- Asset Preservation
- Achieve self–liquidating solutions in lieu of troubled SFR transactions
- Estate Building and Dispostion
- Avoid Probate
- Avoid Ancillary Probate
- Maximize Gift Tax advantages Dispositions
- Privacy Protection at some level, depending on state
Whether you are an investor, or a private homeowner, one of the most elemental rules of successful investing is “Keeping what you have” – particularly in troubled times such as the U.S. economy is facing for possibly another decade or more here in the early 21st century. The THLT, properly created and employed by a team of processors and attorneys who pay careful attention to evolving case law, may be absolutely the best and most efficacious asset preservation strategies for these times. It prevents hundreds of thousands of dollars in equity from being wiped out with one fatal swoop. Equity is put in ‘cryo freeze’ and saved for later when economic conditions have improved. The THLT is a way of preserving the rapidly dwindling net worth of the middle class.
��Unlike broader legal protections sought through asset protection strategies, asset preservation focuses on protecting the economic viability of the investment itself, in terms of maximizing remunerative performance, and the conservancy of the physical plant inherent to that performance – by providing or enhancing the several key factors most critical to that enterprise. This objective makes the planning and implementation of a solid asset preservation strategy the paramount critical component for any real estate investment program.
The essential scope of the asset preservation endeavor embodies – more than anything else – the mission critical estate planning imperative of insuring for adequate operating capital to profitably own, operate, and maintain the underlying asset at its optimal level. An essential element of this objective is maintaining access to attractive capital sources, and maintaining the good credit ratings and debt–to–income ratios necessary to achieve adequate operating capital.
Our THLT system provides a platform that inherently delivers a comprehensive asset preservation functionality that essentially covers all the necessary bases for most property owners.
These asset preservation features encompass all of the more advanced investment techniques taught over the years by the prestigious CCIM Institute (an affiliate of the National Association of Realtors, originally established by the California Association of Realtors in 1954 under the name Certified Property Exchanger [CPE]), and practiced by investors, and the clients of estate planning and wealth preservation attorneys throughout the past half–century – but delivered in a more streamlined, economical, multi–faceted, and user–friendly package that can be used by ALL real property owners.
How the asset preservation imperative is implemented and achieved varies by the type of real estate involved, the owner and investor objectives in the particular situation, the availability of existing financing and/or the amount of dead equity that might be brought to life, and the property’s functionality in its local marketplace.
The core of the effort is the seamless integration of private investor capital in conjunction with sound property management fundamentals that incentivize all beneficiaries of the Trust to provide the resources necessary to preserve the asset.
Achieve self–liquidating solutions in lieu of troubled SFR transactions
The THLT offers property owners, trapped by their existing financing, the opportunity to convert this financing into a self–liquidating investment under the right circumstances . . . by forming an investment opportunity for private money with incentives for investors to take on responsibility for the monthly payment obligations and the care and maintenance of the property during the life of the Trust. This solution can liberate the property owner from the burden of ownership (payments that have become oppressive for them) while still protecting them and preserving the asset for their future benefit.
As early as the 1950’s, astute Realtors� began realizing that many people who owned real estate did not necessarily want to totally divest themselves of real estate ownership, but rather, they were uncomfortable in the circumstances surrounding their current ownership situation. These Realtors� reasoned, in effect – that there was no bad real estate… there was only inappropriate or untimely ownership. The problem was not the property per se, but with the life circumstances of the people who owned it.
Life changes, cash flow issues, financing challenges, and potential tax liabilities are all prominent determinants in the real estate viability equation . . . and today’s economic climate has added a whole new set of problems. Even in the best of times, property owners are faced with challenges presented by too much equity, too little equity, lack of attractive financing solutions, possible deadly tax ramifications, and the specter and uncertainty of relocation decisions.
In most instances, one or more of these factors results in a property owner being trapped in a situation that creates and/or perpetuates a downward spiral in net worth and financial security. This is especially so in the troubled SFR (1–4 units) segment of the marketplace, where, because of circumstances – existing financing is a burden to the property owner, while being attractive to possible investors. This is a classic example of how one man’s trash can be another man’s treasure.
Our THLT is the catalytic converter for turning a sizable portion of this toxic waste into jet fuel – allowing many property owners a manageable game plan for preserving their estates in these troubled times . . . protecting trapped equity, preserving credit ratings, and achieving economic viability for real property assets that are otherwise at risk by utilizing:
- the homeowner’s existing equity;
- existing financing already on the property (when attractive); or,
- a combination of both…
Our THLT can be strategically implemented to forge a mutually acceptable structured estate planning and asset preservation vehicle for property owners, while offering an attractive investment alternative for real estate investors of all stripes – whether looking for a home to live in as a principal residence, or as a viable income opportunity.
