Land Trusts & Liability

Dear Fellow Investor:

I keep hearing that investors are being told that they do not
need a legal entity such as a corporation or limited liability company
(LLC) since they are using a land trust. Folks, let’s cover this one
more time. A land trust gives you no true legal liability protection.
Its primary purpose is to provide you anonymity in the ownership of
property.

Done properly, both the corporation and the LLC can also hide
ownership of the property. As a matter of fact, in most states, the
neither the corporation or the LLC is not required to divulge its
owners. This can be a good anonymity tool in itself. Of course, if
you are on the list of officers and/or the registered agent supplied
to the state, it could be guessed that you are also the owner of these
entities. But you can always get someone else to hold these positions.

Even if the opposing party knows that you own the corporation or
LLC, the liability shield provided by state law will help protect your
personal assets from liabilities within the LLC. Compare this to the
discovery of the land trust beneficiary during a court case. Opposing
counsel will simply modify the suit to include the beneficiary. This
will be allowed since the trust has no legal basis to protect the
beneficiary.

On the other hand, courts are reluctant to allow the shields of
legal entities to be pierced easily. If they did so on a regular
basis, commerce would grind down when investors in these entities
could not be protected and investments were withdrawn. Also, the
revenue states receive for organizing and maintaining these entities
would dry up.

Before the court will consider allowing the shield to be pierced,
it must be demonstrated to the court that you disregarded the
separate nature of the entity. That is why proper day-to-day
operation and formalities are so important.

But in this eBrief, we are discussing the land trust. There
is some practical protection that is gained using the land trust.
Let’s take a look:

1. It slows down the opposing side costing them time and money.
(This is also true of owning property in a corporation or LLC.) The
land trust is not a common structure and will require opposing
counsel to figure out how to approach the issue.

2. Often the opposing side does not go to the effort of finding
out who the beneficiary is. They just go after a judgment in the name
of the land trust. If this happens and you are the beneficiary, your
assets are not subject to the judgment, just the assets of the named
land trust.

Of course, post-judgment interrogatories could be used to find
out who the beneficiary is. Then a motion could be entered into court
to have the judgment expanded to the beneficiary as well.

3. If the beneficiary happens to be an innocent third party such
as your children or your wife who are not in the business, the court
frequently will make an attempt to protect their interest.

I am also told that a trustee cannot legally divulge the names of
the beneficiaries. I invite you to email me the clause you believe
supports this position. This is just not true. There are ways to make
the trustee liable to the other parties to the trust.

But the court can still compel the trustee to tell who the
beneficiaries are. What would you do if the judge threatened to put
you in jail until you provided the names of the beneficiaries? This
actually happened to a friend of mine. Guess the path he chose.

Don’t get me wrong. Land trusts have their place, but they are
not the be all, end all, prevent plaque on your teeth solution to
holding title to property. Land trusts should never be used to take
the place of a legal entity, but can certainly be used in addition
to them.

For instance, I would use land trusts to hold title to several
houses that would otherwise be owned by a single LLC. That way a
simple perusal of the courthouse records would not show all these
houses owned by one entity.

In any case, do not ever use the land trust without a good
education on the subject. Sloppy paperwork or no paperwork here
can cause a lot of problems down the road.

Dyches Boddiford
www.DBoddiford.com

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