FLORIDA LAND TRUST AND LLC’S

Florida Land Trusts

In Florida, the Land Trusts can be set up by any individual, group of individuals, Limited Partnership, General Partnership, Limited Liability Company (LLC), a Trust Service Provider. The Florida Land Trust can be established for a number of reasons, most commonly to secure and protect the asset, as well as to ensure the privacy of the buyers.

To set up a Florida Land Trust you will first start by completing various forms that name your Trustee. These forms are usually provided by the company setting up the Trust. In naming the Trustee, you can either use your name or it can be under the Title Company or Trust Service Provider’s name. The service provider will be named as Trustee of the Land Trust, and many experts recommend using a company in a different State to further enhance the privacy factor. The trustee has all the fiduciary responsibilities of the Trust, and answers to the beneficiaries of the Trust, who retain all the ownership rights.

According to Uniform Trust Code (UTC) requirements, the same person can be named as the sole trustee and the sole beneficiary of the Trust, but it’s not recommended.

Although considered to be an affordable option, there are still various costs involved. This is normally in the form of a setup fee, which can range anywhere from $250 to $500, attorney fees for the administration of the Trust, including the submission of Tax forms and bills (in the case of an irrevocable Land Trust), as well as yearly fees averaging $300 for maintaining the Trust.

Florida Land Trusts

In Florida, the Land Trusts can be set up by any individual, group of individuals, Limited Partnership, General Partnership, Limited Liability Company (LLC), a Trust Service Provider. The Florida Land Trust can be established for a number of reasons, most commonly to secure and protect the asset, as well as to ensure the privacy of the buyers.

To set up a Florida Land Trust you will first start by completing various forms that name your Trustee. These forms are usually provided by the company setting up the Trust. In naming the Trustee, you can either use your name or it can be under the Title Company or Trust Service Provider’s name. The service provider will be named as Trustee of the Land Trust, and many experts recommend using a company in a different State to further enhance the privacy factor. The trustee has all the fiduciary responsibilities of the Trust, and answers to the beneficiaries of the Trust, who retain all the ownership rights.

According to Uniform Trust Code (UTC) requirements, the same person can be named as the sole trustee and the sole beneficiary of the Trust, but it’s not recommended.

Although considered to be an affordable option, there are still various costs involved. This is normally in the form of a setup fee, which can range anywhere from $250 to $500, attorney fees for the administration of the Trust, including the submission of Tax forms and bills (in the case of an irrevocable Land Trust), as well as yearly fees averaging $300 for maintaining the Trust.

creating a florida land trust - titlerate

As far as tax is concerned, the beneficiaries will need to file tax returns as part of their personal income reports on the schedule “E”, but the Trust itself will not be taxed. Additionally, a property held within a Land Trust can be exchanged for another property free of tax under the Section 1031 of the Trust Code.

To place the title deed into a Land Trust, the transfer should come directly from the seller to the trustee. In this document the trustee is named solely and given all the duties and responsibilities. The other important document you will need to solidify your Land Trust is the agreement between the beneficiaries and the trustee. This stipulates the exact duties of the trustee and the rights of beneficiaries, as well as highlights the roles of each beneficiary, if there is more than one. Likewise, agreements between benefactors should be drawn up to set clear rules and regulations, to cover what will happen in any instance where there is a problem. Perhaps, one of the beneficiaries is unable to contribute, maybe one wants to sell and the other does not want to, or one beneficiary decides to leave the Trust. The contract should be drawn up to preempt any situation that might arise.

Along the same vein of protecting the interests of all beneficiaries within the Trust, another important step to consider is the insurance. Insuring property in a Land Trust requires the services of an experienced insurance agency or company. Any changes to the beneficiaries or ownership details must be communicated with the insurance company so that any loss or claim can be processed easily. Ordinary homeowner insurance will not offer adequate protection for Land Trust owned property, and must be dealt with separately.

As far as tax is concerned, the beneficiaries will need to file tax returns as part of their personal income reports on the schedule “E”, but the Trust itself will not be taxed. Additionally, a property held within a Land Trust can be exchanged for another property free of tax under the Section 1031 of the Trust Code.

