Some investors will acquire and hold each property in its own separate Title Holding Trust or Land Trust in order to afford the  maximum privacy and protection possible, while others hold all of their real estate holdings in one (1) Title Holding Trust or Land Trust.

There are many reasons for considering a Title Holding Trust or Land Trust, but here are certain highlights that you might want to consider:

Privacy and Confidentiality of Ownership.   This is by far the most important benefit of Title Holding Trusts or Land Trusts.  Anyone with an internet connection today can view your ownership of real estate.  Privacy and confidentiality is extremely important to most people who don’t want others knowing what they own.  You can negotiate, make offers, acquire, hold, management and ultimately dispose of real estate through a Title Holding Trust so that no one knows who is really behind the transaction. 

Protection from Liens and Judgments.   Real estate titled in the name of the Trustee of the Title Holding Trust or Land Trust is not subject to liens or judgments that have been filed against the beneficiary(ies) of the Title Holding Trust. This can be extremely valuable when property is owned by multiple owners (co-owners). 

Discouraging Litigation.  Let’s face it, people tend to only sue others who appear to have money or property.  Attorneys who work on contingency are only likely to take cases which they can not only win, but collect, since their fee is based on collection.

Avoiding The Due on Sale Clause

Investors ask this question because they want to know if they can avoid triggering the due on sale provision in the loan documents by having the current owner transfer the property into a Title Holding Trust or Land Trust, and then by having the current owner subsequently assign some or all of the beneficial interest ("ownership interest") in the Title Holding Trust or Land Trust to the investor who's goal is to ultimately acquire the property subject to the existing promissory note or debt. 

Assignment of Beneficial Interest in Title Holding Trust

This assignment or transfer is merely a written assignment between the seller, buyer and Trustee of the Title Holding Trust or Land Trust.  Assignments transfer ownership of the Title Holding Trust or Land Trust by assigning all or a percentage of the beneficial interest ("ownership interest") in the Trust, which therefore transfers ownership of the underlying assets held in the Trust. 

The assignment document executed by the buyer, seller and Trustee is not recorded and is therefore not part of the public record.  Ownership transfers via assignment of the beneficial interests often go unreported and the lender is not made aware that the transfer has taken place. 

Investors, and some "experts," claim that using this strategy will in fact get around the due on sale clause.  How can a claim like this be made by anyone before actually reviewing the due on sale clause itself to determine exactly what action would or would not trigger the due on sale provisions in the promissory note? 

Considered a Conveyance of Title

The transfer of a beneficial interest in a Title Holding Trust or Land Trust via an assignment document is considered to be a conveyance of the underlying real estate held in the Trust for legal and tax purposes. 

It should be viewed just like any other transfer of real estate that was transferred or conveyed using a Grant Deed, Quit Claim Deed or Warranty Deed.  The fact that the assignment of the beneficial interest is not recorded does not change anything and will generally not avoid any due on sale clause or any other seasoning requirements of any current or potential lender. 

So, in many cases, an assignment of some or all of the beneficial interest in a Title Holding Trust or Land Trust will most likely trigger the due on sale clause.  Careful review of the actual due on sale provision in the loan documentation should be makde by the investor's legal advisor before making any decisions regarding the due on sale clause. 

Due On Sale Clause Contained in Promissory Note

Let's review a sample of a due on sale clause I copied out of a promissory note that came a across my desk today.  I have identified the critical content in bold underline.  I was also surprised to note that this lender specifically addressed land trusts in its due on sale clause. 

DUE ON SALE - CONSENT BY LENDER. Lender may, at Lender's option, declare immediately due and payable all sums secured by this Deed of Trust upon the sale or transfer, without Lender's prior written consent, of all or any part of the Real Property, or any interest in the Real Property.

A "sale or transfer" means the conveyance of Real Property or any right, title or interest in the Real Property; whether legal, beneficial or equitable; whether voluntary or involuntary; whether by outright sale, deed, installment sale contract, land contract,  contract for deed, leasehold interest with a term greater than three (3) years, lease-option contract, or by sale, assignment, or transfer of any beneficial interest in or to any land trust holding title to the Real Property, or by any other method of conveyance of an interest in the Real Property.

