Land Trust Essentials: Knowing The Playe...

Hey Moguls, Randy Hughes here again…

I’m following up on a series about Land Trusts. I know, I know, not the sexiest of topics, but a very important one. And, one that I just happen to be an expert on – they don’t call me Mr. Land Trust for nothing. J

I’m going to share with you how important it is to effectively, creatively and ethically leverage Land Trusts to protect your assets and your privacy as a real estate investor.

You might be wondering what qualifies me to speak so confidently about Land Trusts… so here you go…

In addition to buying more than 200 houses, I’ve published several pieces and books on Land Trusts for real estate investors, and I’ve been a licensed Continuing Education Instructor for the Illinois Association of Realtors for more than 20 years. And, I also teach Land Trust Law and Administration to attorneys. Satisfied with my qualifications? Hope so!

I’ve already provided some great lessons including “How Hard is it to Find a Land Trust Beneficiary?” and this terrific live training call. And make sure you check out Part 1 of this series, if you haven’t already.

So, let’s get to going with Part 2…

In my last lesson we learned what a Land Trust is…just a few pieces of paper in the form of a Deed in Trust (sometimes called a Deed to Trustee) AND a Trust Agreement (a contract between the Trustee and the Beneficiary).

We also discussed the primary and very worthwhile benefits of using a Land Trust as a real estate investor, which are (i) privacy of ownership, (ii) asset protection and (iii) to make higher profits.

Most real estate investors are familiar with Deeds, but not with Trust Agreements. So, this lesson will concentrate on the heart of the Land Trust—The Trust Agreement and all the many players involved:

The Grantor
The Trustee
The Successor Trustee
The Beneficiary
The Successor Beneficiary
The Director
The Successor Director

Since the Trust Agreement is a contract that follows contract law, the Trustee and the Beneficiary can agree to almost anything (as long as it is lawful and not against “public policy”).

To understand the best way to craft a Land Trust to meet your individual needs it is important to learn who is involved, what their limitations are and who holds the ultimate power.

Who Is the Land Trust Grantor?

The Grantor is the person or entity that creates the trust initially and puts the property into the Trust. This is why the IRS calls the Land Trust a “grantor type trust.”

Most Land Trusts are created as revocable (meaning that the terms of the Trust Agreement can be changed during the life of the Trust). A Land Trust can be created as Irrevocable (meaning the terms of the Trust Agreement cannot be changed during the life of the Trust), but we will be dealing with only the revocable type Trust in these lessons.

Who Is the Trustee?

For our purposes the Trustee is essentially a figure head.

We only want our Trustees to hold legal and equitable title to the property…nothing else!

We don’t want our Trustees to collect rents, buy insurance or deal with any day-to-day operations. There are more than 100 years of case law that guarantees a Trustee that they are not personally responsible for their actions as a Trustee (unless they commit fraud or act without direction from the beneficiary/holder of the power of direction).

Neither the Beneficiary nor an entity owned by the Beneficiary can serve as Trustee of their own Trust. This is called a “merging of interests” and would invalidate the Trust.

Who Is the Successor Trustee?

The Successor Trustee is listed in the Trust Agreement as the person or entity that would assume title to the property if the initial Trustee dies, quits, goes crazy, refuses to serve or is fired by the Beneficiary.

The Beneficiary can designate (in the Trust Agreement) as many Successor Trustees as he/she desires. Successor Trustees do not have to be notified of this designation until they are appointed by the Beneficiary.

At the time of designation to full primary Trustee status, the Successor Trustee would have to accept the promotion to primary Trustee in writing. Trustees can be hired and fired by the Beneficiary/Holder of the Power of Direction with great ease.

If you do not trust one person to be your Trustee you can appoint a Board of Trustees to serve at your (the beneficiary’s) discretion. You could also require a majority of Trustees to take action upon your direction. Someone who might be more cautious than others could have domestic AND foreign Trustees on their Board of Trustees.

Who Is the Trust Beneficiary?

The Beneficiary is the party to the Trust Agreement that has control over the Trust and tells the Trustee what to do and when to do it. If you’re an investor buying property into a land trust, then you’re the beneficiary!

The authority to tell the Trustee what to do is called the Power of Direction (POD) and is usually held by the Beneficiary, but not always. I will give you examples in future lessons of how the POD can be used as an asset protection device.

backup NOTE: Since the liability from the property held in a Land Trust flows through to the Beneficiary, most real estate investors will designate an LLC or Corporation as the Beneficiary of their Land Trust for additional asset protection.

Contingency Plan A

The Successor (or Contingent) Beneficiary takes over the power to control the Trust and Trustee upon the death (or some other stated event) of the primary Beneficiary. If no Successor Beneficiary is designated, the property held in the Land Trust will be probated upon the death of the Beneficiary.

Since avoidance of probate is one of the reasons to use a Land Trust, it is suggested that a Successor Beneficiary always be named in the Trust Agreement.

Ready…and ACTION!

The Director is in the position of ultimate power within the Trust. Typically the Beneficiary also holds the Power of Direction (POD), but not necessarily. The POD can be assigned by the Beneficiary to someone (or an entity) else on a temporary or permanent basis.

For example, the Beneficiary could assign the POD to a close confidant for 30 days while the Beneficiary went on vacation to Europe. The POD assignment could be for a specific number of years or until a stated event occurred (i.e. until the beneficiary’s first child attained the age of 18). Let your mind wander on this concept…

If so desired a Successor Director can be designated in the Trust Agreement to fulfill the position should the Initial Director be unable to serve. If you want to designate a Director but do not trust one person to fill this position, a Board of Directors can be appointed with two or more people serving on the board. The possibilities are endless!

Now that you know the basics about Land Trusts and who all the players are in the Trust Agreement, you are prepared to move forward with the specifics about the Deed in Trust. In the next lesson, I will discuss the Deed in Trust and how it differs from a basic Warranty Deed or Quit Claim Deed.

- Randy Hughes, aka, Mr. Land Trust