495: What is a Land Trust and How Can It Protect My Properties?

SHOW NOTES FOR EPISODE 495: WHAT IS A LAND TRUST AND HOW CAN IT PROTECT MY PROPERTIES?

Effective asset protection is critical to your long-term real estate investing success.  But most investors think that LLCs are the only way to set up asset protection.  In today’s podcast,  real estate investor and and asset protection attorney Scott Smith shares how Land Trusts, in combination with a Series LLC, is the most cost-effective and best protection for your investment properties.

What You Will Learn

• What is a Land Trust?
• How a Land Trust can help protect your properties
• Why Land Trusts, combined with a Series LLC, is the most cost-effective and best protection for real estate investors
• What the three different types of trusts are
• How equity stripping strategies, off-shore trusts and multiple bank accounts can offer nearly 100% effective asset protection
• Why LLCs from Texas, Delaware, Nevada and Wyoming are the best LLCs for asset protection

About Our Guest

Scott Smith

Scott Royal Smith is a long time real estate investor and attorney who created Royal Legal Solutions to be a one stop shop for asset protection, tax, and estate planning needs specifically for real estate investors of every type in all 50 states. He currently has a team of 30 employees helping clients become “bullet proof” to litigation while helping them save money on their taxes and build generational wealth for their families.

More About Scott

• He has been very focused on growing Royal Legal Solutions
• The firm has grown quite a bit since he was last on the podcast
• Methodical, strategic growth
• Helping real estate investors around the country
• Personally, he has been very busy with asset acquisition
  • buying a lot of single family homes
  • finding a lot of good opportunities and channel partners
    • it’s not the market but in the marketing
    • You need to be with people who can get the deal flow going
• He’s seeing a huge interest in Land Trusts
  • It makes a lot of sense
  • He has a friend who lost over $3 million from a single lawsuit
    • If he would have had asset protection in place, he probably wouldn’t have lost a dime
    • If he had his assets set up anonymously in Land Trusts, he probably wouldn’t have been sued in the first place because they wouldn’t have been able to locate his assets
  • If you’re investing in single family homes and you’re not using Land Trusts, you’re missing out on a great opportunity to help protect yourself.  Land Trust are:
    • Most affordable
    • Highest value
    • Highest impact protection

Definition of a Land Trust

• There are Three Different Types of Trusts
  • Revocable Trusts
    • You can decide to just dissolve this trust and all the assets flow back to you
    • They don’t give you any type of asset protection
    • But they can be used to create anonymity
    • A Land Trust is a type of revocable trust
  • Irrevocable Trusts
    • They can some provide protection
    • Can be anonymous
    • But they have tax implications, which can be punitive
    • However, if structured correctly, they can be a decent strategy (especially if you live in California
  • Statutorily Created Trusts
    • Delaware Statuary Trust
    • Created by state law
• The Revocable Trust is the best trust for real estate investors
  • The Land Trust
    • This is good if you have a one-up asset and you live in a state that has really bad LLC laws (like California)
• The Delaware Statutory Trust if you’re an investor that wants to use a trust structure because you live in California and you’re looking for something that is a scalable model that provide anonymity and protection

How Much Protection Can You Get?

• You can get nearly 100% protection using combinations of
  • equity stripping strategies
  • placing loans on your own property
  • setting up off-shore trusts that are the owners of the notes
  • and channeling  money through various bank accounts to make the notes bonafide “real notes”
  • But this can be very expensive for the average real estate investor (has 20 single family homes, a small multifamily property, etc.)
• The most cost-effective approach is
  • mixing and matching your Land Trust strategy
  • which helps you avoid the “due on sale” clause of your mortgage, that might be preventing you from moving the asset directly to an LLC
  • The Land Trust will create anonymity in the ownership, so if anyone wants to find the owner, it looks like you qualify for food stamps
  • You can then, combine the Land Trust with an LLC or DST (Delaware Statutory Trust) to get the protection
  • That way, if there is a law suit, they would get little to nothing
  • To recap:
    • You can stop a lawsuit before they get started with a Land Trust – that’s the benefit of the anonymity
    • And if the lawsuit still happens, that’s when the LLC or DST would kick in to prevent them from being able to collect on the lawsuit or get very, very little from it

