Forming A Land Trust
Land Trusts Equal Tax Breaks: Conservation, Farming, Non-Profits All Benefit
Land Trusts Equal Tax Breaks: Conservation, Farming, Non-Profits All Benefit - You can do a lot of things with a land trust to avoid the tax man and still help those who may be less fortunate within society:
- You can set up a non-profit center on the land. If you uncomfortable because you are unsure of what you are doing you can work with seasoned professionals like a Shriner's Hospital if they are looking for a spot to begin providing their high quality healthcare. They are always looking for good partners to work with if the area with which the trust exists is large enough to begin a project like that. If not Shriner's there is always a need for a local Boys amp; Girls Club in every town or county in the nation no matter the size. You as the taxpayer can then take full advantage of your 501 (c 3) privileges.
- With the green, eco-craze going on in the United States most people are using their land trusts to of course conserve some beautiful landmark that everybody must love. The Wall Street Journal calls a land conservation project that is going on in Loretto, Virginia right now a tax break with a beautiful view. Of course this sort of deal can be found almost anywhere in the country where there is a lot of open space. Conservation programs can really take off in a real estate market where land is so cheap. This is done through an easement and limits the ability for people to develop The tax break typically comes with the difference between the value of the land pre-easement versus post easement.
- Organizations like the Land Trust Alliance will help you set up grazing land for your farm animals in a place like Wyoming for example. The trouble with this type of program is that it can ruffle the feathers of some activist groups like the Sierra Club who have at times had quite a few anti-grazing members on their national board. As of 2007 landowners can deduct a donation that fifty percent of their total gross income as noted by the WSJ.
- Sometimes there can be disputes over land trusts with the local bureaucracies and those who left the land in good faith that it would be used for the purpose that it was meant for. As a matter of personal experience I watched a dispute between our city council and the family of a gentleman who had passed away and wanted some land used for a saddle club. The saddle club had already been there for years, but with the death of the gentleman there was incongruity in who exactly owned the land. We had people on the city council having to state that they didn't hate horses because many of them would become displaced if the city took over the land. The law can be more generous to career ranchers or people who own land for horses as the percentage of deductible income can increase sometimes by 17 percent with each passing year.
- Several states such as Florida have set up a tax break to make sure local farmers don't go completely extinct. What it deals with is a corporate subsidy that allow people who set up farm operations on a land trust Assessors tend to take it easy on a tree farmer or a citrus producers so when assessing the income that the land can make they make, it is assured that the owner gets the subsidy. The Miami Herald Tribune reports that millions could be lost to local governments in regards to the agreement.
Establishing Land Trusts: 10 Things You Need to Know
One of our associates, a mortgage underwriter for 20+ years, says “I’ve seen investment vehicles come and go. Some I say "good riddance!" to; others could get us out of this mortgage mess. One of the more beneficial investment solutions is the real estate land trust.”
This is a revocable living trust agreement used to hold title to real estate for privacy and anonymity. More recently, it is being used to avoid the long, drawn-out probate process and to pass on valuable real estate to heirs before the courts drain the assets of all assets! So, as an estate planning or asset protection tool, land trusts are feasible, economical and darn useful. Ten things you should know about establishing a land trust and other reasons to consider them in your real estate investing plans are:
Establishing a Land Trust:
- You'll want to use a land trust anytime you acquire property, whether you purchase it or inherit it. A land trust is primarily a privacy instrument and identity protector. Each property should have it's own Land Trust.
- Who should prepare your land trust? You can pay an attorney or title company big bucks to do it for you or you can prepare it yourself. You can purchase a fill-in form online or at most big box office supply or stationery stores. You can even create your own as long as it contains: the address of the property, name and address of the Trustee, name of the Beneficiary(ies), Tax ID number of the beneficial interest, legal description of the property (take the legal description from the deed), and a notary's seal.
