There are over 80 million lawsuits filed every year in the United States. Landlords and real estate investors are especially susceptible to liability. Are you a target? Are your assets easy to locate? Is your real estate titled in your name?

You wouldn’t walk around with a financial statement taped to your forehead would you? So why would you have your most valuable assets exposed to public scrutiny? Anyone can go down to the county courthouse or recorder’s office and look up the owner of any property. Real estate records are now computerized, so all of your real estate holdings can be located at the touch of a button!

Any mortgages on your property will be recorded as well. Most recorded mortgages will state the amount of the original principal balance and the date the mortgage payments began. All one has to do is figure out the balance of your mortgage and subtract that amount from the market value of your house. Bingo! Now they know how much equity you have and hence whether suing you is worthwhile.

If a tenant or creditor is contemplating suing you, he will make an appointment with a lawyer. Unless he can afford an attorney by the hour ($150 and up), he will likely seek a “contingency-fee” lawyer. A contingency-fee lawyer does not charge by the hour; he charges a percentage of whatever he collects. Most contingency-fee lawyers will not take a case unless there is something upon which to collect. If you have no real estate in your name, then finding out your ownership interest will not be easy for a typical lawyer. It’s not that lawyers are lazy. It’s simply a matter of allocation of resources; lawyers focus on cases they can win and collect. If they don’t find any assets in your name (and there is no other apparent “deep pocket”), they probably won’t take the case. As you can see, appearing “broke” is the best lawsuit-repellent money can buy!

There is another problem with owning real estate in your own name. If a judgment is obtained against you and filed in any county in which you own real estate, all real estate in that county will have a lien attached to it. You cannot sell or refinance any property in that county, since no title insurance company will guarantee a clean title. You’re stuck until you pay off the lien.

Some people use a corporation or limited liability company to hold title to their real estate. While these entities will protect you, they will not protect your property. If you own all of your properties in one corporation, a judgment against the corporation will create a lien on all property owned by the corporation. Furthermore, the directors and officers of a corporation are public record, so a corporation will not hide your ownership.

The solution for holding title to real estate is a land trust. A land trust is a revocable, living trust used to title ownership of real estate. Title to the property is held in the name of a trustee, who is forbidden to reveal the beneficial owner. The beneficial owner or “beneficiary” can be an individual, corporation or other entity for further protection. Land trusts were first used in Illinois, hence the nickname, “Illinois Land Trust.” In nine states (AL, FL, GA, HI, IL, IN, ND and VA), land trusts are specifically recognized by statute. In most other states the validity of land trusts are supported by common law and general trust principles (land trusts are not recognized in TN & LA).

A land trust, if properly setup and implemented, will hide your name from the public records. No one will know who owns the property but you, your attorney and the trustee. If a judgment is entered against you, a lien will not automatically attach to the property, since title is not in your name.

A transfer of realty into a land trust virtually no income tax consequences. A land trust is considered a revocable “grantor” trust under the Internal Revenue Code, so it does not require a separate tax identification number or income tax return. Thus, you continue report the property for income tax purposes as though you still own it. Furthermore, a transfer of property into a land trust will not usually trigger the “due on sale” clause of your mortgage.

A land trust will allow you to assume an FHA or VA loan without recourse. Anyone can assume an old FHA or VA loan without qualifying, but few investors realize that such an assumption is with recourse. If the investor sells the property and the buyer assumes then defaults on the loan, the investor (and anyone else who previously assumed the loan) may be held liable. If a land trust is established to take title to the property and assume the loan, there is no recourse against the beneficiary. Furthermore, the loan will not appear on the beneficiary’s credit report as a liability. So What are your waiting for?

Get that Property Out of Your Name!

William Bronchick, CEO of Legalwiz Publications, is a Nationally-known attorney, author, entrepreneur and speaker. Mr. Bronchick has been practicing law and real estate since 1990, having been involved in over 600 transactions. He has appeared as a guest on numerous radio and television talk shows including CNBC Power Lunch. He has been featured in Who’s Who in American Business, Money Magazine, the Los Angeles Times and the Denver Business Journal. William Bronchick has served as President of the Colorado Association of Real Estate Investors since 1996.

