Land Trust Stronger Than LLC?
Over the past few years there has been much talk about land trusts and LLC’s. Most say an LLC is the strongest entity for asset protection and that land trusts offer little or no protection against creditors or lawsuits whatsoever. I beg to differ.
Here is a step-by-step example of how I use two land trusts for privacy and protection here in Southern California. Tell me what you think.
1.I prepare then record a junior trust deed in an amount equal to the fair market value of my property, whereby I am the trustor, the pre-printed title company is the trustee and Land Trust #1 is the beneficiary. This step blocks all of your equity, leaving the property seemingly over encumbered.
2. I then prepare a grant deed including a statement that says (” The value of the property in this conveyance, exclusive of liens and encumbrances is $100 or less, and there is no additional consideration received by the grantor, R & T 11911,"
from myself directly to Land Trust#2. This step not only avoids the Due-On-Sale clause in any senior lien, it also avoids any possible property tax reassessment as well as the documentary transfer tax.
Notice in the above example there is no mention of any trustee of either Land Trust. By not disclosing their identities in the public records, it makes it impossible to compel them to disclose the identity of who actually owns the property.
With an LLC it is possible to determine via the secretary of state who holds interest in it, thereby opening the door to a charging order.
Not only does my example protect all of the equity, in the event that true ownership is somehow discovered, it gives the beneficiary of Land Trust #1 the option to foreclose its lien, wiping out any and all judgment creditors.
Why do investors disclose the identity of the “Trustee of the Land Trust” when there is no statute, precedent, regulation or case law to my knowledge that requires it. Maybe I’m missing something here. You be the judge. All comments are welcome.
For all you newbies, a land trust is the same as a title holding trust.
Darryl-California
Darryl,
This sound like a great idea. However, I do have a couple questions (concerns?).
When you create that first land trust to shield the property and your identity, doesn't the deed have to be recorded? Assuming it does, wouldn't you have to name your trustee in order to have legally vested the property in it, versus in the trust? If the deed is vested in the trust (i.e., naming the trust last) rather than a named trustee, the trust itself would no longer be a land trust, but would most likely be deemed dry (grantor) trust vs. a nominee title-holding land trust.
Then when the second land trust is created, wouldn't you again have to reflect its trustee on the transfer document for exactly the same reason (in order to vest the property in the trustee versus in the trust, or in your own name)?
Remember that the primary benefit of a land trust is that it vests 100% of the legal and equitable title to the property with the trustee, while retaining anonymity and all management and benefits (and responsibilities) for the beneficiaries.
Regarding the question of which is better (LLC or LT), I get that all the time. But the fact is that they are two different things, which do two different things...the land trust can protect the property from judgment creditors, while the LLC merely allows for separation of your other assets from the property (or anything else in the LLC) . Anyone suing can get to the property, but not to your other assets. Whereas, with a co-beneficiary land trust, they can get a judgment against you, but not against the property.
In other words, the fact is that neither device will stop you from being sued personally (in personam), but the land trust will stop any suit in rem (against the property) re. liens, partition actions or charging orders on the trust property.
I think I like the 2nd mortgage idea for shielding equity, but I do think I might be a teensy bit afraid of a claim of lender fraud by an irate creditor were I ever to be sued and the system challenged in court, and the false loan be discovered. I would be found guilty of deceptively depriving a creditor of its pound of flesh. And I honestly think it ‘would’ be discovered under the form you refer to since the land trust itself would not withstand the scrutiny of the courts relative to what a bona Illinois Land Trust is supposed to look like.
But I do see some edges that might easily be polished. Good post.
Just some thoughts.
Bill Gatten
N o. A trustor is either a borrower or obligor. I have never had a problem recording a document where the trustee was not named.
Darryl,
Thank you for the kind words. A lot of water has gone under the bridge in those ten years.
I do like your idea Darryl...but I need some time to cogitate on it I guess. Although pleeeease do remember that title is vested in the first name on the deed. XX as trustee for the YY trust (the other way around the deed would be in the name of the trust and be dry or failed)
From my perspective, if the trustee is not named on the deed then the title can not be vested in him/her/it. The vesting of title is exactly as listed on the transfer document. And remember that a land trust is not a land trust, unless the deed is properly recorded and the following is extant in your transaction:
Trustee named as owner of the property
Beneficiary not the Trustee
Trustee cannot collect and disburse funds
Trustee must be paid a fee commensurate win industry standards
No paid property manger allowed
No ‘stepping’ of trusts to avoid income taxation
There must be no loopholes allowing for characterization as a business arrangement (business trust, corporation, partnership, etc.) ...land trusts are specifically for holding an asset for its protection, and or securing indebtedness.
Note too that the Probate code you are referencing relates to trustee-directed inter vivos trusts only, and presume that the deed in trust is always in the name of the trust (not the trustee) and that the trustee is fully in charge (w/the power of direction).
The California authority you might want to look more deeply into is ‘The Estate of Tutules (14 Cal.App.2d 78, *80)’ and ‘Walgren v. Dolan 226 Cal.App.3d 572; 276 www.Cal.Rptr. 554 [Dec 1990]).’ The trustee needs to be named on title and retain the function of actively dealing with matters of the property, in order to avoid characterization as a passive or dry trust or failed land trust.
Best of good luck,
Bill Gatten