Setting up a trust is a common practice among professionals in the housing industry. While there are different types of trusts in every state, an investor who is buying their first property or a group of investors joining together to purchase multiple homes could be exploring what a trust will provide. Learning if you should use land trusts for real estate can be an asset.
What is a Land Trust?
A trust is a legal document that is designed to shield a property owner's identity from different liens, judgment and some estate taxes. A revocable trust is commonly used to remove the personal name of a property owner from a public title search due to privacy concerns. All trusts are managed by an appointed trustee and can be transferred without a public record naming the actual trust owner.
How Trusts Can Help Investors
Rental homes used for passive income generation are often rented to multiple individuals during the time period when an investor or group of investors own the property. A trust could be setup when a home is purchased to protect the identity of all owners from becoming public knowledge. Trusts can also be used to avoid probate issues upon a property owner's death.
Because privacy is important to adults who own a number of homes, protection of information is important. Some investors choose to buy homes and enter into agreements in the name of a real estate land trust to receive initial protection against personal liens or code enforcement by city officials in the name of a property owner.
The beneficiary of a land trust could be changed at a later point in time and this does not affect the land title. Trusts are assignable by the owners and new beneficiaries can be added in the future. Some investors have used trusts when entering into assumable or non-assumable mortgages to prevent enabling due on sale clauses in real estate transactions.
Trusts Offer No Asset Protection
Investors who are confused about protecting their assets can sometimes create a trust in hopes of being hidden from creditors or legal action. While a trust does create a level of privacy, it does not create asset protection. Property owners can still be liable for issues related to a property unless an asset protection business formation has been selected like an LLC or corporation.
Most Trusts Have Administration Fees
It is common to choose a bank, attorney or other financial lender that has the ability to become the trust beneficiary. Most companies provide a land trust fee schedule that includes all upfront costs for account establishment and annual fees for trust management. Some fees paid annually by investors could qualify as a business expense to offset some taxation.