Financially stable individuals look for ways to protect investments and shield themselves from liability whenever possible. In the past, a land trust was attractive to real property owners because it provided purchasing anonymity and extra legal protection when compared to taking title in your name or jointly with a spouse.
Alone, a land trust does not provide sufficient asset protection to pass the Sollertis standard.
Having a land trust is a thing of the past. Nowadays, wealthy real estate investors and those who want to build a shield around their real property use a limited liability company and an asset protection trust to hold their valuable real estate assets.
What Is a Land Trust?
There is some evidence that suggests land trusts were used during the Roman Empire and during the Middle Ages in England. The first mention of their use in the United States was in Illinois in the late 1800’s.
Regardless of when they started, their purpose was to conceal the identity of the owner of the land.
By way of example, Walt Disney formed a land trust that he used to purchase land from various sellers in Orlando, Florida, where Disney World is now located. Had the public known the identity of the buyer, they likely would have known his intended purpose for the land, and the sellers of the land likely would have increased their asking price. By concealing his identity, Mr. Disney was able to acquire the land for better pricing.
How Does a Land Trust Work?
Like all trusts, a land trust has the following three components:
- Settlor: this is the person who creates or settles the trust. Sometimes the Settlor is referred to as the Trustor or Grantor.
- Trustee: this is the person who holds the trust property, under the written terms established by the Settlor in the trust document, for the benefit of the Beneficiary.
- Beneficiary: this is the person who benefits from the trust property.
Typically, to settle a trust, the Settlor will execute a trust document, which names the Trustee, and the Beneficiary, and will then transfer property into the trust.
Because the purpose of the land trust was to conceal the identity of the owner of the land, the Settlor would transfer cash to the Trustee to hold under the terms of the trust, and would name himself or an entity that he owned/controlled as the Beneficiary of the trust. The terms of the trust would state that the Beneficiary was to control the actions of the Trustee.
So, once the cash was transferred to the Trustee, the Beneficiary would instruct the Trustee to purchase the land. The Trustee would then purchase the land with the cash and title to the land would be vested in the name of the trust. The only information that would be included in the transaction documents and publicly recorded deed to the land would be the identity of the Trustee and the identity of the trust.
Once the Trustee had secured the land, he would manage the land pursuant to the terms of the trust and/or the instructions of the Beneficiary. Ultimately, at some point in the future, the Trustee would convey the land to the Beneficiary.
For instance, in the Walt Disney example, once all of the land had been secured, that land was transferred by the Trustee to a company that Mr. Disney owned and controlled, and that entity then developed Disney World.
Problems With a Land Trust
While land trusts concealed the identity of the owner of the land from the public record, they did nothing to prevent the disclosure of the Settlor and Beneficiary of the trust in a litigation matter where such information could be easily obtained through the use of interrogatories which are written questions that the Trustee would have to answer under penalty of perjury.
For instance, a litigant could submit the following written questions to the Trustee:
- Who is the Settlor of the trust?
- Who is the Beneficiary of the trust?
In addition to the interrogatories, a litigant could demand that the Trustee produce a copy of the trust.
A litigant could also take the deposition of the Trustee, which means the Trustee would have to answer questions asked of him or her by the litigant’s attorney under oath while a court reporter records both the questions and answers, all of which would be included in a written transcript. After discovering the identity of the Settler and Beneficiary, the litigant could then take their depositions as well.
All of these tools available to the litigant in his or her case against the Trustee are referred to as “discovery”.
Historically, many states had some form of discovery during litigation. The first comprehensive discovery system did not exist until 1938 when the Federal Rules of Civil Procedure were enacted. Shortly thereafter, the individual states began to enact comprehensive discovery laws. It would have been around this time that the use of a land trust to conceal the identity of the owner of the land began to become obsolete.
While there is some mention of land trusts on the Internet in modern times, the trusts they are describing are really just trusts that own land. In that sense, any trust can be a “land trust.”
Although the Trustee does not have to disclose the beneficial owner of the land on the vesting deed, the Trustee will need to disclose the identity of the beneficial owner in any litigation, on any financing applications, and on many government permits.
In fact, in California, if a trust is purchasing a real property, it will most likely have to disclose who its beneficiaries are during the escrow process so the escrow agent can properly deal with tax reporting issues.
For these reasons, the days of using a land trust to conceal the owner’s identity have long passed. In 30+ years of representing successful real estate investors, I have never heard of any one of them, or any attorney that I know, using a land trust.
Another problem with a land trust is that it does not does provide any means of asset protection.
