|The Myth Behind Land Trusts
If you’ve read some of my other articles, you’ve read about the very difficult topic of protecting a client’s personal residence. In a recent article, I discussed the pros and cons of using Qualified Personal Residence Trusts (QPRTs); Equity stripping and the 1% CFA mortgage, Limited Liability Companies and Intentionally Defective Grantor Trusts (IDGTs). If you would like read the newsletters I did on these topics or would like a free PowerPoint presentation on the 1% CFA mortgage, please e-mail firstname.lastname@example.org.
What prompted this article are some of the responses I received from many readers who wanted to know why I did not discuss “Land Trusts” as a viable tool to protect not only the personal residence, but also any other real estate owned by a client.
What is a Land Trust?
Simply put, a land trust is a “revocable*” living trust with unique features when it comes to “hiding” the true owner of property in the trust.
(*Land trusts can also be irrevocable trusts that would provide terrific asset protection, due to the fact that the client no longer owns the property. Having said that, clients typically use land trusts to keep the property in their possession and hide them in place of giving assets irrevocably out of their estate (which may have gift and income tax consequences)).
If you’ve read my articles for any amount of time, you will know that I get disgusted when I hear “asset protection” advisors tell clients that a good way to protect assets is by “hiding” them. There is NO legal way to “hide” assets. Having said that, land trusts many times sell on this very concept; hiding your assets.
Because asset protection is such an important topic today, marketers are aware of this and are heavily marketing land trusts as asset protection tools. Why? To generate legal and administration fees. The problem is that a client or advisor reads that land trusts can be an affective asset protection tool and blindly jumps in to use them not knowing that there is no real asset protection provided.
What is the problem?
As stated above, a land trust is a “revocable” trust. Asset protection 101 is that revocable trusts provide NO asset protection from creditors. For example: If Dr. Smith has a Christmas party at his house where he serves alcohol where someone drinks too much and drives home and gets into a terrible car accident killing three people in another car, Dr. Smith is going to be sued. As a general statement, ANY assets in Dr. Smith’s name or ANY assets in a “revocable” living trust will be at risk to the lawsuit that will ensure.
The sale’s pitch
The sale’s pitch with land trusts is that everyone should have their real estate in a land trust because when a plaintiff suing you (or thinking of suing you) does a search to find out what assets you own, they will not be able to “find” the assets you own in a land trust because they are affectively “hidden.”
I found one web site that gave an example of a $3,000,000 lawsuit against a client involved in a car wreck. The client had $1,000,000 of auto insurance and because the client had his house in a “land trust,” the plaintiff’s lawyer was not able to find the house and therefore, settled for the $1,000,000 of insurance coverage instead of going after $3,000,000 in assets.
The above example is absurd and one of the reasons that has moved me to write this newsletter. Remember that I had several people e-mail me and tell me that they thought land trusts would “asset protect” their homes. Land trusts technically provide NO asset protection.
Land trusts only temporarily hide your assets so that IF a personal injury attorney does a search to find your assets, the attorney will not be able to do so from an initial cursory search. In the car crash case, a lawsuit is inevitable and the assets owned by the client will be found.
Isn’t a land trust better than nothing?
I suppose. If having your real estate in a land trust will help you sleep at night, than use a land trust IF and ONLY IF it is coupled with other asset protection tools such as Limited Liability Companies, Family Limited Partnerships, etc. The problem with the way land trusts are pitched is that they give the client a false sense of security that the land trust will “protect” the assets in the trust. Again, land trusts provide NO asset protection from creditors.
You need to understand that in the “real world” what will happen with a lawsuit is that a personal injury attorney will file suit and then take the deposition of the person being sued. At that deposition, the attorney will simply ask the client to list their assets. While it may be premature and objectionable, in a deposition the question will be answered, the defendant will have to disclose assets in a land trust and the objection will be noted. Again, there is no legal way to hide assets.
In my opinion, land trusts are not very useful when it comes to “asset protection.” If you use a land trust, make sure the asset(s) being transferred to the trust are already owned by a separate entity that provides “real” asset protection. The bottom line is that land trusts do not protect assets notwithstanding what the marketers of the topic will tell you.