At the end of the day, the trust provides the principals with all of the advantages of a “subject– to”, lease–option, installment note; land contract, or wrapped contract – as well as several elemental estate planning, asset preservation, and asset protection benefits built–in . . . without ANY of the disadvantages.
Applications of the Title–Holding [land] Trust in estate planning arrangements are particularly effective.
Easy Integration with Estate Plan – The Title–Holding [land] Trust can easily be integrated into the beneficiary’s(ies’) existing estate plan or other asset protection strategy. The Title–Holding [land] Trust would name the existing living trust or other asset protection entity as the beneficiary of the Title–Holding [land] Trust.
Estate Planning Benefits – The beneficiary can name and provide for one or more successor beneficiary(ies) today without actually transferring legal title of the real estate to them now. The beneficiary retains complete control over, and use of, the property. The successor beneficiary(ies) can easily be changed at any time by completing and executing a simple change of beneficiary form.
Succession of Ownership – The trust agreement may provide for the beneficial interest to vest in another person upon the death of the beneficiary; it may provide for joint tenancy arrangements with rights of survivorship; and/or it may provide for intervening life estates as well as contingent interests and remainders.
The beneficiary generally names one or more successor beneficiary(ies). The successor beneficiaries become the primary beneficiary(ies) upon the death of the current beneficiary. This can be especially useful for providing for one’s children and grandchildren. The successor beneficiaries will have the right to control and use the property immediately after death since the Title–Holding [land] Trust avoids probate.
Avoids Probate – Real estate is generally subject to probate upon the death of the owner, unless the real estate is held in joint tenancy. However, when property is held in a trust, such as a Title–Holding [land] Trust, probate is not necessary to pass title since the Title–Holding [land] Trust Agreement provides for succession of ownership upon the death of the beneficiary.
For example, a woman may create a Title–Holding [land] trust, naming herself as the sole beneficiary. Utilizing a Contingent Successor Beneficiary(ies) addendum to her trust agreement, upon her death, the property will vest in her daughter as her named successor beneficiary. Thus real estate may be passed at death from one person to another without the need for probate. Such a use of the Title–Holding [land] Trust is not subject to attack on the ground that the trust has not been executed in accordance with the requirements of the Statute of Wills.
By appropriate provisions, a grantor of property into such a trust may retain a measure of control over the beneficiaries and the manner in which they deal with the property. By conferring the power of direction upon a person other than the beneficiary, the Settlor may make available to the latter the income and avails of the property, but impose upon the judgment of the donee of the power of direction decisions relating to mortgaging or sale of the property.
Ancillary Probate (Non–Resident Ownership) – Another effective beneficial use of the Title–Holding [land] Trust is to avoid ancillary administration. Upon their death, absentee owners of real estate, who live outside of the state where the real estate is located (i.e. residents of another state) are generally subject to ancillary probate in the state where the property is located. However, ancillary probate can be avoided by holding the real estate in a Title–Holding [land] Trust because the interest in such a trust is considered to be personal property rather not real property.
For example, the estate of a California owner of Virginia property held in a Title–Holding [land] Trust need not be subject to ancillary administration in Virginia, the jurisdiction where the property is located. The beneficial interest is personal property and is to be probated in the state of the beneficiary’s domicile in the same manner as other personal property. The trustee will recognize this devolution of interest and will deal with it in the same manner as with stocks, bonds, securities, and other personal property interest. In addition, real property can be held in a Title–Holding [land] Trust for the benefit of another trust domiciled in another state. The Title–Holding [land] Trust works in conjunction with an existing trust and estate plan. This also assists out–of–state Trustees that are not permitted to own real estate in another state.
Testamentary Dispositions – Use of the Title–Holding [land] trust for testamentary purposes is preferable to a joint tenancy arrangement since it need not confer an immediate interest in the survivor or remainderman (Contingent Beneficiary). An appropriately drawn trust agreement can exclude the designated recipient until death or the occurrence of the event which accelerates the remainder interest from participating in existing rights to the property, its disposition, or its management.
Under such an arrangement, the beneficiary, despite the designation of a remainderman can sell or mortgage the property without concurrence of the remainderman. It has the additional advantage of precluding a party from breaking the arrangement by transferring out, a possibility always present in a joint tenancy arrangement. The anticipation of such problems can avoid controversy and litigation.
Where used for testamentary purposes, the trust agreement and supporting documents should be carefully drafted. They should expressly deal with the beneficial interest and not purport to deal with the real estate.
