Hope you brought your swim suit, because today we’re going to jump head first together into waters that many investors have skimmed the surface of, but few have actually dared dive deep – Land Trusts. And who better to take us there than Mr. Land Trust himself Randy Hughes.
Used well, Land Trusts can be an extremely powerful device in your real estate investing business, and more than anyone else we know, Randy is THE guy to talk to about how to effectively, creatively and ethically leverage them to protect your assets and your privacy as a real estate investor.
Besides buying more than 200 houses, Randy’s published a number of respected works on Land Trusts for real estate investors, he’s been a licensed Continuing Ed Instructor for the Illinois Assoc. of Realtors for 20+ years, and even teaches land trust law and administration to attorneys.
You may recall Randy’s previous lesson, “How Hard is it to Find a Land Trust Beneficiary?” or the terrific live training call we did with him recently on the topic. Today we’re starting a fresh series of lessons with Randy on mastering Land Trusts for real estate investors. And what better place to begin than at the beginning.
Without further ado, let’s hear from Randy…
The Fundamentals of Land Trusts for Real Estate Investors
You are embarking on a series of training lessons about Land Trusts and the reasons why all real estate investors should consider using a Land Trust to hold title to their property. The benefits are many and the negatives are few.
By the time we round home base together, you will have a solid understanding of what a land trust really is, why they matter so much, specifically what they accomplish for you, and a lot more.
Maybe you’ve heard of land trusts before, but never really wrapped your mind around their purpose and the best practices for their use. If this is you, then I expect this will be more than a little eye opening for you. And if I’ve done my job well, you’ll walk away from these lessons equipped with the realization of how important land trusts are for your real estate investing endeavors, and with a lot more tactical knowledge on how to deploy them.
Today we’ll get started right at the beginning with the “10,000 foot view” of land trusts…
What Is a Land Trust?
In simplest terms, Land Trusts are nothing more than a few pieces of paper designed to hold title to real estate and real estate related assets (like options, contracts for deed, mineral rights, air rights, etc.).
So rather than holding title in your personal name or in the name of your corporation or LLC, you can take and hold title in the name of your land trust.
To create a Land Trust you need (i) a Deed in Trust (similar to a Warranty Deed) and (ii) a Trust Agreement (a contract between the Trustee and the Beneficiary). That’s it. The heart of the Land Trust is the Trust Agreement and I will explain this agreement in more detail in another lesson in the near future. But for now it is important that you first understand the “big picture” when it comes to trusts.
Please Note: In these lessons I will be discussing Land Trusts that hold title to real estate as opposed to “not-for-profit” or “community” Land Trusts. They’re different animals for different purposes, and in case anyone is familiar with the latter, it’s worth clarifying that I’m talking exclusively about land trusts for real estate.
One Big Difference with Land Trusts
Most Trusts are “Trustee Driven” meaning that the Trustee makes all the decisions about what happens with the Trust’s assets. This is not the case with Land Trusts. Land Trusts are “Beneficiary Driven” meaning that the Beneficiary makes all the decisions about the assets inside the Trust.
This is a highly significant difference between Land Trusts and most other kinds of Trusts, and part of what makes the land trust such a powerful tool for investors to deploy. But it’s also this difference that often leads to confusion amongst professional advisors and oftentimes prevents real estate investors from benefiting from using a Land Trust in their business. More on this soon.
Why Use Land Trusts?
The primary benefits of using a Land Trust as a real estate investor are (i) privacy of ownership, (ii) asset protection and (iii) to make higher profits. We’ll drill into each of these benefits in greater detail together throughout this series lessons. In fact, there are so many benefits to using a Land Trust I wrote a booklet called, 50 Reasons to Use a Land Trust, which you can have a free copy of free if you’d like.
You may be wondering, “What’s the big deal anyway? Why shouldn’t I just hold title in my own name?”
Here’s why: Real estate investors are perceived by the general public as “rich” and therefore tend to be bigger targets for frivolous lawsuits. Lawsuits – even frivolous ones – will inevitably cost you lots of money (in defense costs), time (that you could use to create more profits) and aggravation (diminishes productivity).
The sad truth is that frivolous lawsuits are a racket against people like us, and big business for attorneys. They know full well that once you’re fingered in a frivolous lawsuit, more often than not you’ll end up settling (and lining their pockets with your hard earned money in the process) because it’s simply less costly in every way to settle than to push through and aptly defend yourself for the entire lawsuit.
Lawsuits can and will drain the life and money out of you, and take you away from doing what you do best…making money in the real estate business.
Consequently, smart real estate investors spend some of their valuable time learning how to protect their assets from attack (liens and judgments). By far the cheapest form of asset protection is personal privacy. And bottom line the cheapest form of privacy for a real estate investor is to use a Land Trust to hold title to their investments.
Why? Because with a Land Trust, only the Trustee and the name of the trust are even known to the public. The deed to the property is held in the name of the Land Trust Trustee and the Trust – neither of which are you, the “rich” real estate investor. In fact, done right there is no recorded document on planet Earth indicating who the beneficiary of the Trust is. The only way to determine the beneficiary of a Land Trust is to sue the Trust (we will discuss this process in more detail in future lessons) and that is not always easy (or inexpensive) to do.
For now, think of a land trust as your own personal smoke screen – a cloud through which you, the “rich” old real estate investor can’t easily be seen or reached. This is a huge benefit to you in terms of asset protection through simple privacy. It’s akin to the privacy of holding your cash in an offshore or Swiss bank account – it’s all there, but no one can see it.
With this in mind, one question I hear a lot is…
Are Land Trusts Really Legal?
Short answer: Yes – absolutely.
Rest assured that Land Trusts have been around for thousands of years and actually came to us from England. Over 100 years ago the first Land Trust was formed in the United States by Chicago Title Company to help develop a subdivision in Chicago, Illinois.
Side Note: Since the first American Land Trust was formed in Illinois many other states refer to the Land Trust as an “Illinois Type Trust.” Bear in mind this does not mean that all Land Trusts are “Illinois Land Trusts.” Each state either has a Land Trust Statute or not and there is no Federal Land Trust Law. Some states have better Land Trust Statutes than others and we will learn in this series of lessons which states are best to form a Land Trust in and why (no matter what state YOU live in OR what state the property is located in).
So now you should have the big picture of the essence of what a Land Trust is, what makes it unique and special and most importantly what it can do for you. Now buckle up and get ready, because in the next few lessons I’m going to take you where most people have never been…inside a Land Trust!
In the meantime if you want to jump start your Land Trust education, please feel free to enjoy a webcast training I’ve prepared on how to create your first land trust.
Also, please share any comments or questions you have so far below. I’d love to hear from you.
Ask your fellow real estate investors if they have ever used a Land Trust. Ask them why or why not? Put your finger on the pulse of what your investor colleagues are doing in this arena.
Ask your real estate attorney if she/he knows how to create a Land Trust. Just start the conversation for now, and we’ll come back to this soon.
Write down the names of two people that you would consider asking to be your Trustee. We’ll discuss more about who should be your Trustee in later lessons, but for now just come up with a couple of names of people you think might be able and willing to do this for you.