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SOME POTENTIALLY USEFUL BUZZ WORDS AND DEFINITIONS
North American Realty Services, Inc. 11/30/2002 All rights reserved
Bill Gatten – Making it BIG in Creative Real Estate
For additional information on the Equity Holding Land Trust go to: www.landtrust.net
"Reprinted and used with Permission of Author - 12-2005"
ACCELERATION PROVISIONS (SEE “DUE ON SALE CLAUSE”)
The provision in a standard mortgage loan agreement that warns of the rights of the lender to demand an early loan payoff (acceleration) if the borrower does not adhere to certain provisions of the loan agreement relative to unauthorized transfers of ownership (See: 12USC1701).
ALIENATION PROVISIONS (SEE “DUE ON SALE CLAUSE”)
A provision within a standard mortgage loan agreement that allows the lender the right to accelerate loan payoff should the property be disposed of: i.e., by a transfer of ownership to another by any means not authorized within the contract or by legislation (See: 12USC1701).
ANCILLARY ADMINISTRATION (SEE ALSO PROBATE ADMINISTRATION)
Administration of a decedent’s real estate in the state where the property is located, versus the state in which decedent was domiciled. If a settlor beneficiary in a co-beneficiary land trust were to hold real estate in his/her name and not transfer its title to a land trust, then his/her estate would be involved in ancillary probate proceedings. However, when the property is vested with a land trust trustee, ancillary administration in the state where the property is located is not necessary. Why? Because the non-resident land trust beneficiary holds an intangible personal property right at death, rather than owning the real-estate per se, thus avoiding the time and expense of Probate (e.g., H. Kenoe, Kenoe on Land Trusts, (Ill. Inst. For CLE, Rev. 1989; Orig: Land Trust Practices (1972, 1974); Uniform Probate Code §4-101).
ASSET PROTECTION (SEE PROTECTION FROM LINES AND JUDGMENTS)
ASSIGNMENT (RELEASE OF LIABILITY)
An assignment or sale of beneficiary interest in a land trust does not affect or release a borrower from any original obligations under the terms of the financing on the trust property.
ASSIGNMENT (OF BENEFICIARY INTEREST)
In most jurisdictions, when a beneficiary assigns its interest in a land trust all or in part to another, public notification of the identity of beneficiaries is not mandated. However, even when such notice is required at the inception of the trust, then subsequent sale or assignment of beneficiary interest need not be recorded (e.g., as specifically pertinent to the NARS Equity Holding Trust System™). In states where such notification is required, such requirement typically refers to the complete–not a partial–assignment. However, in any event, failure to so notify, if discovered, may carry a small penalty, which would likely be exceeded by the value of complete anonymity.
ASSIGNMENT (COLLATERAL…SEE COLLATERAL ASSIGNMENT OF BENEFICIARY INTEREST)
BENEFICIARY INTEREST, SALE OF (RE. ALIENATION PROVISIONS (SEE ALSO “DUE ON SALE CLAUSE”)
Most modern due-on-sale clauses caution against “...sale of beneficiary interest in borrower, without prior notification to the lender, when borrower is not a natural person.” Were the borrower to be a natural person (e.g., were the loan to have been made to an individual), then the injunction would not be applicable. In fact, such a sale or assignment of beneficiary interest would not be “in the borrower” at all; but in actuality being of personal property (i.e., UCC property)–not of the real property (real estate) which is the lender’s security.
BUSINESS TRUSTS (CONSIDERATION RE: TITLE INSURANCE, TAXATION, ETC.)
Business trusts (e.g., grantor trusts) are not classified as trusts for purposes of the internal revenue code, because they are not “simply arrangements to protect and conserve the property for the beneficiaries.” (i.e., A. R&TC 118.s.39.112(a)1(e)).
A properly structured land trust shouldn’t risk classification as a “business trust,” in that the holding of title to real property does not qualify the holder as being engaged in a business. However, if the land trust trustee were to be engaged in the processes of management, development, or exploitation of the property for profit, such an arrangement could [probably would] constitute classification as a business trust. Such classification would/could then likely result in double taxation as would classification as a corporation, or as an association being taxed as a corporation. (Swanson v. Commissioner, 296 U.S. 362, (1935).
Relative to insurability of title, a grantor (“settlor”) of a business trust could not expect a title company to insure title to property placed into a business trust or “off-shore” trust. These kinds of trusts are actually classified and taxed as partnerships, associations or corporations. Title vesting in an unrecognized trust could lead to undue exposure for third parties, i.e., title insurers. Prior to issuance of title insurance, the title insurer may request either—1) a certified copy of the trust agreement, or 2) a “certification of trust,” which spells out the name, term, nature, purpose, parties, and powers of the parties to the trust.
Q. How is a business trust taxed?
A. The government taxes business trusts according to the economic reality of the arrangement. If the trust is a sham or facade with no real economic reality, then it will be ignored and the tax liability will be placed directly on the individual who formed the trust. If the trust has only one individual who funded it and operates it, it will generally be taxed as a sole proprietorship. However, if two or more individuals control it (i.e., if it resembles a partnership), it will likely be treated as a general partnership. If the trust is registered as a corporation under state or federal statutes, or has the characteristic of a corporate structure it will be treated as a corporation.
CAL VET LOANS (SEE “VETERAN LOANS, STATE SPONSORED”)
CERCLA
The Comprehensive Environment Responsibility Compensation Act–Regards hazard waste issues (only) with regard to commercial property – Title 42 USC (U.S. Code) 9601-9675
CHARGING ORDER
A court order allowing for a means for a creditor to reach a debtor partner in a general partnership, without forcing the dissolution of the entire partnership (…or land trust).3 See the Uniform Partnership Act §28.
