be taken.
Land Trusts make passing assets to heirs incredibly simple and can even prevent expensive cases of probate. Probate is a legal process in which assets being passed to heirs must be assessed or appraised by the court system. If land is left to heirs through Trusts, the property does not need to enter this process. Just make sure the Land Trust names a successor in case of death or incapacitation.
Land Trusts also protect the beneficiary from the need to file complicated tax returns. Unlike an LLC, a Land Trust is not required to obtain a federal tax ID number or file a return. Instead, the beneficiary is the taxpayer, meaning you can file tax returns in the same manner prior to your real estate purchase.
Transfer of Interest
Land Trusts are categorized as revocable trusts, meaning that the beneficiaries can be changed at any time. That means you can anonymously change the beneficiary to another individual, to an LLC, or to any other corporate entity at any time without reporting to the Secretary of State.
What are the Disadvantages of Land Trusts
While Land Trusts are excellent tools to provide an additional layer of privacy and protection for real estate investments, there are several disadvantages. Some investors enter into Land Trusts believing that they offer complete protection from liability. Unfortunately, complete protection is very rarely, if ever, legally attainable.
If the title holder of a Land Trust finds themselves in a legal dispute, the court handling the case is legally allowed to order the disclosure of the beneficiary’s identity. The beneficiary can also be found liable for damages incurred in property management-related lawsuits.
Some investors enter into Land Trusts believing that they can avoid paying taxes altogether due to the separation between title owner and beneficiary. Land Trusts are certainly not a method of obtaining tax exempt status. As mentioned previously, the beneficiary of a Land Trust must still report income on their tax returns.
Revocable vs Irrevocable Trust
The information regarding Land Trusts thus far has pertained to revocable Land Trusts. A revocable Land Trust is one that can be changed at any time. Assets remain in the grantor’s estate while the title is transferred to a beneficiary, providing all of the aforementioned benefits.
An irrevocable Land Trust removes all rights and ownership of property from the grantor. These kinds of Land Trusts are primarily used for avoiding a capital gains tax that would otherwise be applied if property was sold outright. An irrevocable Land Trust should never be used if the original property owner intends to continue benefiting from their assets.
Before you commit your real estate assets to a Land Trust, make sure you understand the benefits, disadvantages, and your obligations as a grantor. You want to structure your business ventures in a way that serves your interests fully without legally complicating your life.