#1. Land Trusts in California
Land Trusts in California
In California, general trust law is found in the Probate Code §§15000-19403. There is no exact land trust statute in California, unlike Illinois land trust law, (765 Ilcs 405/410/415/420), Massachusetts business trust (Mbt) law (M.G.L.c.182, §2), and Virginia land trust law (Va. Code Sec. 55-17.1).
Land Trusts in California
So, land trusts created in California for California asset are based on general trust law in the aforesaid California Probate Code. But an out-of-state land trust may be formed that would hold title through the trustee of a California property, to take benefit of more useful statute and case law of other state. Indeed, the Virginia supreme Court in Air Power, Inc v. Thompson, 244 Va. 534, 422 S.E. 2nd 786 (1992), has confirmed that Va. Code Sec. 55-17.1 gives the trustee of a land trust both legal and equitable power of the real property, which protects the privacy of the beneficiaries.
Indeed, since California does not have a exact land trust statute, there is no legislative history nor industrialized case law on it in this state, only California general trust law and case law. But a general trust law may have some advantages over a exact land trust statute with more requirements. Indeed, Illinois land trust statute (75 Ilcs 435) requires that holders of power of direction owe fiduciary duties to holders of useful interests. California general trust law does not have a similar requirement.
In any event, the avoidance of probate over a real asset in a land trust trumps all difficulties in its creation.
I. California general Trust Law:
A. Creation Of Trust:
California Probate § 15000 states that "(t)his agency (Division 9 of the Probate Code) shall be known and may be cited as the Trust Law." And § 15001(a) states that "(e)xcept as otherwise provided by statute: This agency applies to all trusts regardless of whether that were created before, on, or after July 1, 1987."
Among other methods of creating trust, a trust may be created by: "(b) (a) transfer of asset by the owner during the owner's lifetime to other person as trustee," under § 15200(b) of the California Probate Code. And "a trust is created only if there is trust property," under § 15202 thereof.
"A trust may be created for any purpose that is not illegal or against group policy," under § 15203 thereof. A land trust is not for an illegal purpose, nor is it against group policy in California, although it is not widely used in this state.
And "a trust, other than a charitable trust, is created only if there is a beneficiary," under § 15205 thereof.
B. Trust Of Real asset And Personal Property:
So as not to violate the Statute of Frauds, which requires a written instrument to be enforceable, §15206 states that "a trust is relation to real asset is not valid unless evidenced by one of the following methods: (b) By a written instrument conveying the trust properly signed by the settlor, or by the settlor's agent if authorized in writing to do so."
And under § 15207 (a) thereof, "(t)he existence and terms of an oral trust of personal asset may be established only by clear and convincing evidence." Under § 1528 thereof, "consideration is not required to generate a trust...."
Lastly, "a trust created pursuant to this part (1, part 2, agency 9 of the Probate Code) which relates to real asset may be recorded in the office of the county recorder in the county where all or a part of the real asset is located," under § 15210 thereof.
Ii. Mechanics Of A Land Trust:
A. Advantages And Benefits:
(1.) Privacy:
One of the much-heralded advantages of a land trust is that a grant deed-in-trust of a trust asset in the name of a different trustee (private or institutional) may be recorded with the County Recorder, but the land trust deal that states the names of the truster/settlor/investor and the beneficiaries is not recorded.
Thus, the creator/grantor of the land trust: the trustor/settlor who invests in real asset can keep his/her/its name, as well as the names of the beneficiaries out of the County Recorder's and County Assessor's books, and to a confident extent hide the investment from group view.
But a judgment creditor of a trustor/settlor or of a beneficiary can subject the latter to sass written interrogatories on his/her/its assets, or to debtor's exam under oath in court to rule assets, and not merely rely on County Recorder and Assessor asset searches.
The land trust deal may also use a name for the land trust different from the name of the trustor/settlor who created it. This is other asset protection benefit. And if the beneficiary thereof is also the same trustor/settlor, the latter may prescription his/her living trust or wholly-owned diminutive liability business as the beneficiary to hopefully avoid gift tax issues.
(2.) Avoidance Of Probate:
Moreover, just like successor trustees may be designated in the land trust agreement, successor beneficiaries may also be excellent to avoid disruptions in distribution of trust assets at termination of the trust, face of probate proceedings.
A land trust may be created as revocable (terms of the deal may be changed) or irrevocable (cannot be changed), but the latter requires the filing of cut off tax returns and is taxed at a higher rate than the trustor/settlor's personel tax rate, unless thought about a easy trust in which all incomes created are taxed to beneficiaries. For federal wage tax implications, if the grantor/trustor is also the beneficiary, the Internal wage assistance (Irs) classifies it as a grantor trust that has tax consequences that flow directly to the trustor's Form 1040 and state return.
(B.)Disadvantages And Pitfalls:
(1.) Separtate deal For Each Property:
In order to hold the privacy of the investment or transaction and the asset protection benefits of the land trust, only one real estate asset can be listed as held in it. Thus, a different land trust deal is created for each property. This could be cumbersome, although the same trustor/settlor, trustee, and beneficiary can be named in each agreement.
(a) Simpler Alternatives:
Simpler alternatives are to purchase investment or rental properties through a diminutive partnership (Lp) or a diminutive liability business (Llc), or transfer such properties to a more flexible living trust that does not need the filing of cut off tax returns, or transfer the ownership interests of an Llc (not title of the property) to a living trust.
An Llc may also generate a land trust by conveying title of a asset to the trustee, and prescription itself (Llc) as the beneficiary for privacy of ownership. Sometimes less is more; for indeed, creditors can see through and have recourse against avoidance of operation of judgment on properties through asset protection schemes. And transfers of ownerships of properties may ensue in tax assessments.
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