‘CHFA’* TYPE LOANS – STATE SPONSORED OWNER-OCCUPIED LOANS (*CALIFORNIA HOUSING FINANCE AGENCY)
Because these types of loans specifically require the financed property to remain “owner occupied,” a special “permission to vacate the premises and rent under unusual circumstances" would have to be obtained from the lender before entering a NARS Equity Holding Trust System™. Such “special circumstance” would typically be – 1) extreme financial hardship while the property is being offered for sale, or 2) temporary vacancy due to a temporary job transfer, with proof that property will be re-occupied in the near future. (The potential for benefits of a NARS Equity Holding Trust System™ under such a loan is good if such permission is obtained in advance, and if the property is scheduled for sale prior to the termination of the grace period allotted).
3 Henry H. Keno, Kenoe on Trusts §§6.48 – 6.60. IICLE (1989)
COLLATERAL ASSIGNMENT OF BENEFICIARY INTEREST
In many cases, private lenders will make loans that can be secured by a collateral assignment of one’s full or partial beneficiary interest in a NARS Equity Holding Trust System™. However, due to the lender’s general lack of knowledge about such trusts, don’t expect to accomplish much by approaching institutional lenders at random with a request for such a loan.
Nonetheless, a lender opting to be secured by real estate would be far better off with a collateral assignment of such beneficiary interest, in that there would be no need for standard foreclosure, and time and costs constraints would be greatly diminished. With land trust interest as security, the secured party may proceed directly against the trust without NOD restraints, publication, auction, or concerns of the borrower’s right of redemption.
• See UCC Regs §§§9-102 (1972); 9-504 (1978); 9-501(3) (1978)
• See, for example, Fla. State. §679.304
CONTRACT
An agreement between parties to perform, or not to perform certain things. May be bi-lateral (all parties bound to do some specific thing) or unilateral, wherein only one of the parties is obligated to perform. A proper contract must contain the following elements:
1. Sufficient legal cause or consideration
2. Competent and capable parties
3. Consent of all parties to the agreement and to the obligation
4. A lawful object or objective (subject matter)
CREDITOR’S LIENS, ATTACHMENTS, CHARGING ORDERS
A creditor of a beneficiary in a co-beneficiary land trust may not attach the land or claim an interest in its corpus. (Such protection is similar in effect to holding a property in a limited partnership or multiple member limited liability company)
• Resnick, Bernard, “Is There Such a Thing As A California land trust?” See pg. 225, L.A. Bar Bulletin, April 1973
• Finnie v. Smith, 82 Cal. App. 707 (1927)
• IRC §1034; Rev. Rul. #66-159, 1966-1 C.B. 162
DAMAGE (TO TRUST PROPERTY BY RESIDENT)
Damage to the trust property by a resident beneficiary is treated under the NARS Equity Holding Trust System™ as a default, and is handled by eviction in the manner described under “DEFAULT” herein.
DEBT- TO- INCOME RATIO
Any party leaving a leased property’s loan in his or her name will, no doubt, be viewed by a new lender as an income property owner, becoming subject to a reduced Debt-to-Income Ratio ("D:I") adjustment for determine his or her qualified income when applying for a new mortgage loan. Note, however, that a NARS Equity Holding Trust System™ transaction will most often create more income than one might receive from an ordinary lease/rental. And the settlor’s new lender will, as well, typically treat the entire transaction as a seller assisted sale of trust NARS Equity Holding Trust System™ property…according the borrower a 100% credit for all rental income without a deduction for normal rental expenses.
DEEDS (CONVEYANCE DOCUMENTS)
In states where the standard conveyance document is the mortgage: a Deed in Trust, a Warranty Deed, a Bargain and Sale Deed or a Quit Claim may be used as the conveyance vehicle from settlor to trustee. Conveyance out of the trust is by a trustee’s Deed, or any of the other standard conveyance documents. In states where trust deeds are the primary means of security, a Grant Deed is generally the vehicle for conveying the property into or out of the trust. (Also see “Unrecorded Deeds”)
DEED IN LIEU OF FORECLOSURE
A deed given to a lender by a mortgagor in default in lieu of that party’s being foreclosed upon by the lender. A frequently used scheme employed by “creative investors” in an attempt to circumvent a lender’s due-on-sale clause involves an investor’s loaning perfunctory sum (say, $100) to a homeowner, and then securing the “loan” with a second mortgage on the property. The borrower and the lender then conspire for a prompt default (ostensibly) allowing the investor to foreclose and assume the existing first mortgage without a due-on-sale violation. Do note, however, the first mortgagor is not obliged in any manner to allow this to happen. He/she and could and will enforce their alienation provisions at any time.
DEFAULT (REMEDIES)
A defaulting co-beneficiary is ‘dispossessed’ by means of eviction. Mandated judicial foreclosure and ejectment action to cure default is by-passed, avoiding the risk of a defaulting tenant’s claiming “Equity” (i.e., having an equitable interest in the property). This avoids eviction and forces a time-consuming judicial foreclosure and/or ejectment process.
To divest the defaulting party of his/her beneficiary interest in the trust, The NARS Equity Holding Trust System™ Beneficiary Agreement provides that a default by a co-beneficiary is an “offer to sell” its (the defaulting party’s) beneficiary interest to the non-defaulting beneficiary/ies for Fair Market Value. (This is determined by an MAI appraisal at the expense of the defaulting party, following payment of a Default Fee and the bringing current of all defaulted sums.
