Title Holding (Land) Trust - Seller Financing on Steroids!
More than a simple land trust, this asset preservation technique can be used as a transfer system. But why should you use it? What are the advantages?
- Defer 100% of capital gains (and depreciation recapture) until the trust is terminated (up to 20 years)
- Prevent a lender from exercising its “due on sale” clause
- Allows for loan payment take-overs without violating the due-on-sale clause (for residential properties only)
- Eliminate exposure to foreclosure
- Be able to evict a defaulting “resident beneficiary” according to tenant law
- Reduces the risk of taking a small down payment, (or providing a private loan where the LTV is higher than you’re comfortable with)
- Reduce management headaches and negative cash flow by having a ‘tenant’ with a pride-of-ownership mentality
- Before you rent or lease out your property for a negative cash flow, consider using the trust
- Get privacy, safety and legal protection
- Protection from litigation, creditor judgments, tax liens and probate issues
- It’s quick and easy
- Preserve property tax basis (in CA as of this writing)
- Acquire a property with a low down payment and no bank qualifying
- Freezes the seller’s equity until some point in the future when housing has begun to appreciate again (the seller will get their equity at some point in the future)
- Sell without short sale or foreclosure (if you have a decent loan, you’re not upside down and you’re not too far behind on payments)
The Title-Holding Land Trust (often referred to as the “Illinois Land Trust”) is accepted throughout most of the United States. This revocable, inter-vivos, beneficiary-directed trust may arguably be the best possible means of real property asset protection and of transferring real estate.
It’s like taking seller financing strategies and putting them on steroids. (Read about the risks of various seller carry back strategies and how the Title Holding Trust System avoids them). Below you can listen to a satisfied past client:
- A Land Trust
- An Assignment of Beneficiary Interest
- A Beneficiary Agreement (a partnership agreement)
- An Occupancy Agreement (i.e. a tenancy agreement whereby a co-beneficiary ‘leases’ from the trust, versus holding a title interest in the property)
- A Power of Attorney from a non-participating beneficiary to the party handling the management of the property.
So, how much does it cost, and how do we get started?
You’ll want someone helping you negotiate the terms of the trust for your maximum benefit!
[If you have a real estate professional that you want to present this idea to, you may print out this document to give to them]
When combined, these documents effectively afford a would-be buyer all the benefits of home ownership, including income tax deductions in most instances. It protects all beneficiaries from any negative personal or legal action by or against the other parties.
A unique feature is that it converts the settlor’s ownership of realty (real estate) to ownership of personalty (i.e. ownership of the trust, rather than of the property held by it). Therefore, since personalty is not deemed subject to partition by judgment creditors, unrelated parties holding property in this manner needn’t fear the property ever becoming the subject of: a creditor judgment, lien or charging order. Neither would the property be the subject of a tax lien, any party’s bankruptcy, marital dissolution or probate . . . a most comforting feeling when carrying paper for someone else.
The Trust Transfer System gives a seller who is willing to keep his existing financing in place a quick, easy and safe method of disposing of the property, while simultaneously providing a buyer with virtually 100% of the benefits of ownership, including full mortgage interest (in most instances) and property tax deductions.
And without qualifying for bank financing! The down payment and qualification parameters are determined by the seller.
Because the property vested in a land trust has not been “sold,” but merely vested in a trust and leased to a successor beneficiary of the same trust, there is no overt violation of the lender’s due-on-sale (alienation) admonitions.
The trust system provides the seller an excellent means of avoiding immediate capital gains taxation, risky seller carry back scenarios, and the hassle of becoming a landlord with negative cash flow. Also, a state’s withholding tax can be avoided if the trustee is a corporation (at least in California).
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Sign up for ‘Seller Financing on Steroids.‘ It will answer many of your questions before you write or call. It’s a great way to get some of my expertise without paying for my time!
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More on the Due-On-Sale Clause:
The FDIRA (Federal Depository Institutions Regulation Act; or “Garn-St. Germain Law” of 1982; 12 USC 1701-j-3) limits the justification for foreclosure relative to a lender’s due-on-sale clause (over an “unauthorized title transfer”) under certain circumstances, one of which is the vesting of a mortgaged property into an inter vivos trust (such as a land trust).
