Real Estate Articles

Land Trusts | By: Mike Jacka

Do you use Land Trusts, or do you put your investment properties in your own name for all the predators and creditors to find?  I hope not!

In the early 90's we had a rental property in Minneapolis, MN.  It was the middle of January, and we had an ice/rain storm.  Someone that was just visiting one of our tenants walked out into the rain, and there was about 1/2 - 1 inch of ice on the sidewalk, and they fell backwards.  That person cracked their head open and had to be rushed to the hospital.

We thought we had our assets covered.  We had a landlords insurance policy on the house.  Even if that didn't cover it, we were protected because the rental property was actually owned by the corporation, not us personally.  Boy, were we in for a surprise when we found out we were being sued because the insurance only covered so much, they were coming after us for the rest. 

To make a long story short, they settled with the insurance company after all.  But their attorney told us, if we had more rental properties, they would have come after us for everything, because we were negligent.    Negligent???  It was still raining when this happened, were we supposed to be at the rental property chopping ice, while it was still raining?  I guess so...

That was back in our beginning days, and we only had two rentals at the time.  I was renting myself, and my partners house was mortgaged to the hilt, so the plaintiffs attorney found very little to go after.  I guess that was a good thing at the time.  But what about later down the road, when we had a bunch of properties, what was going to stop something like this from happening again???

It was shortly after that, that we herd about Land Trusts.  We went to Atlanta to see Louis Brown do a Seminar about Land Trusts and Asset Protection.  That was back in 1994, ever sinse then, everything I own is titled to a Land Trust.

Now a Land Trust does not give you complete Liability Protection, you still need corporations, LLC's, LP's or any other form of liability protection.  But a Land Trust is the first step of protection.  I am not going to get into asset protection and liability protection through corporations, LLC's or LP's at this time.

A Land Trust keeps your name or your corporations name off public records.  It gives you a certain level of privacy.  If a sharp attorney finds out that you are the beneficiary of the land trust, they can still come after you or your corporation.  But first the attorney would have to find that out and that is not easy to do.  Most importantly though, most attorneys will not even bother to look far enough to even figure out that your property is in a Land Trust, and even if they did, they would not do anything about it, unless their client gave them a big fat retainer before they did more research into the ownership of the property. 

Let me give you an example of what I am talking about:

Let's say someone wants to sue you.  They contact an attorney.  The attorney does a name and asset search on you, but they don't find anything in your name.  But they do discover that the property that their client told them that you own is titled to a Land Trust.  The attorney will then go to their client and tell them that they think they have a case, but it is going to be a little more difficult to get to you because of the land trusts.  If they will give them a (let's Say) $5,000 retainer, they will get started on it right away, but there is no guaranty they will win or ever collect any moneys from you.

You see, once the attorney sees that this is going to be a little more difficult of a case, they usually will not work on a contingent fee bases any more, they want cash, upfront.  This usually deters most potential law suits before they ever happen.

I am now a Trustee for several clients.  I could tell you many stories of how some tenant, or any other person thought they hit the lottery with one of my clients, only to end up walking away with a frown on their faces once they found out how expensive it was going to be just to find out what you really own.

And lets say that you came across a sharp attorney that knew how to get through the Land trust and get to you.  And let's say they were successful and won a judgment.  That judgment would not go on you personally, it would go against the Land Trust  The only thing the Land Trust owns is the one property.  It will not affect all your other properties, because they are all owned in their own Land Trusts.

And let's say you got into trouble with another business, a car accident or anything else that has nothing to do with your investment business, and you did get a judgment against you personally.  If you owned all your rental property in your own name, you would have to pay off that judgment the next time you sold a house.  But if you bought and sold all your investment properties through Land Trusts, then you would be able to conduct normal real estate business and never have to pay off that judgment until you felt like dealing with it.

There are sooo many benefits to using Land Trusts, and I don't know of any negatives related to using them.  There is very minimal paper work involved; that takes maybe 5 extra minutes to prepare.  There are no separate tax reporting issues to deal with because the IRS considers a Land Trust to be a Flow-Through-Entity, which means that you report the property on your own (or your corporations) tax report.

To your success,
Mike Jacka