Upon receipt of an offer to purchase by the non-defaulting parties, the defaulting party has 30 Days to prove that the sum offered in insufficient. If such documented proof is provided, the parties have pre-agreed (in the Beneficiary Agreement) that such sum will be paid in full in the form of an Unsecured Promissory to be paid-out when the property sells at the natural expiration of the trust.
DOCTRINE OF MERGER
Extinguishments of the trust under the Doctrine of Merger is avoided in instances where a remainder-agent is provided, or wherein there is more than one beneficiary (e.g., as in a NARS Equity Holding Trust System™) CA. Probate Code §15209
DUE ON SALE CLAUSE (NOT VIOLATED BY THE EQUITY HOLDING TRUST…SEE CHAPTER 10)
A sale of beneficiary interest in a land trust is a private, anonymous, and unrecorded transfer of a personal property interest in a non-personal entity (i.e., is it 'not a sale of real property [i.e., the lender’s security].) Neither does such transfer of Personalty vest the property’s legal or equitable title interest in the beneficiaries. Nor is a mortgagee’s security interest in the property impaired in the process. (re: 103 Ill. App 3d. 174. 430 N.E.2d 708 (2d Dist.) 1981 Wachta v. 1st Fed. and Damen v. Heritage Bank respectively; Williams v. 1st Fed. S&L, Arlington, Va., #80-308A, 6/17/80, Etal.)
• Note, as well, that neither is the letting (leasing-out) of the property to a co-beneficiary of the trust a compromise of the lender’s security interest under the US Code §1701-j-3 (see Garn-St. Germain/ FDIRA 1982).
• Placement of real-estate into a living trust (i.e., a land trust) in which the borrower requests no release of liability and retains full directive powers [as trustee or as "directing-beneficiary"] does not trigger a “Due on…” action, providing that: A) the trust is revocable by the borrower; B) the trust is in the borrower’s name; C) the borrower is and remains a beneficiary, and D) the trust itself conveys no rights of occupancy, (ibid).
• Pub. “Using California Trusts, Planning, Implementing Administering and Terminating,” Cont. Ed. of the Bar, CA. ©1991 Regents - U of Ca.
• Barnet Resnick, “Is There Such a Thing as a California land trust?” LA Bar Bul. 4/73, pp 216-228 Bentley Mooney Jr., Esq., Preserving your Wealth [68-112];
• H. Kenoe on land trusts, etc
• La Sala v. Am. S&L, 5 Cal. 3d 864, 489 P.2d 1113, Cal.App. 91 Cal Rptr. 238; 97 Cal. Rptr. 849 (LA No. 29851 Supreme Ct. of CA)
• Coast Bank v. Minderhout, 61 Cal. 2d 311, 317 [38 Cal. Rptr. 505, 392 P.2d 265] 12 USCA §1701-j-3
DRY TRUST
A trust in which the trustee has no duties to perform. The land trust that underpins the NARS Equity Holding Trust System™ cannot be construed as a “dry trust” because the trustee clearly has function, duty and purpose (even if such purpose and function is only to hold title and sell the property under its Power of Sale as directed by the beneficiary/ies). The often uttered comment that the land trust is, in general, a "dry" or "failed" trust is more than just an inaccurate statement; it is completely untrue! Anyone who has ever studied land trusts in detail learns quickly that the trustee's obligation to deal with matters of title, and its Power of Sale, clearly excludes the trust from the category of "Dry" or "Failed.” Such claims have surfaced many times over the years, and have been consistently refuted and ruled against.4
• E.g., Pepper Pot II, Inc. v. Imperial Realty Co., 1 Dist., 133 Ill.App.3d 951, 88 Ill.Dec 9239, 931, 479 N.E.2d 949, 951, Kenoe on Land Trusts, etc.
• In Ca. under Gray vs. Union Trust Co. (1915), 171 C637, 643-644, 154 P306; Craven vs. Dominguez Estate Co., (1925), 72CA 713, 237 P 821; Boxford v. Haskens & Sells (1978) 81 CA3d 780, 146 CR 752; and California Probate Code, §15200-15210.
• Bottsford v. Haskens & Sell (1978), 81 CA3d, 146 CR 752
• 300 Ill. App. 329, 20 N.E. 2d 992 (1939)
• B of A v. Spar Realty Corp., 20 Cal. App. 2d 10 (1937)
• E.g., Ringrose v. Gleadall, 17 Cal. App. 664 (1911)
• CA. Probate Code, Sec 15200–15201
4 E.g., Pepper Pot II, Inc. v. Imperial Realty Co., 1 Dist., 133 Ill.App.3d 951, 88 Ill.Dec 9239, 931, 479 N.E.2d 949, 951, Kenoe on Land Trusts, etc.
EXPRESS TRUST
A Direct Trust. A trust created or declared in express terms [usually in writing]; as distinguished from a trust that is inferred by law to arise from the conduct or dealings of the parties. (E.g., an “Implied Trust,” see Black’s Law, 6th Ed.)
FAILED TRUST (SEE “DRY TRUST”)
FIDUCIARY RESPONSIBILITY
Most courts throughout the country (specifically Illinois, California, Florida) have made it clear that the trustee in a land trust has no responsibilities for accounting or bookkeeping: their only duty is holding title and dealing with matters pertinent to title and its Power of Sale.
FORECLOSURE RESTRICTIONS (RE. “EQUITY PURCHASERS” AND “FORECLOSURE CONSULTANTS”)
Some states have enacted – or are considering enacting – specific legislations concerning professional dealings in foreclosures by Realtors® and investors (e.g., CA. Civ. Code §§2945-2945-11 re. Realtors®, and §§694-695-17 re. investor activity). In California, for example, Realtors® and real estate brokers (Foreclosure Consultants)—unless fully bonded –– are prohibited from professionally assisting in any real estate related transaction that would purport to save a mortgagor from foreclosure while leaving the debtor in the property.
