Recently, I introduced you to some strategies for protecting your assets from lawsuits and creditors (equity stripping, irrevocable trusts, and sale-and-leaseback agreements). Today we will discuss another approach people often think will protect their assets—land trusts. Let’s begin with two myths.
Myth 1: Land trusts always hide ownership.
Land trusts can give you privacy. But using a trust to buy land all by itself won’t hide your ownership of the property. You will also need to take two other steps: pay cash and use a trustee other than yourself to represent the trust.
Why is paying in cash necessary? Because if you don’t pay in cash, it means you needed a loan. And a loan normally requires a mortgage that will be recorded against the property at the Recorder’s Office. The mortgage, in turn, will usually reveal that you are responsible for paying the loan. It doesn’t take a genius to connect the dots from there.
Why use a trustee other than yourself? Because when a trust buys land, the way it is written on the transfer documents (and stated in future title reports and searches) is usually something like this: Jordan Sundell as trustee of the CNMI real estate trust dated April 1, 2019, or the CNMI real estate trust dated April 1, 2019, through Jordan Sundell, its trustee. In either case, if privacy is your goal, you don’t want the trustee’s name to be easily associated with you.
From there, it’s straightforward to regain control of the trust. Have the trustee resign and then appoint yourself or, better yet, your limited liability company as the new trustee. At that point, the publicly available records will still list the original trustee but the legally relevant documents will say that you are the trustee.
Myth 2: All land trusts offer strong asset protection.
The only kind of trust that provides asset protection is an irrevocable trust, i.e., a trust that you cannot modify or cancel. And even then, an irrevocable trust won’t protect you if you fully control the trust or are its sole beneficiary.
Land trusts seldom meet these criteria. Most are revocable and the person who controls it also happens to be its beneficiary. In these cases, the trust offers very little asset protection.
So, how can you use a land trust to protect your assets? Simple. Start by creating an irrevocable trust. Give the trust legal title to the property. Appoint yourself as a beneficiary with the right to assign your benefits. And then record your title’s property in the name of the trust. After title has been recorded, transfer your interest as beneficiary to a limited liability company.
The transfer goes unnoticed by potential creditors because the transfer is not recorded or otherwise publicized. And the beneficial interest now falls behind the LLC’s liability shield.
Now let’s turn to three other ways that a land trust can help you.
First, land trusts can protect from homeowner’s association liens. If you buy a condo, often the HOA will require that you buy the condo in your own name. This requirement is aimed at preventing companies from buying up condos and then turning them into short-term rentals. It is especially common in Florida but less so here.
The downside to owning a condo in your name is that you are personally liable for all HOA dues and assessments. As a result, if you fail to pay, the HOA can put a lien on the property, sue you, and go after all of your personal assets (with some exceptions).
Better to avoid that scenario by buying the property in a land trust and then transferring the beneficial interest to an LLC.
Second, using a land trust can effectively turn non-assumable loans into assumable loans.
To understand, let’s take a step back. When you get a bank loan, it will have a clause saying that if you transfer the loan to someone else, the bank can demand that you immediately pay back all of the then-existing principal and interest. This language is called an “acceleration” or “due-on-sale” clause.
A land trust can allow a borrower to coast around the edges of a due-on-sale clause. To do that, the borrower needs to transfer the land’s title to his land trust. And then he transfers the beneficial interest to the next person without recording the second transfer. The second transfer technically breaches the due-on-sales clause but since the transfer is not recorded, and thus not a public record, the bank won’t hear about it unless the new borrower starts missing payments.
Third, parking real estate in land trusts can minimize transfer taxes. Land deals, like virtually every other transaction, from buying a can of soda to purchasing a Rolls Royce, involves putting money in the government’s pocket.
Reducing these taxes is as easy as copying the same procedure as we just discussed for bypassing due-on-sale clauses. The difference though is that rather than transferring the property from your trust to a new person, you would instead transfer the beneficial title to your LLC. This second transfer is technically taxable but since the transfer is not recorded, it never comes across the government’s radar.
Does this tax apply in the CNMI? The laws and regulations are clear as mud. But my experience has been that the Department of Revenue and Taxation falls on the side of common sense about this issue and therefore won’t charge a tax for retitling a property’s name when there’s no “real” change in ownership.
But, of course, caveats apply. So, ask a few questions from knowledgeable people about your exact situation. The details matter.
This column is for information purposes only and is not intended to be taken as legal advice. For specific cases, consult a lawyer.
Jordan Sundell is a lawyer primarily practicing business and real-estate law. He formerly worked for the CNMI Supreme Court and Bridge Capital and is now general counsel for several real-estate companies, including JZ Group. His columns—focused mainly on real estate and small business—are published every other Tuesday. Contact Sundell at firstname.lastname@example.org.