I have been told to hold my investment properties in a Trust, how does this work?

Asked by Rafael, Austin, TX Tue Feb 26, 2008

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Paul B. Perez, , Austin, TX
Mon Mar 31, 2008
Here is how it works:

1.) You buy a home in the name of a trust.
2.) You assign the beneficiary of said trust as yourself.

If you ever want to cash out a property you can owner finance it without ever having to notify the lender simply by re-assigning the beneficiary of said trust.

There is more, but that is the idea. Gotta run to a meeting!

P.S. Only my wealthiest investors do this.
1 vote
Bruce Lynn, Agent, Coppell, TX
Tue Feb 26, 2008
Very complicated Rafael. You need a board certified real estate attorney to advise you on this. For the most part this is late night tv real estate guru junk that just doesn't work for the average investor. Of course it sounds good, but I think most attorneys will tell you to stay clear of it. You can also have trouble with your loans. These guys will tell you that the lenders will rarely if ever call a loan, but with all the trouble they're in now, believe me they will be checking much more closely in the future. There are some very interesting laws in Texas now too regarding lease purchases. Many of the attorneys will tell you it is just not worth the risk. The penalties can be very high if you mess it up.
1 vote
Don Tepper, Agent, Burke, VA
Tue Feb 26, 2008
The information below comes from North American Realty Services (NARS), which promotes enhanced versions of the Illinois-style land trust. The language is a bit stilted, but it gets across the points. Basically, you transfer your properties into a trust. You no longer own the properties; the trustee does. But, because you retain the power of direction, you can direct the trustee's activities. Note: I'm not a lawyer or accountant, so this is neither legal nor accounting advice.

There are other proponents of land trusts. Within the investor community, these include Bill Bronchick and Minh Pham. You can Google them and get their contact information.

Anyhow, here's the explanation NARS:

There are two primary ways to transfer ownership in real property – 1) by a transfer of the property’s legal and/or equitable title to an acquiring party, or 2) by a transfer of a beneficiary interest in a title-holding entity (such as a land trust) which owns the property. Our use of the “Illinois-type” title-holding land trust model entails the property’s legal and equitable title being vested with an unbiased third-party corporate trustee for the duration of our arrangement. In such a transaction the co-beneficiaries (you and I) remain 100% in full control of any and all of the actions of the trustee and all matters relating to the property and its title. When using this method of transfer, maximum legal safety and asset protection is attained, and no benefits or advantages of real property ownership need be foregone. One might think of this method of transfer and asset protection as being analogous to holding the property in Escrow for the term of our agreement, in order to best protect the property, it’s title and both our respective interests.

Although not widely known and grossly under utilized by the vast majority of legal, accounting and real estate professionals, the land trust (Illinois-type title-holding trusts) is in-fact, valid in virtually all states, (excepting only Louisiana and Tennessee due to those state’s characterization of use in trust and use in land being indistinguishable). The land trust is highly respected by those who understand it as a foremost viable and protective real property transfer and holding device. Vesting the property’s ownership with a land trust trustee effectively shields the property from virtually all legal perils (e.g., creditor judgments, IRS tax liens, divorce actions, bankruptcy, partition, charging order, probate, spousal claims, etc.). The land trust is authorized either by specific statute, specific authorization or by the land trust’s exclusion from prohibitions within a jurisdiction’s statute of land uses. It is important to know that, despite its relatively sparse use over the years, the land trust model has been employed in real property transfer since before the beginning of the twentieth century (promulgated first by Chicago Title and Trust of Illinois in 1899, and restructured into its present form in the early 1920’s by Chicago Land Title).

Unlike other inter-vivos (“living”) trust structures, it is the beneficiary/ies and not the named trustee who holds the power of direction and management, or control over the actions of the title-holder trustee. In other words, it is the beneficiaries (you and I) who make all the decisions (100%) relative to the property, its title and any and all duties and actions of the trustee.

In view of the fact that the property’s ownership is wholly vested in the nominated trustee, the property remains protected from virtually any legal action that would attempt to involve the trust’s beneficiaries or it’s property (even including attempted tax lien actions by the IRS). Although the beneficiaries can be sued in personam (against the person) for their own actions, a suit in rem (against the property) is not available to claimants.

While the IRS continues to treat all beneficiaries of land trusts as owners of Realty for income tax purposes, the actual ownership by beneficiaries is that of personalty (personal property versus real estate) and therefore protected under any state’s personal property law (IRR 92-105; The Doctrine of Equitable Conversion; Black’s Law, 6th ed, pp 332/538). This feature of the land trust form creates excellent protection from partition by judgment creditors, charging orders and outside creditor judgments and their resulting liens.

Another important feature of this very versatile transfer device is the simplicity of conveyance of the benefits of real property ownership to a second party without the need for lender involvement, new title insurance or formal escrow settlement.

By combining the title-holding land trust form and a possessory agreement (i.e., a full payout lease), the benefits of real estate ownership can be effectively transferred to a named co-beneficiary without a violation of a mortgage lender’s “due-on-sale” admonitions
Web Reference:  http://www.landtrust.net
1 vote
Mylendingpla…, , Austin, TX
Tue Feb 26, 2008
As a local Austin mortgage guy, I'm getting a lot of phone calls regarding lease purchases. Some calls are from the investors (wanting to buy property in order to offer lease purchases) and some calls are from potential lease purchase buyers.

My take is this: Just so NO. Unless you can buy this home--in your own name with a clean title. Pass.

Here's why:
1) Don't ever buy or lease purchase a home unless the seller has a clean and insured title policy. This is how the typical lease purchase situation works: Person #1 acquires a home (usually from someone who's going into a foclosure or very close to a foreclosure-- from person #2) and then they offers to lease purchase to you, Person #3. But unless the actual owner-- Person #2-- has a clean title you are open to tax liens, mechanics liens of other fun stuff. And since this person #2 was in a distress situation when they found person #1, the likelihood of tax liens or other transferable debt is high.

One way to protect yourself from transferable tax liens is to simply insist any seller has a CLEAN (insured) TITLE. They can't offer you a clean title, or an insured title, shake hands. Leave. Start car. Find a new house.

Make sure any house you buy has a clean title from a local Austin Title company. Most of the investors who purchase homes via trusts are using real estate trust or Land Trusts as a mechanism to protect them against potential tax liens. You, the buyer, should be cautious too.

Not all foreclosures are bad. There are some great deals out there. Just ask your realtor or seller to pull title prior to even making an offer. Don't know how? Call me since title is usually ordered by the mortgage company anyway. Why submit an offer and/or earnest money on a property you think may have tax liens or other transferable tax liens in the first place?

Finally, another issue is to look at the future growth of the home you want to buy. Since most lease purchases prices have an inflated value. Because if you buy a home for 150K but it’s only worth 120K, how are you going to get a fixed rate loan when the lease purchase period is over? Bottom line: if the area is not appreciating 10-15% you are best off renting and getting your things in order until you can buy--with a fixed rate.

If you have mortgage, title questions please call or email Jon @ mylendingplace com
http://www.mylendingplace.com Local Austin Mortgage Company
1 vote
Perry Hender…, Agent, Austin, TX
Wed Mar 12, 2008
This startegy is an advanced one. You need to have lots of assets and lots of liability before it makes sense.
0 votes
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