Likewise, investors (Equity Purchasers) are prohibited from offering someone in foreclosure any scheme that would purport to “save” the mortgagor from such action while remaining in the property. In any of these categories, a careless action by an investor could result in the mortgagor’s (the mortgagor who is no longer in default) reversal of the entire transaction, costing the investor loss of the property, all monies spent, and even severe civil penalties. Warning! Be thoroughly familiar with these laws in your state before attempting to deal in foreclosures as an investment vehicle.
FRAUDULENT CONVEYANCE
The attempt of a property owner to assign or convey ownership in an asset to another for purposes of defrauding another (specifically, judgment creditors), or hindering creditor’s efforts by putting the property beyond their reach (see U.S. Bankruptcy Code §548). Although the Uniform Fraudulent Conveyances Act has been adopted by essentially all states, proof of fraud remains extremely allusive and difficult to prove in court. Any successful claim of Fraud must include specific intent, relinquishment of an asset at less than it true value, and a specific agenda for maliciously defrauding creditors.
GRANTOR’S TRUST
Typically, a Grantor’s trust is considered to be a dry trust wherein the trust’s grantor serves both as beneficiary and as trustee, and wherein the trustee has no function or responsibility other than as a nominee perfunctory manager. Such a trust would have minimal effect relative to asset protection, and virtually no protection against litigation and/or creditor claims. However, in so much as the IRS characterizes the land trust (the basis of the NARS Equity Holding Trust System™) as a Grantor’s Trust relative to IRC §671-678 (re. depreciation of income producing real estate), this characterization allows a non-resident beneficiary to take the property’s depreciation as an offset against income from rental-income, capital-gain and even–to a limited extent–ordinary W-2 income.
HAZARD INSURANCE
When a homeowner holds hazard insurance, statutes in most (if not all) jurisdictions require that the insurance follow to his Inter-Vivos trust. This leaves the grantor with the option of naming the trust as additionally insured or merely remaining as the primarily insured. In a NARS Equity Holding Trust™, such insurance is converted to non-owner occupant (landlord) coverage prior to (or during) the creation of the trust. The resident or investor beneficiary then becomes insured automatically merely by virtue of being a beneficiary in the trust. The insurance policy can then remain in force in the name of the settlor beneficiary throughout the trust term, providing full coverage for all beneficiaries (as delineated in the Beneficiary Agreement). For contents (furniture and fixtures) coverage, a resident beneficiary might opt to obtain its own separate insurance (See, e.g., Probate Code 18110.5)
HOMESTEAD: LITERALLY, “THE DWELLING PLACE OF THE HEAD OF THE FAMILY, WITH THE LAND AND APPURTENANCES SURROUNDING THE MAIN HOUSE.”
In modern usage, however, the term applies to the mandatory exclusion of one’s personal residence from and forced-sale by creditors. A Homestead Right is a homeowner’s personal right to quiet enjoyment and freedom of claims from one’s credit against his home, within certain limitations (100% in Florida, $50,000 in California). In other states a Homestead affords homeowners a sizeable tax break…20% off normal taxes in Texas and a flat $25,000 in Florida). In certain states (Florida, specifically), placement of a property into certain trusts could nullify one’s homestead benefits. However, recent legislation there specifically provides homestead exemption for beneficiaries of land trusts. In other areas, though, It may be prudent to include in the body of the conveyance document that, “the homestead claimant has the right to use and possess the property for his or her natural life.” In some areas, an owner must file a homestead declaration annually: in others, a single (one-time) filing is sufficient.
INHERITANCE TAX AVOIDED (WHEN REMAINDER AGENT NAMED, OR WHEN THE LAND TRUST IS IRREVOCABLE)
• CA. Probate Code §600
• CA. Rev. And Tax Code §13303
• Title 18, CA. Admin. Code Reg. 13303(D)
• See Estate of Tutules, 204 Cal. App. 2d 481 (1962).
INVOLUNTARY CONVERSION (E.G., §1033)
“As to non-recognition of gain under involuntary conversion provisions of the IRC concerning land trusts, the answer remains unclear, but probably positive, at this writing.” See IRC §1033 applicable to the taking of the tenant’s interest under IRS Revenue Ruling #71-519, 1971-2 C.B. 309; and to the taking of a perpetual easement pursuant to Revenue Ruling #72-433, 1972 2 C.B. 470, and Revenue Ruling #72-549, 1972 C.B. 472.
LEASE OPTION
A lease under which the lessee has the unilateral right to purchase the property at a specific price at, or by, some future specific date…if he/she would so choose. The option period may or may not run concurrently with the lease period. A proper lease option should be drawn in the form of a term lease with a wholly separate straight option to purchase the property and some predetermined price, under predetermined conditions.
LEASE PURCHASE
A lease, under which the lessee has contracted to purchase the property at a specific price at, or by, some specified date. A bi-lateral agreement carrying with it all the benefits, burdens, risks and shortfalls of any seller-assisted financing arrangement.
LIENS AND/OR JUDGMENTS (PROTECTION FROM)
The Equity Holding Trust System™ serves as an EXCELLENT barrier against creditor claims, lawsuits and judgments…including claims arising out of marital dispute, bankruptcy or probate.
