The history of land trust goes back to medieval England. The prevalence of lengthy wars, such as the Crusades, led landowners to construct a way to delegate management of their land while they were away and in the likely case of death.
Through a trust, landowners could delegate management rights to a trustee. The trustee would serve as the land manager, but would not benefit from the land himself. He’d simply be in charge of management until the beneficiary (usually the son of the landower) was old enough to manage the land himself.
Today we no longer have to plan for years-long crusades, unless you’re knee-deep into one of those medieval role playing games. However, land trusts do have several uses in our modern world of taxes and lawsuits. Land trusts can simplify the tax filing process, since they’re treated as pass through entities.
Land trusts do not file tax returns. You simply report taxes on your personal tax return. Land trusts also provide privacy. This can come in handy in the case of a lawsuit. Property is held under the trust’s name, not your own. Thus anyone threatening a lawsuit won’t be able to connect you to a certain property.
As you can see, land trusts do provide protection and convenience. However, in the case of bankruptcy things can get thorny. Protection of land trust property in the case of bankruptcy is a complicated legal issue. We recommend consulting with a legal professional who is experienced in setting up land trusts. What is certain is that in the case of trusts with multiple beneficiaries, co-beneficiaries can suffer.
Let’s consider the case of John. John is the settler beneficiary and also one of the loan signers on the property. A bankruptcy judge will try to satisfy creditors by selling trust interest from John. While this action is possible, it’s not quite easy. There isn’t a large market for partial interest in a land trust. It’s not an attractive purchase. But if it does go through, co-beneficiaries lose freedoms. They are now tied to whoever bought the partial interest.
Even in less complex scenarios, land trust beneficiaries should consult with a legal professional to avoid the unpredictable actions of a bankruptcy judge. Whether a trust is revocable or irrevocable can make a difference in who has control over the trust. Most land trust are revocable. This means they are still under the control of the grantor, until his/hear death not the beneficiary. This can help a beneficiary who is going through bankruptcy because any property in that trust can be protected from creditors.
Also, the type of bankruptcy being filed can impact the protection of trust assets. Again, land trust do come with important benefits. However, in the case of bankruptcy and especially with multiple beneficiaries, we can’t stress how important it is to seek professional legal consultation.
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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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