To place the title deed into a Land Trust, the transfer should come directly from the seller to the trustee. In this document the trustee is named solely and given all the duties and responsibilities. The other important document you will need to solidify your Land Trust is the agreement between the beneficiaries and the trustee. This stipulates the exact duties of the trustee and the rights of beneficiaries, as well as highlights the roles of each beneficiary, if there is more than one. Likewise, agreements between benefactors should be drawn up to set clear rules and regulations, to cover what will happen in any instance where there is a problem. Perhaps, one of the beneficiaries is unable to contribute, maybe one wants to sell and the other does not want to, or one beneficiary decides to leave the Trust. The contract should be drawn up to preempt any situation that might arise.

Along the same vein of protecting the interests of all beneficiaries within the Trust, another important step to consider is the insurance. Insuring property in a Land Trust requires the services of an experienced insurance agency or company. Any changes to the beneficiaries or ownership details must be communicated with the insurance company so that any loss or claim can be processed easily. Ordinary homeowner insurance will not offer adequate protection for Land Trust owned property, and must be dealt with separately.

Creating an LLC for Property Investment Purposes

Another way to protect and invest in property effectively, without being named on any title deed is to form an LLC, or limited liability company. This LLC will basically perform in the same way that the Land Trust does. It is a larger entity containing numerous members, with the name of the LLC being used on the title deed. This protects each member’s personal assets and finances from any lawsuits, claims, or liens that might occur, especially if the property is going to be rented out. It must be noted however, that as of last year, (April 2010) single member LLC’s are no longer protected by Florida legislature. A creditor can still foreclose on an individual’s interest in a single member LLC.

Rented properties are faced with potential financial risks including slip and fall claims, fire related claims, environmental contamination claims, and various personal injury claims. Instead of these claims resting on the members to personally settle, the income generated by the property in the LLC is used to settle any liens. With a property in an LLC, it still affords some level of privacy, although it is easier for lawyers and private investigators to look up the LLC and find the managing members.

Using an LLC for additional privacy is normally done in conjunction with a Land Trust as discussed above, where the LLC’s sole purpose is to act as the main beneficiary of a Florida Land Trust, making it harder for creditors to track down the owners of the Trust, thereby protecting the beneficial interest of the Trust.

The creation of LLC’s allows real estate investors with multiple properties to separate the problematic assets from the premium ones, therefore protecting the assets from each other. It also offers some level of flexibility when it comes to the distribution of profit among the members.

As far as tax is concerned, the LLC is classified as a “pass-through” company, which means that the income it generates is sent through to its owners and is then claimed on their personal tax returns. This means that the LLC is only subject to capital gains tax on each member’s ownership shares, and not on corporate gains tax as well.

Creating an LLC for Property Investment Purposes

Another way to protect and invest in property effectively, without being named on any title deed is to form an LLC, or limited liability company. This LLC will basically perform in the same way that the Land Trust does. It is a larger entity containing numerous members, with the name of the LLC being used on the title deed. This protects each member’s personal assets and finances from any lawsuits, claims, or liens that might occur, especially if the property is going to be rented out. It must be noted however, that as of last year, (April 2010) single member LLC’s are no longer protected by Florida legislature. A creditor can still foreclose on an individual’s interest in a single member LLC.

Rented properties are faced with potential financial risks including slip and fall claims, fire related claims, environmental contamination claims, and various personal injury claims. Instead of these claims resting on the members to personally settle, the income generated by the property in the LLC is used to settle any liens. With a property in an LLC, it still affords some level of privacy, although it is easier for lawyers and private investigators to look up the LLC and find the managing members.

Using an LLC for additional privacy is normally done in conjunction with a Land Trust as discussed above, where the LLC’s sole purpose is to act as the main beneficiary of a Florida Land Trust, making it harder for creditors to track down the owners of the Trust, thereby protecting the beneficial interest of the Trust.

The creation of LLC’s allows real estate investors with multiple properties to separate the problematic assets from the premium ones, therefore protecting the assets from each other. It also offers some level of flexibility when it comes to the distribution of profit among the members.

