- Holding Property in Trust
The Florida Land Trust
By: Raymond J. Bowie, Esq.
Some of their names are a little strange: GRIT, GRAT, GRUT. Or perhaps CRAT or CRUT. Others are named QTIP, QPRT, or QDT. They may be your next door neighbor, right here in Naples. Maybe you’ve even bought property from one, or perhaps one will buy property from you.
The Coneheads? No, we’re not talking about space aliens. We’re talking here about trusts. And indeed, in many local neighborhoods, it seems there are more trusts owning homes than individual owners. Trusts are also frequently buyers and sellers in local commercial realty transactions. In fact, anytime you see the word “trust” or “trustee” after a party’s name, you should know you’re dealing with a trust.
Trusts are contractual legal arrangements created by one party called the “grantor” or “settlor” naming a second party called the “trustee” to hold certain property in the trustee’s name for the benefit of a third party called the “beneficiary.” Sometimes, the grantor can be the same person as the trustee or beneficiary. There are many varieties of trusts created to accomplish different purposes, and many can become quite complicated.
In all trusts, the major concept is a sort of shell game. The goal is to get certain property out of the name of the trust’s creator or grantor, put the legal title in the name of the trustee, but then still have the income or benefits of the property flow to the beneficiary, who might well also be the grantor. A circular arrangement? For sure, but it serves it certain purposes well. Trusts originated back in feudal times when land titles depended on the pleasure of feudal lords. A land owner worried about losing his land upon displeasing a lord would convey his property to a trusted friend (hence the word “trustee”) for the use and benefit of the owner. This hid the true ownership of the land from a feudal lord intent upon confiscating it. Trusts work just as well today “hiding” the true ownership of certain property or its income from those who might want to take or at least tax it.
Terms such as GRIT, CRAT, QTIP and similar others we have seen are acronyms for certain types of estate planning trusts. The trust most likely to own real estate is, however, the Florida land trust.
Like many snowbirds, land trusts originated up north in Illinois and eventually migrated south to Florida. The Florida statute that recognizes land trusts – Section 689.071 – is largely derived from Illinois statutes and case law. Indeed, the popularity of land trusts in Florida is at least partially derived from the fact that many Midwesterners have settled in Florida and brought with them a familiarity with land trusts as a way of doing business.
Under a land trust, real estate is conveyed by deed from the grantor/owner to a trustee who then holds both the legal and equitable title to the property. Florida statutes provide for certain specific provisions that must be put in a deed in order to create a land trust, empowering the trustee to hold and manage the property. To create a land trust, the deed must never identify the beneficiary of the trust. Another document, the declaration of trust or trust agreement, identifies the parties, gives the beneficiary the power to make all decisions about the management and control of the property, and requires the trustee to carry out the beneficiary’s directions. This trust agreement is never to be recorded. This arrangement provides a number of benefits for the trust beneficiary.
The advantages to the land trust beneficiary are numerous:
- Wealthy or famous people, or parties fearing being the target of harassment or litigation, can keep private their interests in real estate.
- The beneficiary’s spouse has no marital claim on the real estate in trust and does not have to join in conveying the property.
- Members of the public can deal with the trustee as the owner of the property and by law not have to inquire about the extent of his powers or the interests of the beneficiaries.
- Transferring the interest in the real estate becomes easier and less costly to accomplish. The trust beneficiary can transfer effective ownership of the realty by assigning his interest in the trust to another party, rather than by having to execute and record a deed to the real property.
- Judgments against the beneficiary will not attach to the real estate in the trust and hence will not cloud the legal title. Indeed, a beneficiary’s judgment creditor will be unlikely even to discover the beneficiary’s interest in the trust. However, the beneficiary’s interest in the trust can be attached if a creditor does learn of it.
- Since the beneficiary’s interest in the trust is personal property and not real estate, a Florida non-resident can, upon death, avoid ancillary probate of his will in Florida. The probate of his will in his home state will suffice to pass his Florida land trust interest as personal property.
- Mortgage financing on land trust property does not become a personal obligation of the trust beneficiary, unless the lender specifically requires a personal guarantee from the beneficiary.
- Despite the beneficiary’s interest being personal property, the tax code allows the beneficiary to receive the same tax treatment for the property’s income and expenses as if the beneficiary owned the real estate directly, including deductions and capital gains treatment. This includes the beneficiary’s ability to do a tax-deferred exchange using the real estate in the trust.
- Maximum business and tax planning flexibility is permitted, since a beneficiary can hold his land trust interest individually or as a corporation, partnership, or other business entity. Fractional interests can also be conveyed to a variety of beneficiaries in order to facilitate real estate syndication.
- Non-resident aliens can put U.S. real estate in land trusts and avoid U.S. gift and estate taxes by holding their trust interests in the name of a foreign holding corporation or partnership.
- Land trusts can assist with a “gifting” program in connection with estate planning. A land trust beneficiary can transfer fractional portions of his interest as multiple gifts to different recipients over time, at a discounted valuation, thereby reducing the size of his taxable estate at death.
Despite being able to transform real estate holdings into a personal property interest, the land trust is not truly a “philosopher’s stone” capable of transforming lead into gold. Not every outcome of the land trust is positive.$page3 = '
For instance, land trusts do not provide a way to avoid a “due-on-sale” clause in a mortgage. Most mortgages these days provide that in the event the owner sells or conveys an interest in the real property, the mortgage loan becomes due and payable in full, i.e. due on sale. In the 1980’s it was believed that an owner could avoid triggering a due-on-sale mortgage clause by putting the property into a land trust with himself as the trustee and beneficiary, then assigning his trust interest to a buyer without conveying title to the underlying real estate. Clever? By a half. Courts have uniformly held this still triggers the mortgage’s due-on-sale clause.
Problems may also be encountered when land trusts are used not just to hold and manage property, but also to develop it or operate a business venture using the real estate. Often, this entails the trustee rather than the beneficiaries taking on active management tasks. This runs the risk that the land trust could be taxed by the IRS as a corporation. Even worse, securities regulators could deem the beneficial interests in the land trust to be an illegal securities offering.
The biggest problem with land trusts, however, is the possible loss of a resident’s homestead exemption if the resident should place his homestead property in a land trust. Florida law provides for a $25,000 assessment exemption from real estate taxes and protection against creditor claims for real estate owned as the primary residence of the owner or his family.
However, homestead only applies to real property interests. Since a land trust interest is considered personal property, putting homestead property into a land trust may strip the property of homestead protection. This loses the $25,000 assessment exemption and makes the beneficiary’s land trust interest subject to creditors. One solution to this problem is for the trust grantor to retain a life estate interest for himself in the deed conveying the homestead property into a land trust, since a life estate continues to qualify as homestead.
If anything, the various advantages and disadvantages with land trusts point out the need for careful drafting by expert legal counsel. No legal device or stratagem is perfect or without downside risks. It may not turn lead into gold, but the Florida land trust comes as close to being a modern-day philosopher’s stone as the law allows.