83 Cal App. 707 (1927)
See, e.g., Finny v. Smith, 83 Cal. App. 707 (1927); St. Charles S&L v. Estate of Sundberg, 150 Ill. App 3d 2d re: collateral assignment, see U.C.C. §9-102 (1972); §9-504 (1978)
LIMITED LIABILITY COMPANY (LLC)
A hybrid pass-through membership business entity. The LLC provides the protection of a corporation, but is more like a partnership arrangement in many ways. LLC "members” (versus 'share-holders' or 'partners') participate in the day-to-day management of the company without incurring personal liability. All taxing agencies (state and federal) tend to "look through" the LLC to its member’s as the responsible parties in terms of accounting for, and payment of, income tax. Profits and losses relative to passive activities within the company flow to the members who remain free of individual self-employment tax. Since there is no plethora of case law concerning the LLC at this time, it is advisable to seek good professional legal and accounting advice before considering its use.
MARITAL INTEREST (PROTECTION FROM)
“An attorney creating an agency relationship would not be able to circumvent the common ownership requirements inherent in certain civil codes (e.g., CA. Civ. Code. §§752 and 763).”
See “The California land trust, Its Undeveloped Potential in California,” L.A. Bar Bulletin, Nov. 1965, Sec. #7, p. 62.
MECHANICS LIENS
Mechanics liens can attach to land trust property. However, they will likely be wholly invalidated if the trustee is not dealt with directly, as beneficiaries have the right to contract with others except through the trustee.
Gallagher and Speck v. Chicago Title and Trust Co., 238 Ill. App. 39 (1925). (In this case the plaintiff dealt with beneficiaries rather than the trustee: the lien was invalidated.)
A beneficiary can cloud the title by failing to pay a contractor or supplier (e.g., Univ. Of Ill. Law Review, Vol. 1988 p. 74, note 56, Eric T. Freyfogle, “land trusts and the Decline of Mortgage Law”)
MORTGAGE LAW VS. U.C.C. REGULATION (ART. #9)
“Mortgage law" would rarely, if ever, govern a security interest in a beneficiary’s land trust interest.
• Eric T. Freyfogle, “Land Trusts and the Decline of Mortgage Law," University of Illinois Law Review, Vol. 1988, p. 76-99, spec. referring to: “Horney v. Hayes [1957] and its Progeny” (See “Personal Property” below).
NOTARY
A licensed officer empowered to authenticate contracts, take depositions and administer oaths. Although a Notary must authenticate the deed into a trust, there is no basis for requiring notarization of the land trust agreement itself. However, since it could conceivably become desirable to record it or produce it in court in the future (for any unforeseeable reason), having signatures notarized at inception may be prudent
NOTICE OF FIDUCIARY RESPONSIBILITY
Most writings on land trusts appear to suggest the necessity of filing a Notice of Fiduciary Responsibility (Form #56 prior to 1985 and Form RCMW 501-1 Rev. 11/85 since that time). However, our experience has been that either IRS doesn’t know what to do with either of these forms, or doesn’t need them…they all come back by return mail when sent.
IRC 6903(b)
Texas/Regulations Sec. 301.6903-1(a) & 301.6903-1(b) “Every person acting for another in a fiduciary capacity must give notice to that effect to the office of the District Director in writing."
IRC §69803(B) & 7701(a)6 – NFR (Notice of Fiduciary Responsibility) must be filed (IRS Form #56-a).
PARTITION BY JUDGMENT CREDITORS
The dividing-up of a property in order to distribute it, parcel by parcel, to or among owners or their creditors.
Regarding ownership in the land trust, one’s beneficiary interest (being intangible personal property versus real property) provides a high degree of protection (though not absolute insurance) against a judgment creditor’s partitioning of one party’s interest from that of another: thereby forcing the sale of part of the property or liquidating it and dividing the proceeds. To best protect against such potentiality, it is prudent and highly advisable for land trust participants to hold their respective beneficiary interests in a Limited Liability entity such as, say, a Limited Partnership or a Limited Liability Company (LLC). In so doing, each beneficiary can then be free of concern about the accidental or untoward misdeeds of the other (i.e., dealings that could otherwise easily involve the property’s title by either party’s creditor’s claims, tax liens, bankruptcy, legal actions in marital disputes, probate, etc.).
“Since the interest of the beneficiaries under a land trust is personal property, and since the trust agreement expressly precludes the vesting of any legal or equitable right in a beneficiary, partition is not available.”
Henry W. Kenoe, Keno on Land Trust, IICLE, p 3-012 Sec. 3-9 (1989)
CA. Civ. Code §872.210
CA Probate Code §50
CA. Probate Code §133(i)(c)
CA. Civil Code §955.1
Wile, “Judicial Assistance in the Administration of California Trusts,” 1`4 Stan. L.Rev. 231, 245-250 (1962)
CA. Estate Administration, §§33.11 to 33.35 (Cont. Ed. of the Bar, 1959)
Aronson v. Olsen, 348 Ill. 26, 29, 180 N.E. 565, 566 (1932); Breen v. Breen, 411 Ill. 206, 210-12, (1952).
Probate Code §§11600 et. seq. & 2463;
PERSONAL PROPERTY OWNERSHIP
Antecedent debt, lien, or punitive obligation under law or contractual liability notwithstanding, ownership in a land trust will be characterized for all purposes as Personality.
Kenoe on Trusts, IICLE, Springfield, Ill. (1989).
CA. Civil Code §863 – “Beneficiaries take no estate or interest, but may enforce the performance of the trust (a “chose in action,” and, as such, is personal property under CA. Law).
CA. Admin. Code §13303(d)
U.C.C. §9106
Restatement of Trusts, §131(1) “If real property is held in trust and a duty is imposed upon the trustee to sell it, then the interest of the trust is personal property.”