As far as tax is concerned, the LLC is classified as a “pass-through” company, which means that the income it generates is sent through to its owners and is then claimed on their personal tax returns. This means that the LLC is only subject to capital gains tax on each member’s ownership shares, and not on corporate gains tax as well.

Creating an LLC for invenstment - titlerate

An LLC may be complicated to set up, costly, and it is easily dissolved if a member dies or wants to leave, but there are certainly great advantages to using it for real estate investing, specifically for asset protection. An LLC will remain one entity, and completely separate from your personal finances. Therefore, a creditor laying a claim against the LLC, cannot touch your personal finances and assets, even though you own some shares in that LLC. The only assets that can be touched are those of the actual property held in the LLC and the income gained from it, i.e. rental.

Looking at existing LLC’s that want to invest in real estate, it is highly recommended that any property is placed in a separate LLC to the main business so that any liens or claims that might occur from the property such as a lawsuit from an injured tenant, cannot be used to force a member to sell his/her ownership rights in the business.

Although creating an LLC is a great form of asset protection, it does come with its drawbacks, such as the maintenance aspect. The first thing that needs to be done once an LLC has been formed is to ensure that all the forms and documents are professionally drafted, completed and recorded correctly. This includes the operating agreement, ownership interest documents, and other records. Then, as an LLC is a business entity, annual meetings will need to be held and detailed minutes taken. Why is all this necessary? Well, if there is ever a problem with the LLC, and it is being sued for damages by a tenant, then the owner of the LLC will need to give a deposition under oath. If there are any problems with the paperwork, it could result in the plaintiff’s attorneys being able to “pierce the corporate veil”, meaning that they will be allowed to ignore the liability protection and go after the owners’ personal assets. They will no longer distinguish the LLC and owner’s personal assets as 2 separate entities, but see them as “one and the same”.

An LLC may be complicated to set up, costly, and it is easily dissolved if a member dies or wants to leave, but there are certainly great advantages to using it for real estate investing, specifically for asset protection. An LLC will remain one entity, and completely separate from your personal finances. Therefore, a creditor laying a claim against the LLC, cannot touch your personal finances and assets, even though you own some shares in that LLC. The only assets that can be touched are those of the actual property held in the LLC and the income gained from it, i.e. rental.

Looking at existing LLC’s that want to invest in real estate, it is highly recommended that any property is placed in a separate LLC to the main business so that any liens or claims that might occur from the property such as a lawsuit from an injured tenant, cannot be used to force a member to sell his/her ownership rights in the business.

Although creating an LLC is a great form of asset protection, it does come with its drawbacks, such as the maintenance aspect. The first thing that needs to be done once an LLC has been formed is to ensure that all the forms and documents are professionally drafted, completed and recorded correctly. This includes the operating agreement, ownership interest documents, and other records. Then, as an LLC is a business entity, annual meetings will need to be held and detailed minutes taken. Why is all this necessary? Well, if there is ever a problem with the LLC, and it is being sued for damages by a tenant, then the owner of the LLC will need to give a deposition under oath. If there are any problems with the paperwork, it could result in the plaintiff’s attorneys being able to “pierce the corporate veil”, meaning that they will be allowed to ignore the liability protection and go after the owners’ personal assets. They will no longer distinguish the LLC and owner’s personal assets as 2 separate entities, but see them as “one and the same”.

Benefits of Setting up a Florida Land Trust or LLC

Privacy

As we have established already, the main benefit for groups of real estate investors is privacy. Their names are not listed on any public records, as the Trustee will be a third party company or bank. The owners will be listed as the beneficiaries of this Trust, therefore remaining completely isolated from the real estate. This means that they own a beneficial interest in the Trust, this interest being personal property, not real property. Their personal information will be completely confidential, but as far as asset protection from creditors goes, additional protective measures should be implemented, as creditors can still seize beneficial interest. This will be discussed further in the next point. Privacy becomes increasingly sought after for groups that own a fair amount of real estate in the same area, due to strict code enforcement. Trusts effectively eliminate the possibility for city code enforcement to find the owners, and send them to court for various, often minor, code violations.

