Title Holding (Land) Trust

More than a simple land trust, this is a powerful asset preservation tool . . . meaning, it gives sellers a chance to rescue equity that seems to have disappeared in today’s market.  Jumbo sellers are really feeling the pain.  Another party is brought in to maintain the property until appreciation has resumed and economic conditions are favorable for a traditional sale and transfer of title.

What are all the advantages?

  • Defer 100% of capital gains (and depreciation recapture) until the trust is terminated (up to 20 years)
  • A defensible position against acceleration (due-on-sale)
  • 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
  • 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 asset preservation and estate planning.

(Read about the risks of various seller carry back strategies and how the Title Holding Trust System avoids them)

So, how much does it cost, and

how do we get started?

The land trust is unique in that a property’s legal and equitable titles are vested in the trustee, rather than in the owner of record. The land trust’s beneficiaries remain fully in control of the property and the actions of the trustee. As a result of this beneficiary-directed third-party trusteeship, any property so held is effectively hidden from public view and shielded from legal actions by lawyers and creditors.

When there are multiple (unrelated) beneficiaries in the trust, the property and its title become virtually impervious to tax liens, creditor judgments, lawsuits and charging orders. Even the IRS can’t touch a property in a co-beneficiary land trust.The Trust System includes:

  1. A Land Trust
  2. An Assignment of Beneficiary Interest
  3. A Beneficiary Agreement (a partnership agreement)
  4. An Occupancy Agreement (i.e. a tenancy agreement whereby a co-beneficiary ‘leases’ from the trust, versus holding a title interest in the property)
  5. A Power of Attorney from a non-participating beneficiary to the party handling the management of the property.

There are many issue to negotiate, so you’ll want someone helping you negotiate the terms of the trust for your maximum benefit.  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 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.

Because the property vested in a land trust has not been “sold,” but merely vested in a trust and leased, there is no overt violation of the lender’s due-on-sale (alienation) admonitions (see below for more on the Due-on-Sale).

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.


Read more: Estate Planning Benefits of the Title Holding (Land) Trust


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 Title Holding (Land) Trust 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.

Garn-St. Germain allows lenders to enter into and enforce loan contracts containing a Due-On-Sale clause.  There are a few exceptions to this that the Title Holding (Land) Trust takes advantage of:

  • Granting of lease-hold for less than 3 years that does not involve an option to purchase, and
  • Transfer into an inter vivos trust in which the borrower is and remains a beneficiary.

To be fair, there is debate as to whether Garn-St. Germain is the prevailing legal force, because it expressly allows another governing body to interpret and administer it.  Garn-St-Germain (e)(1):

The Federal Home Loan Bank Board, in consultation with the Comptroller of the Currency and the National Credit Union Administration Board, is authorized to issue rules and regulations and to publish interpretations governing the implementation of this section.

That governing body has made their interpretations in The Code of Federal Regulations, which operates as “force of law” under the Administrative Procedures Act of 1946; therefore, 12 C.F.R. PART 591, Sec. 591.5 (1) (vi), appears to be the statutory law on the matter, as things presently stand.

12 C.F.R. PART 591 basically purports that Title Holding (Land) Trusts may not be water tight when it comes to avoiding the Due-on-Sale clause, but it is also quite ambiguous and contradictory:

“The legal argument available to us is that the C.F.R. version of the inter vivos trust preemption to the DOS clause is unreasonable and clearly ambiguous, whereas Garn-St. Germain is unambiguous.  The fact that the C.F.R. version is self-contradictory and nonsensical in application would seem to present a strong defense in proper use of the Title Holding Trusts.  Such a defense is not available to LLC’s, lease-options, land contracts, wraps, or subject-to’s, so when we use the Title Holding (Land) Trust, we are still ahead of the game when done properly.” – David Butler

Part of ‘done properly’ means using the trust primarily for asset preservation and estate planning . . . as an investment strategy, and not intentionally hiding anything from the banks.

What does all this mumbo jumbo mean?

The Title Holding (Land) Trust is one of the most powerful tools out there, but you absolutely want the right people putting your trust together for you.

Some vendors  seem to be flippant and careless about the grey areas in law that definitely exist, and they are leaving their clients unnecessarily exposed in a multi-party trust.   It absolutely matters who puts your trust together for you, and how.  You deserve the best possible chances of having the trust maintain its validity so it’ll keep protecting you and giving you what you need year after year.

I trust our team of processors and attorneys more than anyone else in the country because they are willing to go the extra mile (and the extra dollar) to make sure they are on top of their game.  They have the highest level of professionalism I have seen in the industry.

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.