LAND TRUSTS IN TENNESSEE - A USEFUL TOOL FOR SOME REAL ESTATE INVESTORS BUT NOT FOR EVERYONE

Over the years I have received many questions about land trusts. Among the questions are: Are they effective for asset protection? Do they hide the owner’s identify? Can I assign the beneficial interest in the trust? Who should be my trustee? It eventually dawned on me that the questions seemed to show a need to enhance people’s understanding of land trusts. In this article, I am attempting to provide a brief description of what land trusts are and to weigh the pros and cons of the use of land trusts in Tennessee by real estate investors. I hope this information is of use to the readers.

I see two types of land trusts in Tennessee. The first type of land trust is not the subject of this article. This is the Conservation Land Trust which is used to preserve, in perpetuity, agricultural, forest, woodlands and historic properties and land in this state. The second type of land trust is modeled on what is often call an “Illinois” land trust. This type of trust originated in Chicago in the latter part of the 19th century. City officials who wanted to be involved in commercial real estate development desired to have some type of “blind” trust to hide their interest in real estate projects. The Illinois Supreme Court held that these trusts are valid if the trustee has at least has some minimal purposes. The use of land trust has spread to other states in recent years.

Illinois and at least five other states have enacted statutes that specifically identify and adopt this type of trust. Tennessee has not enacted such a statute. The Tennessee law on trust is more flexible than those of many states and although some people feel that land trusts are illegal or are not trusts, I see no authority for these positions. The IRS does consider land trusts as “sham” trusts for tax purposes in that it does not recognize the trust as an independent taxable entity from the beneficiary. However, I have found no legal prohibition of land trusts in Tennessee.

Tennessee has adopted the Tennessee Uniform Trust Code found at Tennessee Code Annotated 35-15-101 et. seq. This statute requires the Trustee to have duties to perform and that the same person is not the sole Trustee and the sole beneficiary. This is not a problem I have encountered in most land trusts. I have seen Land Trust Agreements normally define the role of the Trustee and give the Trustee some limited role. The requirements for creation of a trust are specified in T.C.A. 35-15-402. My review of the above statues leads me to believe that if the Trustee had no role whatsoever, the trust might not be considered to be a valid trust in Tennessee. Otherwise, most land trusts seem to meet the criteria to be considered as some form of trust in Tennessee.

The typical land trust includes a Grantor, a Trustee and one or more beneficiaries. The Grantor is often the property owner or the seller to the trust. The trustee is usually a separate person or entity familiar to the beneficiary. The beneficiary is the investor/owner. Title is held by the Trustee as a fiduciary for the Trust. The Trust is normally given a name of the street on which the property is located or may even contain the name of the Seller(s). It could also be named by almost whatever name the investor wants to use to suit his/her purposes. It usually does not contain the name of the beneficiary/investor. There can be multiple beneficiaries or the beneficiary can also be an LLC, corporation or other entity.

The land trust is beneficial to investors in that it hides the identity of the beneficiary who controls the Property and the trustee. The Trust Agreement is not recorded. The deed to the Trust names the trust but it does not mention the beneficiary. The deed usually shows the address of the trust as being a post office box or UPS store address or similar facility. It provides some protection from legal liability in that it is difficult to find the identity of the beneficiary. However, it is not foolproof. If a creditor “pierces” the trust through legal process and discovery, the identity of the beneficiary can be exposed and his or her assets can be attached unless the beneficiary is an LLC or other limited liability entity. Land Trusts usually permit for assignment of the beneficial interest which can change transfer and control of real estate without a recorded instrument. Another advantage of the land trust is that a separate trust can be set up for each property you own. This spreads out the risk among various trusts, which is a goal of many investors. Many investor use an LLC or corporation as the beneficiary to protect other personal assets.

A disadvantage of the land trust is that they are not understood by most lenders. Also, lenders generally want a copy of the trust agreement. If you give this to a lender, the structure of the trust is known to them and this may diminish the value of the trust and its ability to protect assets and the identity of the beneficiary. Another disadvantage is that unless the beneficiary is a limited liability entity, the beneficiary and his or her assets may be exposed to creditors who are able to learn the identity of the beneficiary. Finally, it is difficult to find a reliable trustee or even anyone that wants to serve and for this reason I often recommend forming a corporation to do nothing but to serve as trustee of your trust or trusts.

Land Trusts are another tool in the arsenal of the real estate investor. They are not for all investors. I have found that they work best when the investor owns the property outright or participates in a “subject to” transaction. They are also beneficial if you intend to hold the property for long periods of time. They are less useful if you intend to refinance on a frequent basis. Don’t utilize this form of ownership unless you fully study and comprehend the pros and cons of trust ownership. Seek independent tax, legal and insurance advice before using this form of ownership.