Protection from judgments or liens

This form of asset protection is not concrete using a Florida Land Trust alone. Judgments and liens can be held against the beneficial interest, but for the most part, by placing real estate into a Land Trust, the property can be protected somewhat from personal judgments. This is due to the fact that the owners are not named on the title deed, therefore, no one knows that they own any property. To offer further protection the beneficiaries can create an LLC to act as the main beneficiary for the Trust.

Protection from title claims

Similarly placing property in a Land Trust will protect the beneficiaries from any title claims that might be field if there is a problem with the title. This usually occurs when a lien is filed against the owner without their knowledge, and if this happens, the owner can be held liable, even if they have title insurance. Land Trusts prevent this from happening.

Protection from judgments or liens

Suing someone with lots of property, or even just one property, is easy, because attorneys will always look for cases where people have assets (money) involved, making them easy to win. By appearing to be “broke”, it is possible to avoid lawsuits and discourage lawyers from taking the case.

Protection from Homeowner’s Assn. (HOA) Claims and Special Levies

Owning a property in a complex means that there are often HOA claims due to maintenance, upgrades, and other unscheduled fees. If the title is held in the owner’s name, they are then liable to pay these fees personally. Placing the real estate in a Land Trust means that only this Trust or the LLC created (therefore the property itself) is the only recourse for the HOA debts.

Making non-assignable contracts assignable

The trustee powers in a Trust is assignable, meaning that the trustee can be changed easily, without changing the title of the property. This is extremely helpful for real estate investors who wholesale real estate and want to purchase bank owned properties. The non-assignable clause is a big stumbling block for investors because it means that the person placing the offer must be the person who closes the sale, with no transfers allowed. A Land Trust allows flexibility when wholesaling real estate, as the transfer is merely that of the trustee, without the property needing to be closed and then resold.

Making loans assumable

A non-assumable loan, as far as property is concerned, is when the mortgage of the real estate is due in full upon the sale of the property. This falls under the “Due on Sale” clause of the contract. If, however, the property is held in a Florida Land Trust or LLC, this clause can be made null and void, as the property is essentially not being sold. The beneficiaries are merely changing.

Drafting a Warranty Deed to Trustee

To form a Land Trust in Florida, the most important document that you require is the Warranty Deed to Trustee. This document is used to convey the powers and authorities granted to trustee, and stands even if a formal Florida Land Trust Agreement is not drafted, although drawing up this agreement is also recommended. The Warranty Deed must award full powers to the trustee of the Land Trust and must follow various requirements that are mentioned in the Florida Land Trust Statute (Section 689.071). The trustee must be a natural individual or legal entity so that the real property can be conveyed to them in the Warranty, indicating that the beneficiaries’ interest in the Land Trust is that of personal property. Finally, the Warranty Deed must clearly state that the chosen trustee has no personal liability.

How Many Land Trusts Should Be Used

It is possible for many properties to be placed in the same Trust, and for investment purposes where the group of benefactors is common to each property, using the same Land Trust can eliminate a lot of hassle. It will also be cheaper to add properties to the same Land Trust instead of creating a new one for every new property that the group wants to purchase. The only instance where a new Land Trust should be set up is when there are different beneficiaries for each property, or if you wanted to transfer the beneficial interest in one property to another. If two properties where held in the same Trust, the beneficial interest could not be transferred from one to the other, so if this is the aim of your investment, you should use two different Trusts. Establishing separate Land Trusts is not difficult, and although is a bit more costly, it is worth the effort for these purposes. An important factor to consider when setting up a Land Trust for real estate investment purposes is that separation of the assets could be an advantage. Let’s say a group of buyers invest in six different properties, which are rented out for vacation purposes and long term rentals. Five of the properties are rented out within a month of being advertised, but one property struggles to secure tenancy. While the first 5 properties are generating income, the final property is standing empty, with mortgage repayments and other bills accumulating. What could happen over a longer period of time, if that final property fails to get a tenant, is that the overdue payments can be accrued from the income of the other properties in the Trust. This option might be suitable in certain instances so that the income can be shared and used across all the properties, but if things ever got to the point where the lien is called in, or a claim is laid against one of the properties, all the other properties would be considered assets of the Trust, and could therefore be seized by any creditor. To prevent this from happening, separating assets is the answer. One of the more affordable and effective ways of doing this is to split up the properties into different Trusts by categorizing them. So, in the case above, the vacation properties that earn seasonal income could be held under one Land Trust, with the long term rental properties in a different one. Properties that are considered more “problematic” than others should also be separated into a Trust of their own to isolate them completely from the others. Choosing whether or not to combine properties into one Florida Land Trust, can really only be decided by looking at the purpose of your investment, and assessing your real estate portfolio. There are pros and cons to each method, which should be analyzed and discussed carefully by all the benefactors, along with their attorney, who will clearly lay out the implications of each option.