Breen v. Breen, 411 Ill. 206 103 N.E. 2d 625 (1952)
“Whether a beneficiary’s interest in the trust is seen as personal property or real property depends substantially upon the intentions of the parties as expressed in the trust instrument.”
Wright v. Security/1st Nat. Bank, 35 Cal. App. 2nd 264 (4th Dist. 1939), Appeal dismissed 311 US 611 (1940).
An express provision in the trust instrument that a beneficiary’s interest is personal property is not conclusive. It does, however, throw light on the party’s intention, and such holdings are consistent with CA. Civil Code §863 (Rev).
Smith v. B of A, National Trust and Savings Assoc., 14CAL. App. 2nd 78 (2nd Dist. 1936).
PLEDGE OF BENEFICIARY INTEREST (SEE COLLATERAL ASSIGNMENT)
POWER OF DIRECTION
Analogous to voting rights: the power by beneficiaries to direct the trustee in matters of title or sale of the property.
One beneficiary in a land trust can assign Power of Direction to another (or to others). However, it is virtually always more prudent to transfer such “voting rights” by means of a limited Power of Attorney vs. using an Assignment of Power of Direction. By doing it this way, the mutuality of the power by all beneficiaries is retained (analogous to assigning a “Proxy” to another stockholder). This then avoids property tax increases, conveyance tax, transfer stamps and property tax reassessment (in virtually all jurisdictions. Otherwise a relinquishment of more than 50% of the power of direction would create a taxable transfer in real estate and the necessity for reassessment and conveyance tax).
PROBATE ADMINISTRATION (AVOIDANCE OF)
The property of a decedent passes to whomever is going to receive it in one of three ways:
1. by title (e.g., joint tenancy, tenancy in common, community property, etc.),
2. by contract (life insurance, trusts, retirement benefits, etc.), or
3. by probate administration. Inclusion of a land trust interest in probate may be avoided by—1) issuing a certificate of beneficiary interest to the decedent’s family trust, or 2) providing a statement in the trust agreement itself as to who shall receive that interest upon the death of the beneficiary.
Wile, “Judicial Assistance in the Administration of California Trusts,” 14 Stan.
L.Rev. 231, 245-250 (1962)
CA. Admin. Code §13303(d)
Nichols v. Emery, 109 Cal 323 (1895)
Estate of Tutules, 204 Call App. 2d 481, 490-1 (2d Dist. 1962) (Logical implication in Illinois case)
PROTECTION FROM LIENS AND JUDGMENTS (ASSET PROTECTION)
A creditor may reach the corpus of a land trust, unless the trust is irrevocable, or there would be more than one unrelated beneficiary (as with the model of the NARS Equity Holding Trust System™). This concept appears to be based upon the idea that a co-beneficiary in a land trust can be seen as a “partner,” and a claim (or charging order) effected against a co-beneficiary would be impossible without a dissolution of the entity (the trust) and since an unrelated co-beneficiary is not responsible for the actions of the other: such dissolution would not be allowed.
Henry H. Keno on Land Trusts, IICLE, Springfield, Illinois (1989)
Smith v. B of A; Houghton v. Pacific Southwest Trust and Savings Bank: 111 CA 509, 295 p. 1079,
The CA. Code of Civil Procedures §697.510]
RECORDATION
Although the conveyance from the settlor of a land trust to the trustee is (generally) recorded, no other documents are [need be] recorded. However, should a need for constructive public notice arise, the trust agreement could be recorded by the beneficiary/ies (though ordinarily the confidentiality and anonymity of ownership in the land trust are its primary benefits). In some jurisdictions recordation of a description of the trust and identification of its beneficiaries may be statutorily required. However, a failure to so record would likely result in a penalty that would be minor enough to justify opting for anonymity instead. Failure to identify beneficiaries does not nullify the validity of the trust except for purposes wholly unrelated to its objectives.
REIT (REAL ESTATE INVESTMENT TRUST)
A Real-estate Investment Trust is a federal entity, and definitely not a land trust. The REIT is a special tax classification created by Congress (see IRC §§856-858), more resembling a mutual fund that must continually meet qualification under the Internal Revenue Code to remain “tax free.” A REIT can be, or be owned by, a trust, a corporation or an association; be managed by one or more trustees. It must have over 100 or more beneficiaries and meet stringent regulations to be so classified.
REMAINDER AGENTS
With a designated remainder agent, the land trust’s integrity is enhanced from the standpoints of its protection against extinguishments by merger (re. re. the Doctrine of Merger); and as well, from the standpoint of protection under probate and gift taxation.
A person with remainder interest in a land trust need not execute documents relative to the creation of the trust that conveys such remainder interest.
RENTS (NOT) PAID TO TRUSTEE
To avoid double taxation and the classification of a land trust as a business trust, rents may never be paid to the trustee. Instead, such management must be handled, and rents collected, by the beneficiary/ies themselves or by an unpaid designee. When one of two or more beneficiaries occupies the property (e.g., as in an NARS Equity Holding Trust System™), the beneficiaries typically will contract for collection and disbursement of rent with a property manager acting by mutual direction of the beneficiaries, and may be paid for from the mandatory trustee fee…but not by the beneficiaries.
RICO STATUTES
Racketeering, Influence and Corrupt Organizations laws prohibit an individual from engaging in activities that affect interstate for foreign commerce. Since land trusts have been used to conceal ownership for Millicent reasons. In some states (i.e. Florida), failure of a land trust trustee to notify the state of any discovered RICO liens of criminal activity can constitute a misdemeanor and subject the trustee to punitive actions [All Florida Land Trusts should contain a provision regarding compliance with the Florida RICO statues].
