This article is Part 4 of a four-part series on Land Trusts. You can find Part 1 here: Understanding Land Trusts
In the previous installment of the Understanding Land Trusts series, we discussed the Due-on-Sale Clause and how the land trust benefits you. In this part we will discuss various strategies to keep your land trust involvement private.
Constructing a Land Trust for Privacy
The second most important benefit provided by a land trust after the “due on sale” clause protection is privacy. Unfortunately, many real estate investors do not stop at “GO” when creating and subsequently deeding their property into their trust. Well over 60% of the land trusts I have reviewed are oblivious to the importance of privacy. In the typical land trust scenario the real estate investor creates his trust with himself as the grantor, trustee, and beneficiary. The trust agreement will typically require title to trust assets be taken in the name of the trustee of the trust. Of course, if the real estate investor is the trustee then the possibility for anonymity is gone. One solution is for the trustee to be someone other than the grantor. Here’s why:
Marco sets up the 675 Evergreen Trust, dated November 1, 2013, with himself as the trustee. When Marco deeds his property out of his name and into his trust, Marco will remain on public record because the property is titled in his trust as:
“Marco as Trustee of the 675 Evergreen Trust, dated November 1, 2013.”
The way in which Marco created his trust and subsequently transferred his property into the trust will provide him protection from his lender accelerating the mortgage, but Marco eviscerated the principal benefits of using a land trust – anonymity. Even though Marco recorded his property under the 675 Evergreen Trust, his name still appears on the property’s title as a trustee. Many people would assume Marco created a trust for his own benefit, most likely, a personal living trust. However, Marco’s name does not need to be listed as the trustee on the property’s title to maintain this illusion. To maintain a shield of privacy, Marco has three options available to him; all three of which I have used successfully in my practice to shield my client’s identity:
- Marco could chose to use a nominee trustee as his initial trustee;
- Marco could serve as his trust’s initial trustee but omit his name from the deed (e.g., 675 Evergreen Trust, dated November 1, 2013);
- When recoding the deed choose an extremely long name for your trust to keep your name as trustee from appearing on the county recorder’s website.
Each of these strategies works as follows:
The nominee trustee is a person, whom you trust, to serve as trustee for recording purposes only. After your property has been deeded from your personal name to that of the trust, which as I indicated includes the name of the trustee, your nominee trustee will resign and you will take control as the undisclosed successor trustee and the public will be left with the impression, because your name is no longer on the title, that you no longer own the property.
By way of reference, this is how the land trust is similar to a Nevada corporation with nominee officer and director protections. When I create a Nevada corporation, an attorney in my office assumes the initial director and officer position of the client’s corporation. As the initial officer and director, the attorney’s information is provided to the Nevada Secretary of State to be made public to anyone with a computer. After the initial filings are complete, control of the corporation is passed to my client with the nominee’s resignation and my client’s subsequent assumption of these positions. From the public’s perspective, John Q attorney is listed as the nominee officer and director, and my client’s involvement is hidden. This process can be repeated on a yearly basis to keep your involvement private.
When the trustee resigns, does this imply that your trust will be without a trustee?
Absolutely not! When you create your trust, you will be sure to nominate a successor trustee to assume control when the initial trustee is no longer serving. Who will be the successor trustee? You.
The question you might be asking of yourself at this point is what happens if your nominee trustee will not resign, or, even worse, he sells your property. For me to answer these questions satisfactorily, you must understand the legal relationship between the trustee and the trust beneficiaries. How can the beneficiary fire the trustee who presumably has control? Most financial planners and attorneys you speak to about land trusts typically get this wrong. They do not understand this very important dynamic that distinguishes the land trust from a living trust. The trustee in a land trust holds title to trust property for the benefit of the trust beneficiaries. A trustee’s powers are limited to the specific powers conferred to him under the trust agreement. All other powers are specifically reserved to the trust beneficiaries. In a good land trust agreement, your trustee should have the power to deal with tenants, make repairs, and expedite other limited expenditures, but all other matters concerning title, i.e. sale, loans, encumbrances, change in trustee, etc., require the consent of the trust beneficiaries. In other words, the beneficiaries are the ones with the real power under a land trust, which is why you should always be the beneficiary of any trust that holds title to your property.