Using a Third Party Managing Agent to Rent the Property in Trust

So, now that the property is in a Land Trust and all the documents are in order, the next step is to get income from the property. Renting out the real estate is done in the same way as if the property was owned by an individual. The name of the Land Trust is used on the lease agreement as Lessor, with all income generated being paid into the Trust’s account. It is up to the beneficiaries to find a rental agency and instruct the trustee to appoint them as the managing agents for the property. For privacy purposes and to ensure confidentiality, any legal agreements between the agency and the Trust will be signed and handled by the trustee. The beneficiaries never have to be involved in the property or be in contact personally with the managing agents. One of the beneficiaries could step in as the managing agent and oversee the running and maintenance of the property, and if privacy is not an issue then this is acceptable, however, setting up a managing agent is more secure and allow for better control, especially when several beneficiaries are involved. The management of the property is easier with a reputable managing agent who can handle complaints, draw up legitimate rental agreements, deal with an HOA and attend meetings if applicable, and perform reference checks on potential tenants. Managing agents will also be involved in the general upkeep of the property as advised by the trustee (on behalf of the beneficiaries). Agencies have databases of trusted contractors to perform repairs and maintenance and they will contact these companies, process quotes and invoices for payment, as well as oversee the work done on the property, so that the beneficiaries do not have to be involved.

Selling Property in a Land Trust and Termination of the Trust

One of the objectives of setting up a Land Trust is to secure ownership when a group of investors want to purchase the same property, thereby becoming co-beneficiaries. In order to sell the property, sub-divide it, or partition off a portion, all the beneficiaries must be in agreement. No partition actions are allowed on properties held in Trust because the beneficiaries technically do not own the real estate. They own a beneficial interest in the real estate, and if they really wanted out, they would have to sell their beneficial interest to a new party. If this action is not restricted in the agreement between beneficiaries, they can do this without the consent of the other beneficiaries. In the case of a conflict arising amongst the beneficiaries, it is recommended that joint or co-beneficiary agreements are avoided. The sole purpose of creating a Land Trust for real estate investment, is to purchase property to resell for a profit, or to sell to a third party client, hence the sale of the property is the ultimate goal. With a Florida Land Trust in place, the property will easily avoid the double closure involved if you are purchasing property to transfer to a third party. Instead of needing to foreclose first, incur all the closing costs and undergo length transfer procedures, you can simply transfer the beneficial interest to the third party who will then take ownership of the Trust, and close the deal. This allows real estate investors to retain 100% of their profits. The sale of beneficial interest also has no bearing or impact on lending criteria, and does not violate any form of bank approval. Foreclosures are also simpler with properties in a Land Trust, then the trustee foreclosure services like the posting notice of trustee sale, public auctioning, and the trustee deed issuance is taken care of without the beneficiaries be named personally, letting you keep a good name and clean personal credit history. The typical sale of real estate within a Trust all comes down to transferring the beneficial interest. If the new beneficiaries do not want to keep the property in the Trust, they can either terminate the Trust agreement, after the term has ended (if the Trust is irrevocable), but generally the Florida Land Trusts are fully revocable, meaning that termination can take place at any time. In the instance of an Irrevocable Land Trust, the UTC, states in Section 412(a) that the Trust can be terminated when it: “expires pursuant to its terms, no purpose of the trust remains to be achieved, or the purposes of the trust have become unlawful, contrary to public policy, or impossible to achieve.” The Code does also permit other forms of termination or modification to the Trust which are settled in court, namely when all the parties (i.e. the grantor and all beneficiaries) give their consent. In the case of an uneconomical Trust where the total value is less than $50,000, and outweighs the costs of administration, then the trustee may choose to terminate the Trust, with notice being given to the beneficiaries. Courts may also consider these grounds for termination, but might appoint a different trustee to manage the Trust. If the Trust is terminated, the trustee is required to distribute the funds outright and proportionally to the value of the interest of each beneficiary: “in a manner consistent with the purposes of the trust.” (UTC, Section 414)

