May 3, 2016
By Alberto Sangalli
I am constantly getting feedback from Students and non-Students about their using land trusts but not understanding them. Even worse, the people who are closing their deals have no idea of what's up and are bungling closings because of it. Some Realtors® and even closing agents are totally unaware of what land trusts are all about and the result is complications and lost deals. Following is a short course in land trusts that is not designed as a legal opinion or legal advice but to answer the "essential" questions I keep getting: Land trusts are designated as "pass-through entities" by the IRS and are not issued Federal Tax ID Numbers ("TIN"). The TIN that should be used by the closing agents is the TIN of the individual or entity that is the Beneficiary of the land trust. For example, if the beneficiary is an individual, his Social Security ("SS") number is his TIN. If it is an entity such as a corporation or LLC, the TIN should be the one issued by the IRS for these entities. If it is some other entity such as a Partnership, then the TIN will be the SS numbers or TINs for each of the Partners. Having said all that, I had one student who, with great effort, actually got a Federal Tax ID number issued for a land trust she formed. The bank employee was wrong, the IRS didn't understand the issue and it was forever a mess with double filings needed for the life of the land trust. And there's more: Land trusts are principally designed to keep the beneficiaries anonymous in the Public Record. If you are the beneficiary and the Trustee, the land trust does no good in protecting your ownership of the property. Trustees can be individuals or entities, these include LLCs and corporations. Whoever is on title in the public record is easily found by doing a search first in the public record and then in Sunbiz.org The way to remain truly anonymous is to have an attorney or other designated no-related individual be your Trustee and use his mailing address for the Trust.
Any disbursement from the sale of a property or rental income should be made to the beneficiaries directly - NEVER to the Trustee. This is the biggest issue for closing agents and attorneys who are uninformed about land trusts. They want to make the check payable to the Trustee and use his TIN. The only way these closing agents and Relators® will ever "get it" is through education and having a "Disbursement Authorization" signed by the Trustee and the Beneficiaries. This authorization must also include the Beneficiaries' TINs.
Land trusts are used extensively for legal transactions where "straw buyers" are accumulating land or properties for a buyer who does not want it known that he or his entity are buying. Walt Disney used this tactic to accumulate raw land for Disney World in Orlando. Many local developers have used land trusts for the same reason. Being a straw buyer is not illegal unless there is mortgage fraud involved.
Most people who use land trusts like them because of ease of transferability of the beneficial interest. This can be done in minutes, without recording the new beneficiaries in the public record and saving on attorneys' fees. Using this transfer method to avoid paying doc stamps or transfer taxes is illegal and not reporting capital gains is a Federal offense punishable by jail time.
Generally, asset managers in REO transactions will allow buyers to be land trusts. Almost always, loss mitigation representatives involved in short sales will NOT allow land trusts. This is because of the anonymous transferability of the beneficial interest without the seller knowing. This is one way to avoid deed restrictions if the beneficial interest is transferred before the original closing. In these deed restricted properties, you must read the deed restriction carefully because there are numerous other ways to legally avoid them.
Land trusts also limit the liability attached to a specific property because the property is owned by the land trust and not the beneficiaries - the beneficiaries own the land trust but not the property. Each land trust should be designed to own only one property and the land trust should "extinguish" itself when the property is sold or transferred.In summary, this has been a brief overview of how land trusts work and some issues you may have if you decide to use them. I suggest you read more information about land trusts if you decide for various reasons to use them.
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