What is a land trust?
For purposes of this article, we were talking about private land trusts. We are not discussing land owned by the United States government and held in trust for Native American tribes or individuals. And since our law firm is located in Arizona, we are specifically discussing the Arizona land trust.
A private land trust is a legal entity that takes ownership of a piece of real property at the request of the property owner. Allen trust is simply a revocable, living trust that allows for the management of real property (land, a house, or building) while you are alive.
A land trust that owns land is also known as an Illinois land trust. It provides anonymity and can avoid probate upon the original owner’s death.
How does a private Arizona land trust work?
Arizona land trusts are essentially revocable, living trusts. They have a grantor, a trustee, and one or more beneficiaries. The trustee manages the trust, and the beneficiary is the one that benefits from the land trust.
The grantor is the person who transfers assets into the trust in sets the terms of the trust
The trustee is someone other than the grantor. He or she manages the property. For example, if the Arizona land trust owns a rental property, it would be responsible for overseeing maintenance and collecting rent payments.
The beneficiaries are whoever you name. Typically, a person creating an Arizona land trust for privacy reasons would name himself as the beneficiary. And just like any living trust, children or other loved ones are named as contingent beneficiaries after the original beneficiary dies.
Because the trust is revocable, the grantor can change the terms, replace the trustee, dissolve it, or do anything he or she wants with it.
What’s the purpose of a private, title-holding land trust?
Individuals create Arizona land trusts for the purpose of obtaining privacy. If John Brown wants to create such a trust, he would NOT name the trust “the John Brown Trust.” Instead, he may name it “the Wildflower Trust” or “the Arizona Cattle Trust.” Something not tied to his personal name.
The land trust names someone else as the trustee. Thus, a house might be titled in the name of “Jane Smith, trustee of the Wildflower Trust.” In this way, the original landowner does not (immediately) appear in the public record if someone is searching for assets. John Brown’s (the grantor’s) name does not appear (immediately) in the public record. Of course, John Brown had to transfer his house to the Wildflower Trust. And that is done by a deed that is recorded at the County Recorder. And anyone with half a brain can figure this out.
So apparently the purpose of a land trust is privacy from people who can’t figure out how to do a simple title search with the County Recorder.
Are land trusts permitted in Arizona?
Yup. An Arizona land trust is nothing more than a plain vanilla living trust that names someone other than the grantor as trustee. Arizona law allows for people to create revocable living trust. And there’s nothing prohibiting the person from naming someone other than himself as trustee.
That being said, there are no statutes or court cases in Arizona specifically permitting a land trust. But there’s also no law specifically permitting you to chew gum or allowing you to blink your eyes. Because it is not prohibited, you can do it.
Does the Arizona land trust provide any asset protection?
The only purpose of a land trust is to provide privacy. But that privacy can quickly dissolve if you lose a lawsuit.
If someone gets a judgment against you, the next step will be for that person to get you to pay. If you don’t pay the judgment, the next step will be to require you to attend a debtor’s exam in court.
In that debtor’s exam, the opposing attorney will ask what assets you own. You can truthfully say that you do not own the property held in the land trust.
The next question will be, “Do you have any beneficial interest in any property?” At that point, you need to mention that you’re the beneficiary of the land trust that you created. If you failed to disclose this, you are committing perjury. And the penalty for perjury could be jail time or a fine.
So now that your judgment creditor knows about the property in the land trust, your creditor can easily get the court to order that your property be sold to pay off the judgment.
If land trusts provide no creditor protection, why are they so popular?
The truth is, we don’t know why land trusts are popular. Maybe it’s the same reason that diet pills are popular. most people are looking for a quick and easy solution. Everyone knows that the real way to lose weight is to change your diet and to exercise. This is no secret. But nevertheless, enterprising people continue to get rich by selling weight loss supplements.
There are also enterprising people who are getting rich by selling “asset protection solutions” that don’t work. For example, watch this video. The attorney sounds very convincing. But you’ll notice that he admits that his “solution” does not actually protect you from lawsuits or creditors. The promise is simply that it will make it more difficult for the creditor to collect from you. That’s like selling you running shoes with the claim that they will protect you from wild animals … because they will help you run fast.
A Land Trust provides NO asset protection. Just like running shoes provide no protection from wild animals.
Do Land Trusts Formed in Other States Provide Protection?
Land trusts in any state provide privacy … as long as you don’t actually lose a lawsuit and face an aggressive creditor’s attorney wanting to get his 40% cut from collecting on the judgment again you. That attorney will easily be able to force you to disclose your beneficial interest in your land trust. At that point, your creditor can easily get a court to order that your property get sold to pay off the judgment.
This is the same in any state. A land trust is simply a plain vanilla living trust with one tweak: It names someone other than you as the trustee.
What if I include a couple of LLCs?
This is the standard solution for when land trusts are used. The drafting attorney forms one LLC to serve as the trustee, and a different LLC to be the beneficiary of the land trust.
I liken this to taking a paper wall and painting scary monsters on it. The fact remains that your paper wall is made out of paper.
Again, if someone wins a lawsuit against you, the next step will be to drag you into court for a debtor’s exam. During that debtor’s exam, the plaintiff’s attorney will ask you whether you own any beneficial interest in property. Your choice will be to lie (and face a perjury charge and jail time) or tell the truth. Once the plaintiff’s attorney finds out that you are the beneficiary of a simple living trust with a different trustee, the attorney will get the court to order that your property sold in order to pay the judgment.
The fact that you added some LLCs into the mix will probably increase the plaintiff’s attorney’s work by about 8 hours. Eight hours times an hourly billable rate of $500 is $4,000. So, if the judgment is fairly significant, and the plaintiff’s attorney is getting a typical 40% contingent fee for collecting the judgment, the LLCs don’t really help you much. If anything, they anger the plaintiff’s attorney and make you look bad to the court. Using a land trust in combination with LLCs makes you look like a fraudster who was trying to hide assets from creditors. (And in fact, that would be correct.) Judges don’t like fraudsters.
Is there an alternative that actually works?
Yes. You can use an intentionally defective grantor trust (IDGT). The type of IDGT that we prefer to use for this purpose also includes two ways that you can amend the trust or even unwind it at a later date. First, the trust would allow you to name a Trust Protector who has the power to amend the trust, replace the trustee, or even unwind the trust if you ever wanted.
Second, the trust would include a Special Power of Appointment. That permits you to “appoint” (or direct the trustee to transfer) the trust property to anyone that you want (other than yourself). If you have someone that you trust, such as a close friend, parent, or fiancée, you can have the property transferred to that person. And then that person can transfer the property back to you.
This approach is much better than the “paper wall” illusion of protection that an Arizona land trust offers. Generations of case law make it clear that an IDGT with a Special Power of Appointment protects you from creditors, assuming you funded the IDGT properly.
If you want to protect your house or other properties in Arizona, don’t use an Arizona land trust. There are better solutions. Schedule a Strategy Session and let’s talk. We’re here to help.