Importance of Using a Title Company That is Investor Friendly

After looking at the Florida Land Trust in detail, highlighting the many advantages and pointing out the possible little hiccups that could arise, it is always recommended that an investor friendly title company is used. Why is this important when property is held in a Florida Land Trust? Well, let’s look at this below in more detail. Firstly, let’s discuss what a title company does and why you need them in the first place. A title company is there to facilitate and coordinate the interests of all parties involved in a real estate transaction, also maintaining the quality of the titles or deeds. They aim to research the title as far back as possible and establish that the chain-of-title is clean and that the property is marketable. In other words, the title company will find out if there are any liens or defects on the title and work to clear these, including any outstanding property taxes, HOA levies, or water services, false affidavits, undisclosed heirs, secret marriages or invalid divorces. This process of research is called an Abstract of Title. Once this abstract of title is complete, the title company must then prepare a Commitment of Title Insurance, and send this to both the lender and the prospective buyer. These documents will list the problematic items that need to be corrected in order for the Good Title to be issued. The title company will work with the list to correct each item and complete all the documents. Once Good Title is given, the parties can go about exchanging documents and closing the deal with the issuing of the HUD 1 statement. This statement includes all the paperwork for conveying the title, securing the lender, and dealing with other issues such as current leases and rights-of-way, as well as detailing all of the incurred costs. Over and above the title management duties, title companies are also responsible for drawing up the title insurance policies for the property, which can be either an Owner Title Insurance Policy or Lender Title Insurance Policies. The title insurance companies work closely with real estate agents and help to close sales, giving both parties peace of mind that their important and expensive investment will be insured and protected against any possible claims or lawsuits that may arise. The homeowner or investor title insurance is a once off payment and lasts for as long as you own the property. There are also no renewal premiums. Why should you use an investor friendly title company? Well, by making sure that the title company is investor friendly, you can be sure that your title insurance is valid when you make simultaneous or double closings. Many title companies do not offer their services for these kinds of closings, associated with the use of a Florida Land Trust, and they might tell you that this is not possible or even that it is illegal. To find investor friendly title companies, you would need to network with other real estate investors and find out who they use. The main real estate investor organizations in South Florida where you can attend meetings and discover who the big players are, including BRIC (Boca Real Estate Investment Club), DISTRESSED REIA (Distressed Real Estate Investors Association), and GCREIA (Gold Coast Real Estate Investors Association). While many title companies shy away from Land Trust owned properties and real estate investors, those that are creative and think outside the box, will be able to provide ideal, completely legitimate solutions for double and simultaneous closings. This includes establishing a Florida Land Trust, so that you also have complete security and anonymity as a property investor. Independence Title, Inc. is a company that does provide these services in the State of Florida. We offer investor friendly title insurance and settlement services. Wholesaling properties without using an investor friendly title company will be like banging your head against a brick wall. This is because many title companies have no idea about how to work around the assignment limitations on contracts and don’t understand how to use Florida Land Trusts and LLC’s to close deals simultaneously. It is not worth trying to explain it to them, so the best thing to do before you find an end buyer or even begin to make an offer on any property, is to first secure a reputable title company that specializes in double closings, simultaneous closings, and that is willing and able to work on deals for real estate investors. This is very important to ensure that all the title documents are valid, and that they have been legally recorded and safely filed. This eliminates any fraudulent activities that might occur, and prevents problems later on down the line when the property is sold or placed into another Trust, or used for any other purpose. A company that deals with real estate investors almost exclusively, like Independence Title Inc, always uses Florida Land Trusts to close deals, as they have discovered that it is the most effective and efficient way to handle short sales. They specialize in offering real estate professionals the ultimate solution to becoming referral magnets, and give investors the tools and support to thrive in the property market, where many others are struggling.