Landlords incur risks from all sides. They are often seen as wealthy, particularly by the people who write them monthly checks. Their tenants have ample opportunity to develop grievances, real or invented.

The risks call for self-protection, said lawyer William Bronchick. Among all professions, landlords face the greatest threat of being sued, he said.

An active real estate investor and president of the Colorado Association of Real Estate Investors, Bronchick sells do-it-yourself software to help savvy property owners protect themselves with the right legal structure. It is one of several products sold for that purpose.

The right legal structure, he said, often includes a land trust. Such an agreement allows one party, called the trustee, to hold ownership of property for the benefit of another, called the beneficiary.
Land trusts offer several advantages to property owners under the broad headings of privacy, protection from liability, and tax minimization, according to Bronchick.

Want a land trust?

There are many books and software programs that help real estate investors learn the ins and outs of land trusts. Here are some of them:
Software

• Step-by-Step Guide to Land Trusts, legalwiz.com/landtrusts $397
• Land Trusts Made Simple — Basic Home Study Course With Forms $237
• Business Owners Toolkit, forms and information available to paid members

Books

• “Land Trusts for Privacy & Profit: Using the ‘Illinois-Type’ Land Trust in Other States,” by Michael Warda, $34.95
• “JK Lasser’s Real Estate Investing,” by Michael C. Thomsett, $16.95

Other lawyers contend that the liability benefits are illusory. When push comes to shove in court, they say, a land trust will provide no real protection.

In an age when anyone can determine property ownership using public databases, owners sometimes find themselves targeted by private investigators or plaintiffs’ attorneys. Municipal code-violation enforcers as well as journalists may have interests in tracking down property owners.

“Lawyers want to sue people with money,” Bronchick said.

The best defense is to hide your assets, he said. “Make it look like you’re broke.”

An investor with several properties can place each one in a separate trust, making them hard to link together, according to Bronchick. All the trusts in turn may be held by a single corporation.

The choice of corporate structures varies, depending on individual considerations such as taxes. For someone with a total annual income of less than $100,000, for example, a C-type corporation is taxed at a lower rate than an S corporation. Another option is a limited liability corporation, or LLC.

When property is controlled by a corporate entity with limited liability, the landlord enjoys a degree of protection, Bronchick said. Forming a corporation requires legal and tax counsel. Canned software such as Bronchick’s product for land trusts is no substitute, he said.

Denver real estate investor Chris Yates of CM Yates Inc. has often used land trusts for privacy and protection of assets, he said. But tighter lending requirements are making it harder to do.

“In the past, a land trust was often part of creative deal structuring,” he said. “Now when they see a trust in the chain of title, it’s a red flag. They’re more nervous than in the past, and they may think a buyer using a trust is engaged in some sort of fraud.”

Buying property from a trust is generally not a problem, said lender Sean Bennett of Moncor Inc. But lenders may look askance at someone proposing to buy property from a trust that they themselves control as the beneficiary, he said.

The dark side of land trusts, critics argue, is that they enable bad behavior on the part of landlords by allowing them to operate anonymously. A slumlord can escape accountability by using corporate smoke screen.

Denver lawyer John Head, who has represented plaintiffs in many real estate cases, has another take. He doesn’t believe anyone, by using land trusts, effectively escapes liability or pursuit by attorneys.

“There is no legitimate reason for someone to set up a land trust purely for investment reasons,” he said. Trusts do have legitimate purposes, such as when a trustee is assigned to act as the caretaker of a property, he said.

Whether a property is held in a trust or not, debt financing can be a big deterrent to someone hoping to sue. If there’s little equity to recover, the plaintiff’s attorney may pass on the case, Bronchick said.
Trusts can protect against title claims. When a property is sold, typically sellers sign a warranty deed saying there are no liens against the property, dating back to its origin.

If a past lien is discovered later, the seller may still be held liable, Bronchick said. This surprises many sellers who thought they were indemnified by title insurance. If the property had been held and then sold by a trust, normally the trust would now have no assets to recover in a lawsuit.