Real Estate For Fun and Profit

What is a Land Trust?

A Land Trust is an instrument used to separate ownership of property into two parts – control and benefits. There are generally three parties (sometimes 4 – which I will talk about later) which are described by the Trust – the Grantor, the Trustee and the Beneficiary.

Grantor

The Grantor is the party that transferred the property into the Trust. The transfer can be at the time of purchase or at anytime during the life of the ownership. When the Grantor deeds the property to the Trust, they no longer have any control nor do they derive any benefit from the property – these aspects of ownership pass to the Trustee and Beneficiary respectively.

Trustee

The Trustee controls the assets of the Trust. Usually, the Trustee is given this control with severe restrictions on when they can exercise this control. Specifically, the Trustee is usually given the ability to deed the property from the Trust to another entity – but they are only allowed to sign such a deed with written instruction from the Beneficiary. To do so without such instruction is embezzlement and fraud. The Trustee can be either a person or a business entity (corporation, LLC, etc.) and should be deemed trustworthy by the Beneficiary.

The Trustee serves at the whim of the Beneficiary. If the Beneficiary wants a different person or entity to fill this role, they can ‘fire’ the current Trustee and install a new one. The method to do this is described as part of the Trust document.

Likewise, the Trustee could resign. Again, this procedure should be part of the Trust document.

Beneficiary

The Beneficiary derives all of the benefit from the assets of the Trust. This means that any rents collected or proceeds from the sale of the assets will ultimately be directed to the Beneficiary. The Beneficiary can be made up of any set of persons and corporate entities – in any percentage of ownership (i.e. Bob Smith could have 25% beneficial interest and Smith and Sons, LLC could have the other 75%).

The Beneficiary can also be changed during the life of the Trust. To continue the example above, Bob Smith could sell his ‘beneficial interest’ in the Trust to Sally Brown. This is considered to be the sale of ‘personal property’ rather than ‘real property’ because the property continues to be owned by the Trust and what is transferred is only an ‘interest’. Again, the method of documenting the transfer of beneficial interest should be described in the Trust document.

Depending on the laws in your jurisdiction, the change of Beneficiary may still be a taxable event (i.e. transfer taxes or excise taxes). However, the paying of this tax does not have to reveal the identity of the Beneficiary.

Director

The Director is the 4th role that is sometimes used with a Land Trust. When used, the Director is responsible for directing the Trustee – and often the Trustee is to listen only to the Director and not the Beneficiary. This is useful when the Beneficiary is a collection of persons or entities and the Director is assigned to be the sole voice for them all. Another use would be if you want to give the benefit of a property to family members but you want to stay in control.

How Are Trusts Created?

A Trust is created in the same way that a contract is created. A document is created that describes the Trust and the role of each party in the Trust. The Trust document does not need to be filed with the government nor does it need to register with the IRS.

The Trust can be named in any way that the creator of the Trust wants. For example, a Trust could be called ‘Smith Family Trust’ or ‘123 Main St Trust’.

Why We Use Land Trusts

Trusts provide anonymity and continuity.

The anonymity is gained because of how counties record the ownership of property. When property is owned by the Trust, the county records show the ownership listed as the name of the Trust. Sometimes the name of the Trustee at the time of transfer is also listed as part of the ownership record.

We never want the Beneficiary listed in the county record, so we don’t file the Trust documents with the county. They should not demand them, but if we give them, they will record them. Remember that anything recorded is available to the public.

Additionally, our Trust document directs the Trustee to never reveal the identity of the Beneficiary without a court order.

The continuity is also a result of the county’s method of recording ownership. Since the property is owned by the Trust, the Trustee and Beneficiary can be changed without going back to change the listing in the public record. This can be used to mask the transfer of property from one Beneficiary to another.

How We Use Land Trusts

We use the rule of 1 property per Trust. This makes it harder to figure out how many properties are owned by the Beneficiary.

For example, let’s say that Tulsa House Buyers, LLC acquires 123 Main St. When we do this, we will take title in a new Trust called ‘123 Main St Tulsa Trust’. We will assign the Trustee role to either an attorney or to a corporate Trustee (some banks do this for a fee). The Beneficiary will be Tulsa House Buyers, LLC.

Whenever anybody in the public wants to find the owner of 123 Main St., they will look in the county records and find the name of the Trust and the mailing address for the Trust. This Trust will only own that one property. There is no easy way for the public to determine that Tulsa House Buyers owns it, or how many other properties are owned by Tulsa House Buyers.