Land Trusts And Asset Protection Planning
I have lost count of the number of asset protection inquiries about land trust where the prospective clients believe that the land trust is an asset protection tool. Land trusts provide no asset protection benefits. A land trust is a self-settled trust, meaning the debtor is the trustmaker and beneficiary. A living trust used for estate planning is another type of self-settled trust. In the case of a living trust the trustmaker/beneficiary is usually also the trustee. The trustmaker is never the beneficiary of a land trust.
A land trust is used to hide ownership of real property. People use land trusts for privacy and confidentiality. If you purchase property in the name of a land trust the recorded deed will list the name of the trustee (not you) and the property description. The deed and public record will not list the names of the trust beneficiary.
Privacy does not work in asset protection. Your judgment creditor will ask you to disclose under oath all of your legal or beneficial interests in real property. A debtor will have to disclose his beneficial interest in a land trust. Also, if the property owned by the land trust is investment property your federal tax return, discoverable by your judgment creditor, will likely reveal taxable losses or gains related to your ownership interests.
You can use a land trust to incorporate both privacy and asset protection. For example, a married couple might draft a land trust which designates the beneficiary as the husband and wife, tenants by entireties. The beneficiary could be a partnership or multi-member LLC each of which have asset protection benefits. Your personal names will not show up on the public record as property owners/ You will need a trusted third party to be trustee of the land trust.
In the case of an already existing land trust with a public mission to preserve land from development, donating an interest in a piece of land, usually as an easement that runs with the land, the highest and best use of the land is reduced to what is allowed after the interests held by the land trust are taken into account. So, promising that a piece of property will only be used for agriculture, forest, or open space, a family may be able to guarantee that the property can be kept across generations. In this case, I think the asset protection angle is that both the ongoing property taxes, and any inheritance taxes, are reduced after the property is appraised to reflect the new limited use value. In the right circumstances, this change can be the difference between keeping a piece of property in the family, or having to sell it to pay the taxes.