SECRECY (ANONYMITY, PRIVACY)
Sale or assignment of beneficiary interest in a land trust is generally not recorded, and need never be disclosed to anyone but the trustee except in extreme circumstances: for example, in cases of arson claims, building code violations, or upon sale of the property (See “Assignment, Constructive Notice”)…in the face of a court order naming the trustee.
SECURITIES CONSIDERATIONS (SPECIFICALLY CALIFORNIA, BUT RELATIVE TO ALL OTHER STATES AS WELL)
As per corporation codes in many states (e.g., CA. Corp. Code §25102), a land trust could be considered a public offering only if offered to more than 25 persons, and wherein more than 10 of them acquire an interest in the trust. This could be the case when large multi-unit dwellings or commercial properties would be placed into a land trust (10 beneficiaries would be the limit).
In California The Corporate Securities Law Revision of 1968 nullifies former code §25003(b) and §25004, which mandated that a trust must be established for purposes of carrying on a business, or for a trustee’s receiving payment. Similar laws exist in most, if not all states that recognize land trusts.
§2990 of the Real-estate Commissioner’s Regulations (Admin. Code §§2990)/ 10251.
§§25102(e)/(f) and Rules 260.102.2 of the CA. Admin. Code.
People v. Syde, 37 Cal. 2d 765, 768 (1951); People v. Jacquez, 137 Cal App. 2d 823, 834 (1st Dist. 1955)
SECURITIES LAW (CORPORATE)
“It has been held that Corporate Securities Law does not apply to the supervision and regulation of instruments which constitute agreements with persons who expect to gain a profit from their own services or other active participation in a business venture [e.g., as in a NARS Equity Holding Trust System™].” (CA. Corp. Code §25008(a))
SPECIFIC PERFORMANCE
The beneficiaries of an ordinary inter vivos trust have no power to convey absolute ownership of the trust’s property, so as a practical matter, failure to obtain legal title to the property precludes the use of Specific Performance to enforce a contract to convey it. Specific Performance is available to vendees with an agreement to purchase real estate. This agreement may be executed by the beneficiaries of a trust that is the holder of the legal title to the property. In addition, the beneficiaries of the trust do have the power, under its terms to compel by direction the conveyance of the property by the trustee.
Cal.Jur.3d, Specific Performance §51
226 Cal.App.3d 572; 276 Cal.Rptr. 554 [Dec 1990]
STATUTE OF USES
“In most, if not all, states, the Statute of Uses will be held not to apply to Illinois-type land trusts.” I.e., land trusts are excluded from the Statute of Uses. In certain states (California, for example), the Statute of Land Uses is not followed)
Chicago Title and Trust Co. V. Mercantile Trust & Sav. Bank, 300 Ill. App. 329, 20 N.E., 2d 992, (1st Dist. 1939).
#55 Mooney (Grey v. Union Trust)
Mc Curdy v. Otto, 140 Cal. 46, 53, [73 P. 748]
SYNDICATION
Use of the land trust is advantageous in land syndication arrangements, providing it doesn’t give beneficiaries more than ministerial duties, and there are no more than 10 beneficiaries. This is so partly because land trust syndication avoids the double taxation of corporate income, which is taxed first to the corporation, then to the shareholders upon distribution of dividends. [See Schwind, The Land Trust: A Real-Estate Syndication Device, 101 TRS. & ESTS. 650 (1962)]
TITLE INSURANCE COMPANY ESCROWS
In some states, local codes may appear to prevent title company escrow divisions from handling closings which are not ancillary to, or in conjunction with, issuance of title insurance (See, for example, CA. Ins. Code §12340.3 & CA. Fin Code §17006). However, such rules seem to be relaxing (and/or being revised) in most jurisdictions, as title companies (e.g., American Title, Chicago Title, Fidelity Title Etc.) have regularly handled such escrows in connection with the NARS Equity Holding Trust System™, even when issuance of new title insurance was not an issue.
TORT ACTIONS
A long series of Illinois cases in particular have held that trustees of land trusts are not personally liable for breach of duty in property maintenance. However, since the names of beneficiaries are private, the trustee would first be named in a suit, but then dismissed as the beneficiaries were enjoined (see Saeed v. Bank of Ravenswood, 427 NE2d 858, 101 Ill.App.3d 20 (1981).
TRANSFER BY ASSIGNMENT (SEE “ASSIGNMENT”)
By converting the beneficiary interest in a trust estate from real to personal property, such interest may be transferred by a simple written assignment, form, without public notice and without the expense and delay of procuring title policies.
TRANSFER NOTICE
Whenever a beneficiary transfers all his/her beneficiary interest in most trusts to another party, the trustee must file a Notice of Transfer with the Internal Revenue Service. In some states (e.g., Illinois), description of such transfer must also be filed with the office of the County Recorder. However, in that the beneficiaries of land trusts remain fully responsible for all income tax reporting and the trustee has no such responsibility, such filing of a Notice of Transfer is not, and need not be, normally done.
TRUST CERTIFICATES
The use of Trust Certificates to reference and verify ownership of interest in a land trust is optional and usually not done unless the trust’s interest is to be used as collateral for a loan of monies, or unless one would wish to prove ownership (of beneficiary interest) without revealing the underlying documentation. Such a certificate can be a plain piece of paper written in ink. Or it can be an impressive and official looking gold embossed form with filigree…and wild animals on the masthead. They both serve the same purpose.
TRUSTEE (CHOICE OF)
The third party trustee in a land trust can be virtually any company or individual nominated to act in that capacity. However when possible, the trustee would ideally be an independent trust company (e.g., title and trust company), a bank and trust company or a non-profit corporation acting on behalf of its members. Although the land trust trustee is the full legal and equitable owner of the property, a land trust trustee may act or intercede in the affairs of the property only by direction from the trust’s beneficiary/ies.
