by Laura Mueller
Many smart real estate investors use land trusts to secure their investments and collaborate on big projects. A land trust is a legal arrangement where one party assigns beneficial interest in a property to a trustee. The property owner—which may be an individual or a corporation—maintains control of the property’s assets, but the trustee acts as the public face of the property, including acting as the owner for legal purposes.
At face value, the advantages of using land trusts may be hard to spot. Why would a property owner want to shield their ownership for legal reasons? However, there are actually some major benefits. Here are three of them.
Outlined within the land trust agreement are the specifics of the property owner’s continuing rights, generally including ongoing management of the property and all rights to modify, develop, rent, or sell it as desired. Meanwhile, it is the trustee who appears as a the legal face of all proceedings. This level of privacy is often desired by wealthy property owners who don’t want their known assets to have an unfair effect on negotiations. By shielding themselves through a land trust, property owners are able to proceed without the bias that may come with their name or other holdings.
Protection from litigation
A land trust protects parties from possible litigation that may come from an individual knowing they are the true property owner. Once again, it is the wealthy individuals and corporations who have the most to gain from hiding their identity—people may seek to bring frivolous suits against a property owner if they know there is the potential of a big pay out. But if the public face of a property is an unknown entity, or at least a person or entity who is not known to be wealthy, those sorts of law suits are deterred.
If two friends want to collaborate on flipping a house but only one has the capital to make the purchase, it makes sense for the purchaser to draft a beneficial interest land trust that states the other party is entitled to profit from the sale of the property only after the purchaser has regained a certain amount of their initial investment. In this way, the individual who puts more money into the investment ensures that they will be paid out fairly when the house is flipped and sold.
There are many more advantages to using land trusts. In fact, get creative with them and you’ll find that there’s pretty much no agreement that can’t be secured through the creation of a trust. Just always be sure you are proceeding carefully with land trusts, and use an attorney to help draft and finalize the document. Otherwise, you put yourself at risk of unexpected legal challenges that can occur if the trust was made in a situation where it was not allowed (for example: if you create a land trust to transfer your rental property from your own name to an LLC when your lender forbids it). Do a land trust right, however, and you have a lot to gain.
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