- Who is the Beneficiary of the land trust? You can make yourself or another entity you created and control 100% Beneficiary. Yes, you are allowed to earn profits from the sale or rental of real estate in your trust. Or are you looking for an easy and efficient way to pass real estate on to your heirs, without the delay and complications of probate? Real estate held in a land trust does not have to be probated. Technically, what is being transferred is a 'beneficial interest' in the trust, which is considered personal property, not real property.
- Determine who will be your Trustee. Choose wisely. This person actually owns the trust, though they may have no control over it or its holdings. An attorney, trusted friend or family member, or a title company can serve as your Trustee.
- Prepare your Land Trust Agreement according to the provisions in #2. DO NOT RECORD the Trust Agreement. You are only placing a beneficial interest to a property in the land trust. What you will record is the deed that conveys title of the property to the trust.
Benefits of a Land Trust:
- Privacy/ID Protection. In the public records, the trust itself, i.e., "The 1762 E. Pickle Place Trust", will show as the owner of record. The trust agreement naming you as the beneficiary is not a public record. This will greatly lessen your targetability for lawsuits.
- If there are multiple owners/beneficiaries of a trust and they want to enter into an agreement to lease some land to a third party, but the beneficiaries are holidaying all over the world, how will you get all of them to sign the lease agreement. Fortunately, you won't have to; the Trustee is able to sign for all beneficiaries according to the trust document's stipulations.
- Using a land trust instead of a lease option. Once a great way to flip properties, many states have determined that a lease option may give a tenant a vested interest in the property. A friend of mine learned this lesson the hard way when his lease option tenant fell 6 months behind in payments. The subject property was in California and under the lease option contract, my friend had to institute foreclosure proceedings instead of a simpler eviction procedure. After a year in court, the tenant walked away with no rent payments for a year AND $50,000 in cash because the property had appreciated so much. Fortunately, my friend was able to still cash out considerable equity when he sold, something an investor would be hard pressed to accomplish in today's market. Still, if he had had the tenant sign a straight lease agreement to rent the property and an option for the beneficial interest in the land trust (like I told him to!), my friend would have been $50,000 richer!
- Acquiring property 'subject-to': The land trust is one way to not trigger the due-on-sale clause embedded in the loan documents. This is because you are allowed to place a property in trust after it has been financed. Because you are only recording a change to the title, essentially by a quit claim deed, the lender has no right to question the transfer. Where investors trip up on the due-on-sale clause trigger is by trying to change the beneficiary on the insurance policy. It's easier to take a second insurance policy in the name of the trust's beneficial interest holder, leaving the lender off this policy.
What a Land Trust can't do:
- The Land Trust in and of itself is not a liability protection plan. In fact, the beneficiary has no protection at all against slip and fall lawsuits, legitimate collection actions, etc. Though these actions do not attach to you personally (like IRS liens), they do attach to the property. Hence you may want to consider a personal property trust to act as beneficiary of your land trust. This is where you want to really do your research into multiple levels of asset protection or consult with an asset protection attorney.
One final thing you should know about land trusts: big conventional lenders just don't like them. In my 20-plus years as a mortgage underwriter with most of the major lenders, I never saw a purchase or refinance loan get funded unless that property was dropped out of the trust by transfer of deed to a "real" person (who do you think they run the credit reports on???). They may assist you in putting the property back into trust and prepare the documents for recording; however, they will insist on having a copy of the trust agreement in their files - hence, blowing the whole objective of the land trust: privacy.
Until large lenders' feet are held to the fire in compliance with Garn-St Germain Depository Institutions Act of 1982, 12 U.S.C. Code 1701(j) regarding the due-on-sale clause, small local banks are more amenable to funding properties in trust.
For more information on land trusts, read anything written by real estate attorney and investor, William Bronchick, check the HUD and FHA websites, or go to www.efanniemae.com and check out their free webinars.
NOTE: I am not a real estate attorney. I've just seen a lot of trust documents in my career and have some knowledge and insight into how lenders view the many investment vehicles that are promoted. I hope this information helps to clarify some things for you or leads you to research further. Good luck!