An individual agent (e.g., an attorney) may not be a bona fide agent for the beneficiaries and the trustee at the same time, and should not be an agent for multiple beneficiates with different positions and points of view at the same time (e.g., New v. New, 148 Cal. App 2d 372 (1957).
An individual as trustee, though permissible under the law, may create undue risk for the beneficiaries by not knowing the laws or details of land trust administration (filing responsibilities, leeway in responding to inquiries, etc.). A professional corporation as trustee, on the other hand, is well versed in such matters and cannot die and embroil the trust property in affairs of its Probate.
UCC (UNIFORM COMMERCIAL CODE) PROPERTY
The Uniform Commercial Code, adopted by all 50 states, characterizes interest in an Illinois-type land trust as Personalty (Personal Property) vs. Realty (real estate). However, for federal income tax purposes (as we’ve said a dozen time in this book), the beneficiary/ies of land trusts are treated as if they were in-fact owners of real estate. Because local laws view a land trust’s beneficiary interest as personal property rather than real property (except in Louisiana and Tennessee who treat such beneficiary interest as realty5), it is UCC regulation (i.e., Article #9), rather than mortgage law, which governs the interest of the parties.
University of Illinois Law Review, Vol. 1988, p 68, FN#11 (Freyfogle, “Land Trusts and the Decline of Mortgage Law”)
Land Trusts for Privacy and Profit, Atty. Mark Warda, Galt Press, Clearwater Florida, (2002)
UNRECORDED DEEDS
A deed of real estate is legal, valid and enforceable, whether it is recorded or not. Many would-be creative financiers will use this fact in an attempt to hide from a lender the fact that a transfer of ownership has taken place. Not recording a deed on a property in which you are a creditor is not considered wise, in that should the buyer under such an unrecorded arrangement file bankruptcy, the seller (you) will, therefore be deemed an unsecured creditor (filing after the fact will not be recognized as valid). Furthermore, a buyer under an unrecorded deed has no protection against a seller’s illegal sale or the lease of the property to someone else. Though the seller may be subject to lawsuit, the buyer with the recorded deed will always prevail in a claim of ownership.
VETERAN’S ADMINISTRATION LOAN (FEDERALLY SPONSORED)
Low cost, low down payment federally provided home loan mortgage guarantee programs for military veterans. These programs, available in all states, are backed by the U.S. Department of Veteran’s Affairs (formerly known as the “Veterans Administration).
VETERAN’S LAND-SALE-CONTRACTS: (STATE SPONSORED—ALASKA, CALIFORNIA, OREGON, TEXAS, AND WISCONSIN)
A low cost, low down payment, state provided home loan for military veterans. In these loans, the borrower does not become the property owner, per se, until the loan has been paid off. Since the loan is made (or backed) by the state of residence and secured by a Land Contract (i.e., "contract for deed"), conveyance of the property to a NARS Equity Holding Trust System™ is not possible. Although the Vendee (the borrower) is not the owner of the property, and the legal title remains with the Vendor (the state) until the loan is retired, the veteran nonetheless holds equitable title throughout and is, therefore, entitled to income tax deductions for mortgage interest and property taxes paid.
5 Though active trusts are recognized and fully acceptable, in Tennessee, the corpus of any Tennessee trust remains characterized as what it was prior to vesting with the trustee…personalty remains personalty and realty remains realty. The “Illinois Land Trust,” is merely an inter vivos nominee trust without the benefits associated with the Equitable Conversion. In Louisiana, a similar situation arises due to that state's failure to employ or recognize the Doctrine of Equitable Conversion. La. sees the beneficiaries’ interest in a land trust solely as a lien against real property.
UNLAWFUL DETAINER ACTION
Use a Lease Option to take a loss on your personal residence. As you may know, you cannot write off a loss on the sale of your personal residence. However, if you lease/option the property, you may be able to convert it to a rental and take a capital loss when the buyer exercises. NOTE: Classification of a land trust as something else (e.g., partnership, corporation, association, business trust, dry or failed trust, disguised security agreement, equitable mortgage, etc.) is a common objective of the courts, and can prove fatal to one’s intent if absolute care is not taken in drafting the documents and adhering to the standards established by statute and precedent. Carefully review what it takes to make a land trust a land trust, and keep it that way! For a long-term hold via the Equity Holding Trust™…in general: The trustee should, when possible, be a corporation The corporate trustee should be a professional entity whose business it is to holding titles (either trust company or a non-profit corporation acting for its members)
The trustee would ideally be a foreign corporation (out of state) The trustee should charge a fee for its services at least commensurate with “industry stands (i.e., what banks or title companies charge)” Ideally a third-party should be mutually appointed to collect payments and make disbursement (without charge) The collection entity must NOT charge for its services—as paying for such services could constitute characterization of the transaction as an Association (taxed as a corporation) There must be no reference in any related contracts relative to… o Ownership or realty (legal or equitable) o An option to purchase, o A less than Fair Market Value buy-out at termination, o An obligation to continue in the property after termination, o Any rights of renewal or reinstatement, o Any interest consideration between parties for any monies owed from one to another, o Any transfer of income tax benefits o Any verbiage that could be seen as “partnership” or “corporation” language
North American Realty Services, Inc. 11/30/2002 All rights reserved
Bill Gatten – Making it BIG in Creative Real Estate
For additional information on the Equity Holding Land Trust go to: www.landtrust.net
"Reprinted and used with Permission of Author - 12-2005"
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