If any Trustor is a corporation, partnership or limited liability company, transfer also includes any change in ownership of more than twenty-five percent (25%) of the voting stock, partnership interests or limited liability company interests, as the case may be, of such Trustor.  However, this option shall not be exercised by Lender if such exercise is prohibited by applicable law.

This due on sale language clearly communicates that any transfer or conveyance of any part or any interest in the real estate would be considered a conveyance of title and would trigger this due on sale provision. 

The use of a Title Holding Trust or Land Trust in order to transfer the property via an assignment of beneficial interest in this case would not legally avoid the due on sale clause.  In fact, using a Title Holding Trust or Land Trust to avoid this particular due on sale clause would probably be considered lender fraud. 

Investors must be very careful when attempting to be creative with a Title Holding Trusts or Land Trusts.  You should always consult with a legal and tax advisor before jumping to conclusions about the ability of a Title Holding Trust or Land Trust to avoid or circumvent anything such as a due on sale clause, loan or title seasoning requirements, or any kind of assessment, reassessment or taxable event. 

You may know and/or remember from our seminars and webinars that the Title Holding Trust changes the way in which an investor or multiple investors own and hold title to real property.  The Trustee of the Title Holding Trust or Land Trust acquires and holds the legal title to the actual real estate and the owner or co-owner is owns and holds the beneficial interest of the trust. The beneficial interest in the trust is a personal property interest and not a real property interest, which means that the beneficiary now owns and holds personal property and not real property. 

Liens and/or judgments can no longer attach to the real estate because the investor or co-investors no longer own the real estate.  They own beneficial interests in the Title Holding Trust or Land Trust.  The lien or judgment can still attach to the individual's beneficial interest in the trust, but not the real estate since it is no longer owned by the individual. 

The Title Holding Trust or Land Trust is a great way to protect owners, especially co-owners, from each other's liens and judgments. 

Title Holding Trusts are designed and used to keep a persons identity confidential.  The true owner's name never appears on the public records.  There are other benefits as well, such as protection against liens or judgments, but most of the time the Title Holding Trust is used for confidentiality and privacy of ownership.

This is all that it does.  It keeps the property ownership confidential, which is part of an asset protection strategy.  However, the Title Holding Trust or Land Trust is not enough when more than privacy and confidentiality are needed.  The Title Holding Trust will not protect the true owner from any litigation.

You may wish to visit The Center for Wealth & Legacy Studies and ask some of their advisors about asset protection or wealth protection.  They have a very large Advisory Team that can assist you. 

Granting Powers to the Trustee

The Warranty Deed to Trustee conveys and communicates the various legal powers and authority conferred upon the Trustee of the Florida Land Trust by the Deed.  The Trustee still has all of the powers and authority conferred to it by the Warranty Deed to Trustee even if a formal Florida Land Trust Agreement is never drafted.  We always recommend using a formal Florida Land Trust Agreement, however.

Drafting the Warranty Deed

The Warranty Deed to Trustee must grant full powers to the Trustee of the Florida Land Trust.  The individual drafting the Florida Land Trust Agreement should take great care to ensure that the requirements listed in Section 689.071 of the Florida Land Trust Statute be including in the Warranty Deed. 

Trustee Should be a Legal Person or Entity

A Trustee should be a natural person or a legal entity.  The Florida Land Trust itself does not have legal capacity and is not a natural person or legal entity, so the Warranty Deed must convey the real property to the Trustee of the Florida Land Trust, such as Exeter Fiduciary Services, LLC, as Trustee of Florida Land Trust No. 12345.

The Trustee has the legal capacity to act on behalf of the Florida Land Trust, so you should also take great care in the selection of your Trustee.  There are many providers that charge nominal fees, but getting in touch with them and actually getting timely service can be a challenge.  So, be sure to thoroughly review the options, services, expertise and experience in addition to the fees charged by prospective Florida Land Trust Trustees. 

Personal Property Designation

Warranty Deeds should include language stating that the beneficiary's interest in the Florida Land Trust is a personal property interest (in other words not a real property interest).  The Warranty Deed to Trustee should also clearly state that the Trustee does not have any person liability, which should take care of any possible exceptions that might be found in the Florida Land Trust law. 

