Use Land Trusts to Protect Your Assets

 

 

By Charles P. Castellon, Esq.  (c) 2017 All rights reserved.

If you own real estate assets, you should know about asset protection strategies.  Real estate investors have long used land trusts in Florida to hold title to their properties.  There are many reasons to use land trusts, but this article will focus on the asset protection benefits.  Before discussing this benefit, it’s helpful to review how land trusts work.

A land trust is a vehicle for holding title to real property.  Though property in any state may be owned through a land trust, Florida is one of several states with statutes governing land trusts.  Instead of an individual or corporate entity being the owner, title is held by the trustee of the land trust.  The trustee is effectively the representative of the party with full legal control of the property—the beneficiary.

The beneficiary’s legal interest is considered personal, rather than real property.  What the beneficiary owns is a “beneficial interest” in a trust, not the real property itself.  What the trustee owns, under complete direction and control of the beneficiary, is legal title to the real estate held by the trust.   Trusts of different varieties have been part of our legal system for centuries.

Trusts serve different purposes and may be revocable or irrevocable.  This means that the party transferring title of an asset into a trust may eliminate the trust and take it back (revocable) or give up control of the asset permanently (irrevocable).  Florida land trusts are revocable, which is large part of why the beneficiary is always in the driver’s seat.

Among the benefits to investors from using land trusts are asset protection advantages.  The reason investors should be concerned with asset protection is there are many lawsuits and lawyers in Florida and nationwide.  There is no shortage of reasons why someone may be sued.  The reasons include, but are not limited to, contract or business disputes, personal injury accidents and financial misfortune leading to debt collection.

In many cases, the considerations leading a potential plaintiff to file suit include as assessment of whether the target of that suit has assets to go after.  We’ve all heard of “deep pockets” that are easy to pursue, such as insurance policy money or multinational corporations.

Whenever there isn’t an obvious source of assets, there needs to be a cost-benefit analysis of the likelihood of collecting damages should the plaintiff win the lawsuit.  Money judgments signed by a judge can look pretty framed on a wall, but unless there’s money to take in connection with it, it’s worthless.

Real estate is a great asset class that every investor should have in a diversified portfolio.  The problem is, it’s the most public asset.  You’re unlikely to find what your lawsuit target owns in the way of securities, cash in the bank, precious metals or virtually any other kind of asset.  Their real estate holdings, to the contrary, can be found within minutes through an online public records search.  The savvy investor can legally control a real estate empire without being a target.

Land trusts shield the beneficiary from the public records because only the name of the trustee appears on the trust deed that is recorded.  The beneficiary’s identity is described in the trust agreement, but that’s a private document that isn’t recorded. Another asset protection benefit is found when the investor owns only one property per land trust.  By creating “silos,” you can limit the damage a lawsuit may create.

It’s helpful at this point to draw a distinction between what land trusts can and cannot do.  As we’ve discussed, a land trust can eliminate a public record of real property ownership from making an investor the target of a suit.  What a land trust cannot do is prevent suits from be filed against the owner of the property.

If someone is injured at a property, they can file suit against the owner.  The owner may be the trustee of the land trust, though the trustee doesn’t have personal liability.  In the event that suit is successful, the plaintiff can pursue only the assets owned by that property owner.

In the case of a land trust that owns only one property, they’re limited to the value of that property, minus any pre-existing liens, such as mortgages.  Had the beneficiary held multiple properties within the same trust, all those assets would be ripe for the picking.

A true story from my law practice illustrates another benefit of land trusts.  Local government can put liens on property for code enforcement violations that go uncured after notice to the owner.  Under Florida law, a code enforcement lien on a property may result in liens against all other properties owned by the same title owner in that county.

In 2016, our foreign national investor client bought a rental property in Orange County.  Months later, the county sued our client and several other property owners to foreclose liens on their properties.

The basis for this lawsuit was that our client’s seller was a serial code enforcement violator on numerous properties he owned.  Those violations resulted in liens on his properties that didn’t have violations.  Unfortunately for our client, one of those properties was the one he bought.  What’s maddening about this state of the law is that an investor can have a lien put on their property and face a foreclosure resulting from violations on another property they neither own nor have the ability to cure the violations.

The lesson here is that had our client’s seller held title of his investment properties through land trusts, this mess would have been avoided.  Because the trust is the title owner of each property, a code violation on one doesn’t cross-contaminate the others with liens.

This article highlights some of the benefits of land trusts.  One theme of this discussion is there are benefits from separating the legal concepts of “title ownership” and “control” of real property.  To learn more about land trusts and other legal services to help investors, call Widerman Malek Celebration Law Office at 407 851-0201 or visit www.celebrationlaw.com

 

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