As a result of that federal law, mortgagors (borrowers/property owners) cannot be prohibited from placing their real estate into a revocable, living land trust. Neither can they, following establishment of the trust, be prevented from leasing the property to whomever they might choose.
And, when a buyer (lessee/tenant) in such a trust property is also given a remainder interest (becomes a successor beneficiary or remainder agent) in the same trust, that party becomes fully entitled (under IRC 163(h)4(D)) to virtually the same incidents and benefits of home ownership that he/she would have had they financed the purchase of the property in any other manner.
It is for these reasons and more that the Equity Holding Trust Transfer System can be a superior and logical way to convey the benefits of real estate ownership when a seller will leave the current underlying financing in place to assist the buyer.
What about the Trustee?
While almost anyone can be named the “trustee” of a land trust, there are significant benefits to using a Corporate Trustee for your land trust, including a much higher degree of safety, security, reliability, trustworthiness and credibility.This is especially so when more than one beneficiary is involved. In such circumstances, there are severe draw-backs to using any type of trustee entity other than a third-party, non-profit mutual benefit, corporate trustee.
Appointing one’s self as trustee (or a closely related third-party not at “arms-length” to all the beneficiaries) inherently presents potential conflict of interest issues.Additionally, if a trustee is also a beneficiary, a merger of title is created (Doctrine of Merger), invalidating the trust if challenged in court as being a bona fide land trust. It is also probable that under threat of legal action, the Trustee would likely fail to honor the privacy and anonymity of co-beneficiaries.
An individual trustee would most likely not have the resources to provide a completely separate bonded collection and bill-paying service for the beneficiaries, or be able to provide such services for free. At the same time, the attempt to charge a fee would not be seen as adequate unless the proposed trustee were bonded. On the other hand, an individual trustee’s failure to charge a fee would not support the land trust’s validity in court.
The courts would most probably not acknowledge an individual as a standard trustee, charging fees “commensurate with industry standards.” Therefore, the integrity and structure of the land trust would be severely impaired.
Additionally, an individual trustee’s death would embroil the property in his/her probate or other personal legal actions.
Using a friend or relative as trustee presents much of the same risks and issues found with appointing one’s self as trustee - particularly if the individual is not at “arms-length” with any of the co-beneficiaries. Such a trustee could also have another agenda contrary to the best interest of the co-beneficiaries, or other legal issues personal to them that may pose problems.
Using one’s own attorney would perhaps not pose a problem as long as no other unrelated beneficiaries were involved who would have separate and independent interests and financial objectives within the arrangement.
One’s own attorney would not necessarily create a mutually trusted, unbiased third-party “fiduciary” in the trust relationship.
Though malpractice insurance may help protect against an attorney’s errors and omissions, the attorney would most likely not be bonded as a trustee for land trusts. Thus, the attempt to charge a trustee fee would not be seen as adequate, unless the attorney or law firm was a bonded entity.
Using one’s own corporation would present many of the same problems as using one’s self, or another individual as trustee. Some courts have held that this arrangement would create a merger of title, thus likely invalidating the land trust model.
Using an outside corporation as trustee. In virtually all states, any corporation used as a holdiing company must be either:
- One’s own corporation,
- A chartered depository trust institution (Bank & Trust, Title & Trust, etc.) or,
- A non-profit, charitable corporation established solely for the purpose of holding titles to real estate in trust for the benefit of its members.
The Third Party Non-Profit Corporation
Equity Holding Corporation is a professional non-profit entity specifically engaged in the holding of titles in land trusts, fully staffed by full-time knowledgeable professionals, as an unbiased third-party title holder. A reasonable trustee fee, which is well in line with industry standards, is charged enabling the creation and funding of a third-party collection and disbursement entity providing a free bill paying service.
The Corporation cannot die, thus avoiding probate issues. It is professionally administered and well informed, providing adherence to laws, rules and regulations relative to reporting while maintaining consistent good standing with the State.
It is bonded as a trustee for the title holding, beneficiary directed, third party trustee-nominee title-holding land trust and functions as an unbiased and unassociated third-party title holder.
It is recognized as a bona fide holding institution by any court that might challenge the integrity and structure of the land trust.
