WHAT ARE LAND TRUSTS?
In California, general trust law is found in the Probate Code §§15000-19403. There is no specific land trust statute in California, unlike in the states of Illinois, Massachusetts, and Virginia. So, land trusts created in California for California property are based on general trust law in the aforesaid California Probate Code. But an out-of-state land trust may be formed that would hold title through the trustee of a California property, to take advantage of more beneficial statute and case law of another state.
Since California does not have a specific land trust statute, there is no legislative history nor is developed case law on it in this state, only California general trust law and case law applicable.
The Advantages and Disadvantages of Land Trusts: (1.) Privacy: One of the much-heralded advantages of a land trust is that a grant deed-in-trust of a trust property in the name of a different trustee (private or institutional) may be recorded with the County Recorder, but the land trust agreement that states the names of the truster/settlor/investor and the beneficiaries is not recorded. Thus, the creator/grantor of the land trust: the trustor/settlor who invests in real property can keep his/her/its name, as well as the names of the beneficiaries out of the County Recorder’s and County Assessor’s books, and to a certain extent hide the investment from public view.
But a judgment creditor of a trustor/settlor or of a beneficiary can subject the latter to answer written interrogatories on his/her/its assets, or to debtor’s examination under oath in court to determine assets, and not merely rely on County Recorder and Assessor asset searches.
The land trust agreement may also use a name for the land trust different from the name of the trustor/settlor who created it. This is another asset protection benefit. And if the beneficiary thereof is also the same trustor/settlor, the latter may designate his/her living trust or wholly-owned limited liability company as the beneficiary to hopefully avoid gift tax issues.
(2.) Avoidance Of Probate: Moreover, just like successor trustees may be designated in the land trust agreement, successor beneficiaries may also be selected to avoid disruptions in distribution of trust assets at termination of the trust, outside of probate proceedings. A land trust may be created as revocable (terms of the agreement may be changed) or irrevocable (cannot be changed), but the latter requires the filing of separate tax returns and is taxed at a higher rate than the trustor/settlor’s individual tax rate, unless considered a simple trust in which all incomes created are taxed to beneficiaries. For federal income tax implications, if the grantor/trustor is also the beneficiary, the Internal Revenue Service (IRS) classifies it as a grantor trust that has tax consequences that flow directly to the trustor’s Form 1040 and state return.
(B.)Disadvantages And Pitfalls: (1.) Separtate Agreement For Each Property:
In order to preserve the privacy of the investment or transaction and the asset protection benefits of the land trust, only one real estate property can be listed as held in it. Thus, a different land trust agreement is created for each property. This could be cumbersome, although the same trustor/settlor, trustee, and beneficiary can be named in each agreement. (a) Simpler Alternatives:
There are simpler alternatives: purchase investment or rental properties through a limited partnership (LP) or a limited liability company (LLC), or transfer such properties to a more flexible living trust that does not require the filing of separate tax returns, or transfer the ownership interests of an LLC (not title of the property) to a living trust.
An LLC may also create a land trust by conveying title of a property to the trustee, and designate itself (LLC) as the beneficiary for privacy of ownership. Sometimes less is more; for indeed, creditors can see through and have recourse against avoidance of execution of judgment on properties through asset protection schemes. And transfers of ownerships of properties may result in tax assessments.
In short Land trusts are legal but the benefits of a Land trust may be obtained through other vehicles of both estate planning and business structure that is less cumbersome, more flexible and economic efficient.
This column is produced by Mary Der-Parseghian, Esq. of Der-parseghian Law Group. For questions or comments, please send your message to 4727 Wilshire Blvd., Ste. 301, Los Angeles, CA 90010; email us at Mary@MaryDLaw.com; www.MaryDLaw.com or call 323-937-2727.
© 2011. Der-Parseghian Law Group