I hope this article will be of use to you and I will be glad to answer any questions you may have at my e-mail address at bnotestine@hotmail.com or bob@bellemeadetitle.com

© Robert J. Notestine III, 2011

Attack on Single Member LLC's

Recently, I have received calls or e-mails about single member LLC's and whether a recent judicial decision has softened the liability shield surrounding LLC's. The case many people seem to be referring to is Olmstead v. Federal Trade Commission decided by the Florida Supreme Court on June 24, 2010. Although this may be persuasive authority looked at by the Courts in this state it is not binding in this state and is currently not the law of this state.Two justices dissented to this opinion so there is clearly a division of opinion in this case. For those persons still worried about the asset protection features of LLC's , it is my opinion that they still are very effective in this state and can be combined with various trusts or agreements to increase asset protection. Some investors may also want to explore Nevada or Wyoming LLC's.

Protecting Tenants at Foreclosure Act-2009

The PTFA act passed by Congress in 2009 is only now popping up in eviction cases in Tennesee. This federal law provides a measure of protection to tenants with a lease arrangements who reside in properties that have been foreclosed upon by mortgage lenders. Traditionally, landlord -tenant relationships have been governed by state law in Tennessee, but the PTFA is a piece of federal legislation that impacts state law. Key provisions are 1) tenants subject to a bona fide lease may remain in the property to the end of the lease as long as they pay and are not in default. 2)a 90 days notice period for tenants without a term lease or under a lease terminable at will. For a bona fide lease to exist, the following criteria will be examined by the courts 1) the mortgagor or direct relative is not the tenant 2) the lease was the result of an arms length transaction and 3) the lease requires rent that is not substantially less than fair market rent. I have seen very few cases where this law has been an issue but it appears to be becoming used more and more as a defensive tool by tenants in foreclosure situations.

Delinquent tax sales

There has been some confusion and I receive a lot of questions about the redemption period for delinquent tax sales in Tennessee. In fact, the law was changed in 2006 to state that the period expires "one year from the date of sale as evidenced by the order of confirmation." Therefore the date of sale is the date used to measure the expiration of the redemption period. I also receive a lot of questions about the redemption process. According to the statute found at TCA 67-5-2704, if redemption occurs, the Clerk and Master will send notice of the redemption to the buyer and that person or entity has 30 days to file a motion to contest the redemption or assert claims for additional monies or both. If no claim or motion is filed by the buyer, the buyer will receive a refund of money plus interest at the statutory rate of interest. Finally, another statute states that the person in possession during the redemption period must not commit waste to the property. These provisions are found in Tennessee Code Anotated 67-5-2701-2705. I will be glad to attempt to answer questions you may have about this process.

Tax Impact on LLC's will change July 1, 2009

The Tennessee General Assemby recently enacted just before the end of the current session, a " Technical Corrections Bill". This statute modified the family-owned noncorporate entity exemption under Tennessee tax law. The exemption will no longer apply to rent from industrial and commercial property and some farm property. An exemption still exists if the entity elects by October 1, 2009 to waive the limited liability protection granted by statute. Another option is to convert the entity to a limited partnership. At this time it appears that family owned entities receiving substantally all of its income from residential real property will be exempt as long as the property owned by the entity has no more than four residential units on it. I will post any additional information I receive on this new statute as soon as it becomes available. At last notice this bill was waiting on the Governor's signature.

Tennessee Condominium Act of 2008

For readers interested in Condominium issues,the Tennessee legislature has enacted the Tennessee Condominium Act of 2008 effective January 1, 2009. This is a comprehensive revison of the condominium law in Tennessee and replaces the old Horizontal Property Act as to new condominiums. It generally does not affect condominiums in existence at the time this law goes into effect except for a few provisions which apply to all condominiums in the state. However, it does leave room for existing condominiums to adopt the new law. A few key provisions are as follows:1) Condominiums will be created by a declaration instead of a master deed 2) Units and limited comon elements are more specifically defined by statute 3) In the event a conflict exists between the declaration and by-laws the declaration will generally prevail 4) It defines the plan or survey to be attached to the declaration which will clearly designate the units and the common elements 5) Sets a minimum approval of 67% of the owners to amend the declaration 6)Provides for a master association in more complex developments 7) States specifically the powers of the owners association and the board of directors 8) Sets a statutory quorum for association meetings 9) Requires a specific vote of the owners to convey or encumber common elements and 10) creates an automatic lien for common expenses or assessments from the time they become due.I will be glad to answer any questions you may have about the new act.

Revision In Tax Sale Law

Until this year, the courts in Tennessee had ruled that quiet title suits following a tax sale by the county, could not be filed until at least three years after the sale. Due to a 2008 amendment, the Tennessee legislature amended the law to provide that a quiet title action can now be brought after the one year redemption period. This should help facilitate the clearing of title of properties purchased at county tax sales.