As mentioned, in any litigation involving the trust, the identity of the true owner will be discovered and the litigant, if successful, can take the land away from the owner to satisfy a judgment. Likewise, in any litigation against the owner unrelated to the land or land trust, if the litigant obtains a judgment against the owner, the litigant can then take the land away from the owner to satisfy the judgment.
In summary, the land trust no longer works to conceal your identity and does not provide asset protection.
So, how should you own your valuable real estate?
CONCEAL YOUR IDENTITY
If concealing your identity is important to you, there are ways to make that happen.
At my law firm, Sollertis, we once had a client who wanted to acquire a business to compete against an existing competitor. For strategic reasons, our client did not want the existing competitor to know that he was the owner of this new competing business.
In that situation, we set up an entity that was owned by an asset protection trust. While the existing competitor could, if he tried hard enough, find out that the trust owned the business, he would never be able to find out the identity of the Settlor or Beneficiary of the trust. In that case we settled the trust, and used a Trustee, in an offshore jurisdiction.
If you’re curious, Sollertis is the asset protection law firm I founded in San Diego, CA, devoted to serving business owners, entrepreneurs, and professionals in protecting them, proactively, from threats and risks that are almost inevitable to arise in their personal life and business matters.
Fortunately for you, if you only want to conceal your identity as the owner of real property, you don’t need an offshore trust and Trustee – instead, we can do it right here in the United States. Here is how we can do this for you.
Limited Liability Company in Another State
Let’s start with a limited liability company, or what we frequently refer to as an LLC. Wealthy real estate investors almost always take title to their real estate in the name of an LLC. You can form an LLC in nearly every state, and our state preference changes from time to time based on the various state laws, which also change from time to time. Our clients at Sollertis have the benefit of our team consistently monitoring these updates (and you should know that if you form an LLC in one state, and that state’s laws then change to your disadvantage, you can move your LLC to another state with more advantageous laws).
Once we form your LLC, you will then take title to your real property in the name of your LLC, and your LLC will thereafter own the real property. If you want to conceal your identity, then you would form your LLC in a state that does not disclose the name of members of LLC’s and you would engage a Manager to manage your LLC, of course, under your direction and supervision. You would still call all of the shots, but it would be your Manager who signs the documents and who’s name would be public record, not yours. For a small fee, there are companies that will act as the Manager of your LLC.
In a litigation matter involving the real property or the LLC, the identity of the members of the LLC would most likely not be discoverable until such time as the litigant actually obtained a judgment against your LLC, and perhaps not even then as the lawsuit would take years to process and by that time there are other “moves” we could make.
Asset Protection Trust
To further conceal your identity as the owner of the real property, in lieu of making you the Member of your LLC, we can create an asset protection trust, or what we frequently refer to as an APT, to be the Member of your LLC.
This is how we typically structure ownership for our wealthy real estate investors.
If and when a litigant obtains a judgment against your LLC, the Manager of your LLC will then be subjected to a judgment debtor exam and during that process, may be required to disclose the identity of the Member of the LLC. If the Member is an APT, it will be the Trustee of that trust who’s identity is disclosed. The Trustee of your APT would typically be a company in the state in which your APT is formed.
There are now 19 states that legally recognized an APT, or what has often been described as a domestic asset protection trust, or a DAPT. Just as with LLCs, our state preference changes from time to time as the state laws also change from time to time. And again, just like LLCs, if the laws in the state of your APT change to your disadvantage, we can move your APT to another state who’s laws are more advantageous.
If and once the litigant with a judgment, or what we call a judgment creditor, learns of the identity of the Trustee of your APT, he will try to force your Trustee to disclose the identity of the Settlor or Beneficiary of your APT. If your APT is formed in a jurisdiction that requires your Trustee to keep this information confidential, then your Trustee will not disclose your identity.
If concealing your identity is important to you, you can now see how an LLC and APT can work together to accomplish this objective.
Let’s discuss the second objective of protecting your assets, and how these two tools, the LLC and APT, also work together to achieve that protection.
PROTECT YOUR ASSETS
Advantages of an Asset Protection Trust over a Land Trust
An Asset Protection Trust (APT) has the same basic components as any trust, including a “land trust” as discussed above. But what makes an APT unique are these following characteristics:
- The Settlor is also the Beneficiary. In other words, the Settlor is putting his or her own assets into the trust for his own benefit and including a clause, commonly referred to as a spendthrift clause, which states that his Creditors cannot access the assets of the trust.
- To ensure your APT is recognized, it is settled under the laws of one of the nineteen states that currently recognize self-settled asset protection trusts.
- If you are a California resident, there is a very good chance that your Creditor will sue you in California and will ask a California court to enforce California law requiring you to transfer assets in your APT to your Creditor. For this reason, your APT must have an out-of-state Trustee. So, for example, if you are going to have a Wyoming APT, you need to have a Wyoming Trustee. The California court will not have jurisdiction over the Wyoming Trustee and will therefore not be able to order the Wyoming Trustee to do anything, let alone transfer trust property to your Creditor.
