What is a land trust? Many people have the misconception that land trusts will give them real estate asset protection in the case of a lawsuit. The following article discusses the myths surrounding land trusts and offers some information that will help individuals understand land trusts.
Asset Protection Myths: Asset Protection and Land Trusts
Last wills and testament with a revocable living trust
Asset protection with land trusts are an area that many do not have enough information about. To clear up some common myths and misconceptions, we will begin by discussing what a land trust is and how it can be used effectively by you.
The overwhelming majority of land trusts we see are revocable living trusts. While a land trust does have some different features in regards to making the owner of the property more difficult to find, the land trust does not protect the asset in any way. As a side note, it is possible, but it is rarely the case, for a land trust to be an irrevocable trust as well which would make it an excellent asset protection tool since the individual would no longer remain the owner of the property, however we rarely see this. The majority of people will choose to use a land trust to retain their property without taking it irrevocably out of their estate.
Read about Revocable Trusts vs. Irrevocable Trusts
It is not suggested to try to “hide” their assets in order to protect them. Since 9/11 and the Patriot Act, there is no such thing as secrecy in the United States. There is no legal way for any advisor to claim of doing such a thing. The best way to hide is in plain daylight with a properly drafted irrevocable trust, like the Ultra Trust®, and exchanging the assets into the irrevocable trust to avoid fraudulent conveyance.
Seeing as the topic of asset protection is a main concern for many individuals, discussing various asset protection tools will allow property owners to have choices as well as the information they need to make educated decisions. Unfortunately, many people, as well as advisors will often learn that these land trusts can be asset protection tools and they do not take the time to learn about the details before jumping right in – don’t be one of those people.
Land Trust Disadvantages
As mentioned, land trusts are usually revocable trusts and in all cases, a revocable trust should be avoided when looking for asset protection. To highlight this point, let’s say that Mr. Merker hosts a party at his home in which alcohol is being served. A guest at the party drinks a bit too much and drives home, getting into an accident on the way. Three people in another vehicle were killed. The end result is that the party host will be sued because he was the one serving the alcohol. What happens now? Basically, any assets that are in his name, including assets that are in a revocable trust, yes, including a land trust, will be considered in the lawsuit.
Land Trusts sold to Hide Assets
Those selling these trusts will try to convince people that all real estate should be placed into a land trust. This is done so that if there is a lawsuit in the future, these assets will not be “found” and the land will be protected. This is because the land trust will temporarily hide these assets from creditors. For example, if an individual is in an accident and is being sued for a total of $2,800,000 and had his real estate placed into a land trust, the lawyer for the plaintiff would not be able to locate these assets with a cursory search. In this case, the lawyer may settle for the amount that the insurance will pay and not pursue going after the rest of the individual’s assets, namely because none were found with an initial cursory search, but with one extra step the owner is found fully exposed with no protection.
The Act of Hiding Assets
When using a land trust, the assets in the trust will be hidden temporarily. This is so that if there is a personal injury lawsuit, the lawyer will have a difficult time finding any assets. However, in the case mentioned above, after a little detective work and digging, those assets will be found and will be considered in the lawsuit. In a real type of case example, typically, a lawyer (personal injury one) can file a lawsuit against, say, Mr. Merker, in the case above, and while in the deposition where the oral testimony is given, the truth of any and all assets within a revocable trust or a land trust must be disclosed or a charge of perjury or withholding evidence could turn a civil case into a criminal one.
It may be true that a land trust is better than not having any asset protection at all. However, these trusts should only be used if they are combined with other forms of asset protection, including Family Limited Partnerships or Irrevocable Trusts. Many land trusts are offered to people on the premise that the trust will protect the assets, yet people are unaware that this is seldom the case when the land trust is the only form of asset protection being used.
When there is a lawsuit of any significance, you can be assured that lawyers will dig until they find something. With a land trust, the assets are hidden in the beginning, but they can be located. In the end, the defendant will be required to disclose all assets and these will all be taken into account during the lawsuit. It cannot be stressed enough that there is no legal way to “hide” assets in this manner.
In terms of asset protection, land trusts are not effective. If an individual does choose to take this path, they should make sure their assets will be transferred into a trust that is irrevocable, meaning it is owned by a separate entity.
Please contact us at Estate Street Partners at (888) 938-5872 to find out more about land trusts and how you can protect your assets.