If a remainder or contingent interest is provided for, the right of such a secondary beneficiary to participate in the exercise of the power of direction should be avoided, and the trust agreement should explicitly provide for the distribution of proceeds of financing and of sale to the immediate beneficiary or the retention of the proceeds, or a portion of them, for the use of the contingent beneficiary (remainderman).
By properly designating a remainderman, the real estate held in such a trust need not be inventoried in a probate estate. The beneficial interest devolves directly to the remainderman by virtue of the provisions of the trust agreement and is not part of the probate estate. It may nevertheless be a testamentary disposition for estate tax purpose includable in a tax return and subject to estate and inheritance taxes.
Where however, the beneficial interest is not the subject matter of an appropriate testamentary disposition it is part of the probate estate and recoverable by the executor of the estate. Being personal property, it was first subject to sale to pay pecuniary legatees before resorting to real estate.
Testamentary applications of land trusts should be carefully documented. Indefinite classes of beneficiaries or remaindermen should always be avoided since the trustee will not make a determination of the membership of the class. Nor will the trustee determine who has the right to assign the beneficial interest or direct the activities of the trustee.
This should always be spelled out clearly and concisely, using specific designations, so that all times the trustee can, without difficulty, determine the identity of the beneficiaries and the authority of the person or persons charged with the responsibility of exercising the power of direction. Any failure to completely identify the person authorized to exercise these rights will inevitably result in litigation.
Where no one is designated to succeed to the beneficial interest or the power of direction upon the death of the designated beneficiary, the beneficial interest is probated as any other asset. Since it is personal property, the interest goes to the personal representative rather than to the heirs, and it is to be dealt with by the personal representative in connection with distribution of the estate and its application to the payment of creditors as any other personal property.
Prior to the recent amendments to the Probate Act, the rents of the property, as an accretion of personal property, went to the personal representative and not to the heirs. It is believed that rents accruing under property held in a Title–Holding [land] Trust would go to the personal representative and not be treated in the manner required by the Probate Act, as are rents realized from real estate the title which was owned by the decedent.
Where the property is specifically devised in the will and the executor is directed to convey it to the devisee upon the testator’s death, it has been held that the devisee is entitled to all of the rents from the property immediately and that this right is not deferred until after the administration of the estate. Ordinarily, the power of direction incidental to a beneficial interest in a Title–Holding [land] Trust is exercisable by the personal representative of a deceased beneficiary unless the trust agreement otherwise provides.
However, where the decedent has assigned fractional interests prior to his death, his personal representative could not act solely to direct a sale even though the decedent during his lifetime, held the sole power of direction. Under such circumstances, the personal representative is required to obtain the concurrence of the assignees of the fractional beneficial interests.
Ease of Making a Gift – The federal case, Russell v. United States, 260 F.Supp. 493 (N.D.ro. 1966), illustrates the manner in which a gift can be created by an assignment of a beneficial interest in a Title–Holding [land] Trust. Consequently, property held in a Title–Holding [land] Trust can be easily gifted to children, grandchildren or other parties – simply by completing and executing an assignment of all, or a portion of the beneficial interest in the Trust. No recorded deed is required, making partial transfers exceptionally easy.
Currently the IRS offers taxpayers a golden opportunity to give substantial and meaningful gifts up to $13,000 annually (or $26,000 if you give jointly with your spouse) in 2009 to as many people as desired in cash, investments, and/or property without triggering mandatory filing of IRS Gift Tax Form 706 and possible payment of gift taxes. This limit may be adjusted for inflation in future years. If you mix in a bit of creativity, you have gifts that can potentially benefit you as well as the recipients.
Present donative intent, delivery, irrevocable parting with dominion and control – and other elements of the law of gifts – must be present. It would appear that an absolute assignment of the beneficial interest in the land trust, or a portion of it, without the reservation of the power of direction, with a present donative intent, and without any obligation to the assignor to account for rents or to follow the assignor’s directions with respect to the management or operation of the property will, when delivered to the assignee – constitute an effective and executed gift.
Gifts To Minors – Also, the Uniform Transfers to Minors Act (UTMA) expressly provides that a beneficial interest in a Title–Holding [land] Trust can be assigned to or designated to the custodian of a minor. All states, except South Carolina and Vermont, have adopted the UTMA. Those two states use the Uniform Gifts to Minors Act (UGMA). UGMA and UTMA provisions are similar.
Privacy of Ownership
There are many situations where it is desirable that ownership of property not be disclosed in the public records. The privacy feature, and the benefits attending its use; accounts for a great deal the popularity of the Title–Holding [land] Trust for many investors… at least in those areas where the feature is still of some practical effect. Ownership of real estate in a Title–Holding [land] Trust can insure this privacy and the courts have consistently held that this use of the Title–Holding [land] Trust as appropriate in most states.