Robert R. Rowley PS

Attorney at Law

Contact Us Now

Why I Don’t Use Land Trusts For Client Asset Protection

A “land trust” is an arrangement sold by promoters to try to provide some asset protection to real estate. The idea is that the real estate will be owned by a trustee, instead of the real owner, so that the real owner’s name will not show up in the county’s property records.

In reality, land trusts provide almost no asset protection; they are more in the way of a placebo to make you think that you have some asset protection on your real estate.

Here are some of the problems:

Land trusts are almost always organized as self-settled trusts, which means that they are trusts that you form yourself for the benefit of yourself. In most states, self-settled trusts offer no creditor protection at all. Even in the about 10 states that give protection to self-settled trusts, if you are forced into bankruptcy there is a 10-year clawback that allows assets to be brought out of self-settled trusts unless they have been there at least 10 years. That’s a long time.

If the real estate was gifted into the land trust, then it is susceptible to being a fraudulent transfer since there was no consideration paid for the transfer. If it was sold to the trust, then depending on how the trust was taxed there could be a sale that causes tax consequences.

If the trust is revocable, then in most states the trust will not even be recognized for creditor-debtor purposes. In other states, the creditor could get a court order forcing the trust to be revoked. If the trust is irrevocable, then if something goes wrong then you can’t get the real estate back. Further, a gift to an irrevocable trust could potentially trigger federal or state gift taxes.

The privacy afforded by land trusts is mostly an illusion. Creditors will hire private investigators to follow you around and see where you go home at night. Creditors will get your address from utility companies or mortgage companies and figure out pretty quickly that a trust is involved. Creditors can also subpoena the trustee to a deposition and ask who is the beneficial owner of the property. Creditors can force the disclosure of trust documents.

Most land trust agreements are poorly done, and to try to get some privacy or asset protection advantages there is way too much power and discretion given to the trustee.

Then there are the hassles. For a land trust to work, the trustee really does need to take care of everything, from paying property taxes to electric bills to paying for upkeep of the property. But that means that you either have a trustee who is a buddy who both doesn’t mind all the work and who you can trust to do all this, or you have to hire a professional trustee that will charge for these services.

Land trusts are almost always sold by hucksters who do not have any real-world experience in dealing with creditors, but who went to a “How to get rich by selling junky ideas” seminar or are a low-grade attorney who offer land trusts in addition to other equally dubious strategies such as Nevada corporations, Wyoming LLCs, and offshore trusts.

The alleged advantages of land trusts are so thin that they are simply not worth the hassles. While we are very familiar with the many types of trusts that do provide substantial protection and other benefits to real estate, we don’t use land trusts for the simple reason that we don’t believe they work.

We do help people get out of land trusts and similar schemes as part of our services.