What happens in the event your trustee turns out to be a rogue and sells the trust property without your consent? A client’s wife put this exact question to me after she learned that her husband, the trustee of their land trust, sold the trust property without her involvement. Let me put that a different way: The wife knew the husband was going to sell the property but believed she would need to sign some paperwork to effectuate the sale.
To make matters worse, the husband had consulted an attorney who assisted with the closing and told the husband that he had full power of conveyance as the trustee of the trust. Wow, that was a huge mistake for an attorney to reach such a conclusion without reviewing the trust agreement. You see, in my trust agreement, it states… Except as otherwise specifically provided in this trust agreement, all powers of the Trustee are subject to the consent of the Beneficiaries,…. The trust then goes on to state that the Trustee can convey title to real property but only after he has obtained the beneficiaries’ consent. So how does this alleviate the wife’s concern? Simple, the trust beneficiaries could set the sale aside because they did not give their consent to the sale. The trustee will find himself embroiled in a lawsuit or two, and if an attorney gave the trustee his blessing and advice to move forward with the sale, then he will get the pleasure of experiencing the justice system from the other side of the table as well.
Another question I often receive is: Can my corporation be the trustee of my land trust?
Yes, but with some caveats. To my knowledge, only one state, Florida, specifically authorizes a corporation, absent other requirements, to serve as the trustee of a land trust. Other states are silent on the issue, or specifically state that the corporation must be bonded and licensed in the state where the trust property resides. This can be a problem for those hoping to avoid jurisdictional issues. If you decide to proceed anyway, here’s an example of how it can be used against you:
Bob, an inexperienced attorney, establishes a land trust for his rental properties in Washington, with his corporation, NOIDEA, Inc., as the trustee. When a faulty balcony collapses resulting in severe injuries to a tenant, Bob is sued. The tenant’s attorney is quick to point out that NOIDEA, Inc., is not bonded and licensed in Washington, and that Bob is simply thumbing his nose at the law. Bob has given the Court one more reason to not like him — not knowing the law as an attorney. Bob would be wise to settle.
If you choose to use a nominee trustee then choose wisely. A nominee trustee may not have absolute and unfettered control over the trust property but he will be listed on title and this can pose potential problems. I routinely serve as a nominee trustee for my clients. Selecting the wrong nominee trustee can prove disastrous as my client discovered when he selected his good friend:
After attending one of my asset protection workshops, Brian was eager to put his new found knowledge to use and protect his multiple holdings in upstate New York with land trusts and LLCs. Brian engaged me to create a land trust and LLC for him then he planned to use it as a template to create 14 additional structures. When I drafted Brian’s land trust he informed me his friend Noland was willing to serve as his nominee trustee. I carefully explained to Brian the risk in not choosing an attorney but Brian brushed aside my concerns informing me he and Noland “went way back” and he wasn’t concerned. Fast forward four years and Brian was $15,000 in attorney’s fees attempting to remove state tax liens from all of his trust properties. Brian’s choice of a nominee trustee did not work out as planned.
Brian’s problem was trusting his friend to serve as his nominee trustee. As I stated earlier, when you use a nominee trustee the trustee’s name will appear on title along with the trust name, e.g., Noland Taxdodge as Trustee of the 14th Street Trust, Dated March 1, 2014. Noland, unbeknownst to Brian, had stopped paying New York taxes and the state, seeking to recover its due, filed tax liens on all of Noland’s property located in New York. The State of New York assumed each of the properties held in trust with Noland’s name as trustee belonged to Noland when in fact, they were owned by Brian.
Do Not Include the Trustee’s Name on The Deed
When I was in law school I worked for an attorney who held public defense contracts with several municipalities. As an intern it was my job to handle these cases for the firm. I learned two important things during my tenure defending multiple individuals accused of various crimes. The first was most, if not all, were guilty of the crime they were accused of committing or, in the rare case a person was innocent, he was definitely guilty of several other crimes he was never caught on and therefore belonged in jail. (You can probably gather I did not make a very good public defender.) The second was the defendant typically talked too much after he was arrested. (This made my job as a public defender all that harder to plead their case.) Talking too much is not a problem limited to criminals but people in general. We tend to believe if some information is good then more is better. From an asset protection standpoint the reverse is universally true. Never disclose more information than legally required.