- This will not stop the California court from attempting to help your Creditor get to the assets of your APT. The court will order you to instruct the Trustee of your trust to transfer the assets in your trust to your Creditor. You will have to do as the court orders or else you will be held in contempt of court for which you can be put in jail. So, you will instruct your Trustee to transfer assets to your Creditor. But, the terms of your APT will not give you control over distributions of your trust assets, so the Trustee of your trust will disregard your instruction.
- By using an out-of-state Trustee and not giving you control over distributions of trust assets, your APT wins the battle over the battleground as now your Creditor has to go to Wyoming to fight the war, a state where the courts and laws favor asset protection.
- Historically, Trustees handled the administrative functions of the trust and invested the trust assets. In recent times, we have seen the development of the Directed Trust, a trust in which the Trustee handles the administrative functions of the trust but you, or a group of people you select, handle the investment of the trust assets. Your APT will be structured as a Directed Trust, so you have control over the investment of the trust assets. Much like discussed earlier with respect to your LLC, you will still call the shots, but it will be your Trustee who sigs the documents and who’s name will appear in any public records.
Real Estate Protection with an Asset Protection Trust
Once your APT is formed, it will own the membership interest in your LLC and your LLC will own your real estate. If any litigation arises within your LLC, for instance a lawsuit is filed as a result of a fire that occurred on your real property, only that one real property will be at risk. The LLC and the APT will protect all of your other assets from that lawsuit.
Of course, you will defend the lawsuit and hope to win it, but you will also have premises liability insurance in place, which will cover the cost of the defense and any judgment that is obtained by the person injured by the fire.
You can also use financing to protect the equity in your real property so even if something happens that is not covered by insurance, you will not lose your equity. Here is how we do this for some of our real estate investors.
Real Estate Security & Equity Movement
We put cash equal to the amount of equity in the property into the APT. The APT (or another entity that it owns) then loans that cash to the LLC, and the LLC pledges its real property as security for the loan. So now, the LLC has no equity but has cash equal to the amount of its equity. It then distributes the cash to its owner, the APT.
I’m keeping this extremely simple, as it’s actually a bit more complicated, but you can see how just by moving cash around and creating a secured loan, we have moved the equity in the real property from the LLC to the APT so no matter what happens, there is no equity in the LLC available for a judgment creditor to attach.
The Extension of Protection for Personal Acts
As for your APT, all assets you place inside of it will be protected from any judgments obtained against you personally. So, in the previous two paragraphs we talked about how your assets would be protected from any liability arising from within your LLC. Now, let’s shift and discuss protecting that LLC and the real estate inside it from any liability arising outside your LLC as a result of your personal actions.
For instance, suppose you run a surgeon over in a crosswalk and that surgeon is making $1,500,000 annually and has a work-life expectancy of 30 years.
That would be 30 years x $1,500,000 annually, or $45,000,000 in economic damages perhaps reduced to $15,000,000 present-day value. Most likely, if you have an umbrella insurance policy, your policy limit will be $5,000,000 and that surgeon can come after your personal assets for the remaining $10,000,000. But if your assets are in your APT, that surgeon will not be able to attach them.
These are just a couple examples of how an LLC and APT, working together, can protect your assets.
Obviously, this writing has been prepared to address a niche audience but is general in nature and is not meant to be a comprehensive analysis of all the benefits of an LLC and APT, or of all the ways in which these two tools can work to protect your assets.
By now I can confidently expect you have gained enough of an understanding as to know how valuable these asset protection tools can be for you and the livelihood of those you care most about.
NOW YOU KNOW
Don’t waste your time reading about land trusts – they are obsolete.
Instead, use modern tools such as an LLC and an asset protection trust to both conceal your identity and protect your assets.
Please know that asset protection is like insurance, it doesn’t work unless you have it in place BEFORE THE CLAIM. So, don’t wait until it is too late to get your assets in order. You’ve been working hard for many years, and the risk of happenstance is not a well-recommended protection plan.
The focused team of professionals at Sollertis helps individuals with these types of plans and strategies each day. Learn more by calling Sollertis today at (858) 771-8400.
This material has been prepared by Sollertis for informational purposes only and nothing herein is intended as legal advice for any particular or individual situation. You should not rely upon any information herein as a source of legal advice, and receipt of any such information does not create an attorney-client relationship between you and Sollertis. Viewers and readers should not act upon this information without seeking professional legal counsel. Prior results do not guarantee a similar outcome.