• A Recession Is A Horrible Thing ... To Waste: What companies are doing today to find great success despite the economic challenges
• Succession Issues in the Privately Held Business: What makes it a unique challenge?
• Making Your Banker An Advocate - Not An Adversary

The Wealth & Legacy Series Seminar will be held at the following venue:

"Success, Succession and Sources of Money"
A Very Special Evening
September 30, 2009  -  5:00 PM to 8:00 PM
University of San Diego
Joan B. Kroc Institute for Peace & Justice, Room C & D

The July 2009 edition of the Mortgage Fraud News published and distributed by FannieMae through its Mortgage Fraud Program discusses the most current variation of mortgage fraud that is now running rampant through out the short sale and foreclosure market.

Fraud Alert Involves Land Trusts

This time around the mortgage fraud involves the use of Land Trusts, which are often referred to as California Title Holding Trusts, Illinois Land Trusts or Florida Land Trusts, in order to get around various rules and prohibitions regarding flipping property or double closing on property. 

This is certainly true when the investor is acquiring troubled assets such as short sale, foreclosure or REO properties. The Title Holding Trust (Land Trust) can be a great tool in these transactions, especially when there are multiple investors/owners involved.

Contracts Can Not Be Assigned

There is one catch that the savy real estate investor needs to be aware of before using a Title Holding Trust (Land Trust) to buy short sale and REO properties. The sale contracts used by lenders and other financial institutions, including FHA and Freddie Mac, are generally written so that the party making the offer (buyer) can not assign their rights to purchase to another party. 

The investor will not be able to assign the contract to their Title Holding Trust (Land Trust) or any other person or entity in most cases.  This can complicate the transaction if the investor decides after they have made the offer to acquire and take title in a Title Holding Trust (Land Trust) or any other type of trust or entity. 

This policy is frustrating (at best), but is designed to curtail certain abuses that can go unchecked without this policy. Investors must generally close and take title to the property in the same name of the person or entity that they originally made the offer through.  Acquiring and taking title in the investors name and then deeding the property into the Title Holding Trust (Land Trust) won't work because you will lose the benefit of privacy and confidentiality of ownership once your name appears on recorded title. 

Make Offer Thru the Land Trust

There is generally an easy way around this problem provide the investor knows that he or she wants to acquire and take title to the property in a Title Holding Trust (Land Trust) up front.  Investors can set-up a Title Holding Trust (Land Trust) in advance and make their offers through their new Title Holding Trust(Land Trust).  This is referred to as a dry trust because there are no assets held in the trust. 

The offer to purchase the troubled asset would be made through and in the name of the investor's new Title Holding Trust (Land Trust).  The closing would occur and the property would be conveyed into the new Title Holding Trust (Land Trust).  There is no need to assign the contract because the offer is made in the name of the Title Holding Trust (Land Trust) right up front. 

Title Holding Trusts provide excellent protection against liens and judgments. Liens and judgments can be attached to property that you own in your own name, but liens and judgments can not be attached to real estate held in a Title Holding Trust (Land Trust). This is because you do not own the real estate held in a Title Holding Trust (Land Trust). You own a beneficial interest, which is a personal property interest and not a real property interest. The Trustee of the Title Holding Trust owns the real property interest.

The liens or judgments can be attached a beneficial interest of the trust, but not the real estate directly, so that you can still sell your property without any problems. There are very few real estate investors that truly understand this protection.

So, stay tuned.

This is the second blog post in a series on the Title Holding Trust.

Title Holding Trusts (Land Trusts) are primarily used as an asset protection vehicle because the Title Holding Trust enables a real property owner to buy, hold, manage and sell his or her real estate in a confidential and private manner. It makes it virtually impossible for potential plaintiffs to identify your assets and decide to sue.

Asset Protection Includes Protection Against Liens and Judgments

Real estate acquired andheld in a Title Holding Trust (Land Trust) is also protected from liens, judgments and other clouds against legal to the real property. This is especially helpful when you have multiple co-owners or investors involved in the real estate. It protects each of the co-owners from each other's liens and judgments.

Stay tuned for further blog posts regarding the benefits and advantages of using a Title Holding Trust (Land Trust) to buy, hold and manage real estate. You can also register for one of our upcoming Title Holding Trust (Land Trust) webinars for more complete information.