Land Trust Disadvantages? Here Are Three Reasons NOT to Use Them

The land trust is an ideal vehicle for anonymous property ownership. However, like all asset protection structures, there are advantages and land trust disadvantages. Keep reading to hear more about some of the positives and negatives of this unique entity.

ANONYMITY

Stop lawsuits before they start is not just the tagline here at Royal Legal Solutions.  Anonymity removes the target from your back and deters most lawsuits before they are initiated. This is possible, in no small part, due to the anonymity provided by land trusts. By carefully creating the land trust and utilizing a nominee Trustee, you are able to remove your name as the current record title holder. The land trust is a privately held document that is not recorded, filed, or publicly searchable.

ASSET PROTECTION

When land trusts are combined with a limited liability entity, you get the best of both worlds. The land trust provides anonymity to a degree not generally available with limited liability companies, and the limited liability entity provides strength and compartmentalization that would not be offered with a typical revocable trust. This is done by creating a land trust that is founded and owned by a limited liability company or a statutory trust.

EASE OF FORMATION

Setting up a land trust is a fairly straightforward process. It requires only two main documents: a deed to the trustee and the land trust agreement. Land trusts are valid in all states, although the specific laws governing each differ (especially when dealing with California and Florida land trusts).

AVOID DUE ON SALE CLAUSE VIOLATIONS

Transferring a residential property with conventional financing into an entity like an LLC directly can place the mortgage at risk for a due on sale clause violation. This is not the case with a land trust. Federal law provides several exceptions to due on sale clause violations. Among these exceptions, a transfer to a revocable trust is set out specifically. This allows you to make a transfer to a land trust with confidence, knowing that your mortgage lender will not be calling the note due.

At this point, you are probably thinking, “What are the land trust disadvantages?” We believe in providing a balanced view of different asset protection and estate planning strategies. To that end, here are several possible drawbacks to using a land trust.

LAND TRUST DISADVANTAGES

#1 LOSS OF REDEMPTION RIGHTS

Redemption rights allow homeowners to reclaim their property before and sometimes even after foreclosure. Homeowners would have to pay off an agreed-upon amount, which usually consists of the total debt plus additional costs. This payment must be made within a limited amount of time, in some states homeowners are given 12 months. This valuable right is lost if the property is purchased under a land trust and you are the beneficiary.

#2 POTENTIAL LOSS OF HOMESTEAD EXEMPTIONS

We already discussed the benefits of homestead exemptions. These exemptions go way back to colonial laws, so while they may differ from state to state their ancient benefits of tax and creditor protection aren’t going anywhere. However, with a land trust homestead exemptions can be forfeited. When it comes to assessing property value for taxes, a hefty reduction may be lost with the disqualification of homestead exemptions. For instance in Florida, homestead exemptions can reduce home property assessment values by $50,000.

#3 LOSS OF SECONDARY MARKET LOANS

Another detail you should consider when dealing with land trust is financing options. With a land trust, you are disqualified from secondary market loans. The secondary mortgage market is where loans are grouped together and resold to investors. This allows the primary lender to gain back the initial loan amount.

LAND TRUST DISADVANTAGES RECAP

You may already be considering a land trust and all that you have to gain in terms of privacy and protection. However, we hope this article has been helpful in pointing out land trust disadvantages, including the loss of rights and exemptions.

Redemption rights can be jeopardized in case of foreclosure. Homestead bankruptcy protection and tax benefits are lost. Lastly, you lose secondary market loan options.

CREATE A CUSTOMIZED ASSET PROTECTION PLAN

Land trusts are one of our preferred strategies to create anonymity but they may not be the right vehicle for everyone. To get a customized asset protection plan designed for your situation, Take Our Quiz. We’ll gather your information to have a productive conversation the first time we speak. After completing the quiz, you will have an opportunity to book your consultation.

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

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