Land Trust Foreclosures & How Investors Avoid Them

It’s time to talk about the f-word: foreclosure. Foreclosure is a fear for any property owner, and during the housing crisis became something of a collective national nightmare.

Wise investors often take advantage of land trusts for investment properties because they offer a broad range of specific benefits. Among these is the fact that land trusts allow you to obtain personal financing while also safeguarding the property inside of an LLC structure.

But land trusts aren’t immune from foreclosure.  Real estate investors using land trusts can suffer from the actions of their beneficiaries.  Read on to learn about the relationship between your trust’s beneficiary and foreclosure, as well as some tips on preventing this financial nightmare from becoming your reality.

Do Land Trusts Protect Me From Foreclosure?

Unfortunately, a land trust alone does not prevent foreclosure. This is actually a fairly common misconception about land trusts. This fiction has persisted because of wishful thinking on behalf of those in debt, and also because disreputable land trust companies have pushed the idea. Outright scammers have also exploited it.

Further, the legend of land trusts preventing foreclosure lives on because investors often confuse liability protection with foreclosure prevention. Land trusts absolutely offer liability protections.  

There is, however, a grain of truth beneath the misconception. Some states will extend liability protection to the beneficiary of the trust. But in reality, this is extremely rare.  Most states hold all “permissible parties” accountable in the event of a foreclosure. This includes the beneficiary–and that’s you.

The good news is you don’t have to tango with the threat of foreclosure at all.

How Do Investors Avoid Foreclosure on Land Trust Property?

The good news is you don’t have to tango with the threat of foreclosure at all.

Be financially responsible in your investments. This means planning ahead and actively working with your CPA to ensure you can afford any financing you obtain for your investment property.  Work with your attorney to actively oversee your trust and its activities. Your proactivity will pay off by ensuring you’re on top of any payments you may owe.

Choose Your Trustee Wisely

Trustee fraud is an unfortunately common occurrence. Essentially, your trustee is in the pilot’s seat of your trust. That means that your trustee has the power to cause your property to crash and burn.

Trustee fraud occurs when the trustee  misuses or abuses their power over the property. It isn’t always deliberate, either. Sometimes, trustees are simply negligent and fail to fulfill their duties. If this happens with something like a mortgage payment, you could be faced with foreclosure. This is why it is critical that you choose a trustworthy trustee.

If the integrity of your trustee is at all in question, you can always appoint a board of trustees to guard against the possibility. Using a board prevents any single individual from tanking your investment without your knowledge. To stretch the airplane metaphor: would you rather have one pilot, or three commercial airline certified pilots operating your aircraft? Remember, you’re the passenger and the owner here. With a board, if one pilot decides to knock down three martinis during the flight, you’ll have other people who can take the wheel and regain control.

Get Help Making Sure Trust Foreclosure Isn’t An Issue

Following these tips should keep your plane in the air and your land trust on solid legal ground. If you still have questions, feel free to ask in the comments section below. If you need specific advice, set up a consultation with Royal Legal Solutions today. Asset protection is not a do-it-yourself gig.

My name is Scott Smith. In addition to being an attorney, I’m a real estate investor myself. Before I began specializing in issues surrounding trust foreclosures, I would play for the other side.

If you’re considering a land trust, let us help you protect your valuable investments with a foolproof asset protection strategy from people who’ve been around and seen it all. 

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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