Does California recognize land trusts? Yes, but California real estate investors face certain regulations and restrictions in their home state.
Land trusts (read: What Are Land Trusts?) are not subject to the same burdensome tax obligations as, say, an in-state LLC. In fact, the fact that they are relatively new means that there isn't much law about them at the state level at all. Keep reading to learn more about using a land trust in California, as well as what specific benefits Golden State investors can enjoy when they do so.
The novelty of land trusts in California actually confers some benefits onto their owners. Other states with more established case law have more exceptions to the protections of land trusts. In general, law is built on precedent. This means that court decisions aren't made in a vacuum. They are heavily informed by the rulings of past courts, particularly courts in the same area.
California is a community property state. This is most relevant for married real estate investors. In community property states, anything one party gains during a marriage can be legally treated as a joint asset.
Community property laws come up frequently in the unfortunate event of a divorce. Let's look at an example. John and Mary Smith are real estate investors in the San Francisco area who have been married for ten years. They both have their own investments, but Mary is the more prolific investor. They show up in family court after a mutual decision to end their marriage.
With no asset protection measures or land trusts in place, Mary could actually stand to lose some of the investment properties (or even the money she would receive from them if they are sold) in the divorce. However, if she uses a land trust to hold the properties, this is unlikely to happen.
The land trust itself is controlled by a trustee, and therefore will not be treated as community property. In short, Mary would be in a much better situation using a land trust because John has a legal ability to make claims on property with her own name on it. He does not have this ability if the property is held in an anonymous land trust.
Of course, there are ways around state regulations that confer community property status onto assets gained during a valid marriage. Tenancy by the Entireties, also called TbyE, allows married couples to own a piece of real estate together, but not jointly. Some couples elect to use both methods of protection by both securing shared properties in land trusts and owning them TbyE.
This information may seem a touch cynical. Few people, when marrying, ever believe they will end up dealing with the fallout of divorce. But the unfortunate truth is this: over half of marriages do end in divorce.
When it comes to the law, it's perfectly fine to hope for the best. But the smart investor will always prepare for the worst. The wise investor plans ahead to avoid the worst possible outcomes, like lawsuits and losing property in a divorce.
Royal Legal Solutions works with real estate investors from all over the country. We keep up with the latest changes in state law and other legal technicalities so that you don't have to. We are also well aware of and sensitive to the needs of California investors. Whether you're trying to enjoy the tax benefits or asset protection aspects of a land trust, we can help.
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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