If Ally set up the Chatty Kathy Trust, Dated July 9, 2014 with Ally as the Trustee, it should be self-evident to you by now that when she deeds her property into this trust, assuming she is not using a nominee trustee, Ally will not have any anonymity. If Ally consulted me prior to preparing her deed I would instruct her to call the county recorder’s office where the deed is recorded and ask if the recorder requires the trustee’s name to be listed on the deed. Ally might be surprised to learn the county recorder does not. If the county does not require the trustee’s name on the deed then you are free to prepare accordingly. In Ally’s situation, she would deed the property from her name individually to the Chatty Kathy Trust, Dated July 9, 2014. If you adopt this approach be sure to draft your trust to allow for someone to take title in this manner. Many of the land trust agreements I have reviewed over the years require title to be taken in the name of the trust and trustee e.g., Ally Johnson as Trustee of the Chatty Kathy Trust, Dated July 9, 2014. Such a requirement limits your ability to adopt the strategy I have outlined above.
One final point, this strategy will not work in every state and in those states wherein it does work; it may only work in select counties. Deeding property is not as simple as preparing a deed and recording it with the county where the property is located. Counties typically have very specific margin requirements and ancillary forms must be filed with the deed. For example, when utilizing this technique in California many of the counties require a copy of the land trust be submitted with the deed. The land trust is not recorded but the county requires it for verification purposes.
Long Names Get Truncated
After preparing a few hundred separate deeds transferring property into land trusts an idea struck me. What if I changed the positioning of the trustee’s name from the beginning to the end and lengthened the name of the trust; would this keep my clients name from appearing on the county recorder’s website? The idea centered on the limitations of most county recorder’s websites. If you have ever experienced the displeasure of searching for information on such a site then you will surely agree these databases are woefully antiquated e.g., many still require the use of function keys to move between searches. Another limitation you will find with these sites is their limited search fields. Many of the form fields limit the number of characters thus, if your trust name exceeds the character limitation and your name, as trustee, falls outside of this limit, technology, or lacking thereof, has provided you with an opportunity for anonymity.
Consider how most attorneys create trusts i.e., they require title be taken in the name of the trustee on behalf of the trust, e.g., Mike Bowman as trustee of the 765 Trust, Dated August 19, 2014. If Mike is seeking anonymity when he created this trust obviously he lost. Mike’s name appears first in the property’s title and would be discoverable on even the most antiquated of online search engines. To turn this limitation to your advantage you need to do two things, create an exceptionally long name for your land trust and place your name, as trustee, at the end e.g., The Green Tree and Bountiful Plains Trust Agreement Dated the Nineteenth Day of August Two Thousand and Fourteen, Mike Bowman, Trustee.
If you are reading this and thinking to yourself Mike’s name is still on title you are correct however, Mike’s name will most likely only be discoverable if someone performs a record search in person at the county recorder’s office versus the quicker online approach. Other than title companies, most people search online and thus, would only find the following “The Green Tree and Bountiful Plains Trust Agreement Dated…” Due to the length of the trust name, the positioning of Mike’s name at the end, and the limitation of the county recorder’s website, Mike has found a way to mask his affiliation with this property.
Since utilizing this strategy in early 2003, I have come across some self-acclaimed land trust Gurus who either heard me teaching this strategy at one of my numerous workshops or possibly discovered it on their own. Either way, the long trust name is only half of the strategy; the other half involves tax statements.
Where to Send Tax Statements
When a deed is prepared the county requires the preparer to provide an address for future tax statements. If you are setting up a land trust for anonymity and are willing to utilize one or more of the strategies previously outlined, you can blow it by not hiding your personal address. Seventy percent of my clients when asked where they would like their tax property statements sent will tell me their personal address. Their reasoning is sound. No one wants to miss a tax statement and fall behind on his property taxes.