Cost-Effective Land Trust Strategies for Regular Real Estate Investors

• Set-up one or more LLCs or, alternatively, setting up a “Series LLC”
• The LLCs are established in Delaware, Texas, Nevada or Wyoming, where there are strong asset protection laws, called “charging order protection,” which means, if someone sues you, they can’t get to your ownership interests of the LLC
• You first would ideally have the LLC be an “anonymous LLC”
  • You can create high levels of anonymity with the LLC
  • You can do this in various ways using a law firm
• You would then create a Land Trust underneath the LLC that owns one particular piece of property
  • For example, if your property is 123 Main Street, the Land Trust would be the 123 Main Street Land Trust and the 123 Main Street Land Trust is owned by the LLC
• Your mortgage due on sale clause is not triggered by a transfer to a Land Trust
• You can keep the existing financing in place
• You deed the property from your name into the name of the Land Trust
• If anyone looks into the Land Trust, it will only lead to an attorney and law firm
• So there’s no information that they can get to
• All that information is protected by the attorney/client privilege
• You don’t have to inform your lender that you have transferred the mortgage into a Land Trust
• Over the last 5 years, they have never had a note called due, nor have they had to negotiate with lenders on any part of the transaction
  • The reason why is that there is a law called “The St. Germain Act” which allows you to be able to do this and, if necessary, force financial institutions to allow you to do this
  • You’re able to maintain your good relationships with your retail lender because they can still process all their loans, like they always have
  • The reason you won’t have a problem with your lender is because the note/mortgage is still attached to the property – their business position has not changed at all
  • If your name is still on the chain of title or still on the mortgage, doesn’t that blow your anonymity?
    • No.  They structure the transfer of the property from your name into the Land Trust that looks like the sale into the Trust for investment purposes
      • What it looks like is that you acquired the property, left your indebtedness in place and then you sold your property to a Trust held by other investors
      • They can look at it and see that you were the “credit sponsor.” You closed on the property (they used your credit to get the mortgage) and then resold the property into a Trust for the ultimate investors to have
• The other part of this is that the “type” of anonymity you have to create to be effective to beat lawsuits is not “perfect anonymity”
  • It’s only enough to create doubt when someone is looking to sue you
  • You have to think about the business of lawsuits
    • When someone is looking for who to go after, they are looking for guaranteed pots of money beacuse these attorneys are being paid lots of the time based upon what they can win, how much are actually able to collect from whoever they are going after
    • So all your attorney has to do is to just make it look like a bad business decision or risky business decision for them to come after you
    • Furthermore, if they guess that you still own the property, they will actually find out that you don’t own the property anymore – the Land Trust owns the property – and the Land Trust is owned by an LLC
      • For legal purposes, it’s just as if someone else owns the property
  • The anonymity is structured in a way  to be very strong
  • From the paperwork, we’re attacking the business of the lawsuits because it looks like we create lots of risks for them to sue us in the first place because they can clearly identify who the true owner of that property really is
  • Thirdly, if they guess that you still did own the property and they wanted to proceed with the lawsuit, they are actually wrong and they will blow a bunch on money going down the wrong path – which is exactly what you want them to do with this type of litigation.  The more money they spend, the more painful it is to go after you because it is getting very expensive

Using Series LLCs

• Another cost-effective way to do this with multiple properties
• Set-up a “Series LLC” in Texas, Delaware, Nevada or Wyoming – it does not have to be set-up where you have other properties
• Combine the Series LLC with Land Trusts to be able to set up the best protection
• The Land Trust just has a one-time set-up fee, no ongoing costs and should only be for one property
• You can have one “Parent” Series LLC that creates individual “Child” series
  • Each one of those Child series works just like an LLC for liability purposes
  • And the Land Trust actually holds the title to the property even though it’s, for example, within a Texas Series LLC, which compartmentalizes the asset
  • They can only go after that one asset and they can’t come after your other assets, nor can they come after you personally
• This is the most cost-effective, best protection for single family home investors to hold property anywhere in the U.S., with having the most streamlined taxes operationally and with ongoing expenses
• You can do everything with:
  • One bank account in the name of the Series LLC
  • One EIN number
  • One set of accounting books, as long as they tag income and expenses out for each individual property
• The Land Trust, all the way up through your Series LLC,  are all treated as disregarded links in the chain for tax purposes
  • There’s no additional tax filings per each property

Land Trust Costs

• Land Trusts cost only a few hundred dollars to set-up, depending on the complexity of the trust
• You also need to spend a few hundred dollars to set=up the deed, to transfer the property into the Land Trust in most circumstances
• Ballpark, $500 per property
• You can have a Land Trust set-up within one day
• If you have to deed the property, that can take a bit longer

Possible Negatives with Land Trusts

• Financing properties
  • Some investors fear that they will have problem with the bank approving a a loan if the property is in the name of the Land Trust
  • The bank is only concerned that you can show the revenue
  • Make sure you have good accounting records to substantiate
  • In rare cases, the bank may ask to see the trust documentation to prove ownership
  • As an attorney, he’s OK with clients showing trust documentation to banks or insurance because that is private information
• Refinancing properties
  • It’s better to refinance properties in your own name first and then transfer to a Land Trust
  • Or, take the property out of the Land Trust, re-finance, and then put it back in the Land Trust
  • His firm prefers to leave the existing indebtedness in place
  • That will help you best the best rates and easiest underwriting
  • It is possible to get re-financing within Land Trusts but you would have to pay higher commercial rates

 How to Reach Scott

• Website: RoyalLegalSolutions.com
  • Click on “Get a Price” and get a free eBook on Land Trusts

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