Land Trusts in California

Land Trusts in California




In California, general trust law is found in the Probate Code §§15000-19403. There is no specific 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).

So, land trusts produced in California for California character are based on general trust law in the aforesaid California Probate Code. But an out-of-state land trust may be formed that would keep up title by the trustee of a California character, to take advantage of more advantageous statute and case law of another state. Indeed, the Virginia Supreme Court in Air strength, 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 strength of the real character, which protects the privacy of the beneficiaries.

Indeed, since California does not have a specific land trust statute, there is no legislative history nor developed 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 specific land trust statute with more requirements. Indeed, Illinois land trust statute (75 ILCS 435) requires that holders of strength of direction owe fiduciary duties to holders of advantageous interests. California general trust law does not have a similar requirement.

In any event, the avoidance of probate over a real character 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 division (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 division applies to all trusts in spite of of whether that were produced before, on, or after July 1, 1987.”

Among other methods of creating trust, a trust may be produced by: “(b) (a) move of character by the owner during the owner’s lifetime to another person as trustee,” under § 15200(b) of the California Probate Code. And “a trust is produced only if there is trust character,” under § 15202 thereof.

“A trust may be produced for any purpose that is not illegal or against public policy,” under § 15203 thereof. A land trust is not for an illegal purpose, nor is it against public policy in California, although it is not widely used in this state.

And “a trust, other than a charitable trust, is produced only if there is a beneficiary,” under § 15205 thereof.

B. Trust Of Real character And Personal character:

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 character 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 empowered in writing to do so.”

And under § 15207 (a) thereof, “(t)he existence and terms of an oral trust of personal character may be established only by clear and convincing evidence.” Under § 1528 thereof, “consideration is not required to create a trust….”

Lastly, “a trust produced pursuant to this chapter (1, part 2, Division 9 of the Probate Code) which relates to real character may be recorded in the office of the county recorder in the county where all or a portion of the real character 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 character in the name of a different trustee (private or institutional) may be recorded with the County Recorder, but the land trust agreement that states the names of the truster/settlor/investor and the beneficiaries is not recorded.

consequently, the creator/grantor of the land trust: the trustor/settlor who invests in real character can keep his/her/its name, in addition as the names of the beneficiaries out of the County Recorder’s and County Assessor’s books, and to a certain extent hide the investment from public view.

But a judgment creditor of a trustor/settlor or of a beneficiary can subject the latter to answer written interrogatories on his/her/its assets, or to debtor’s examination under oath in court to determine assets, and not merely rely on County Recorder and Assessor asset searches.

The land trust agreement may also use a name for the land trust different from the name of the trustor/settlor who produced it. This is another asset protection assistance. And if the beneficiary thereof is also the same trustor/settlor, the latter may designate his/her living trust or wholly-owned limited liability company as the beneficiary to hopefully avoid gift tax issues.

(2.) Avoidance Of Probate:

additionally, just like successor trustees may be designated in the land trust agreement, successor beneficiaries may also be chosen to avoid disruptions in dispensing of trust assets at termination of the trust, outside of probate proceedings.

A land trust may be produced as revocable (terms of the agreement may be changed) or irrevocable (cannot be changed), but the latter requires the filing of separate tax returns and is taxed at a higher rate than the trustor/settlor’s individual tax rate, unless considered a simple trust in which all incomes produced are taxed to beneficiaries. For federal income tax implications, if the grantor/trustor is also the beneficiary, the Internal Revenue Service (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 Agreement For Each character:

In order to preserve the privacy of the investment or transaction and the asset protection benefits of the land trust, only one real estate character can be listed as held in it. consequently, a different land trust agreement is produced for each character. 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 buy investment or rental similarities by a limited partnership (LP) or a limited liability company (LLC), or move such similarities to a more flexible living trust that does not require the filing of separate tax returns, or move the ownership interests of an LLC (not title of the character) to a living trust.

An LLC may also create a land trust by conveying title of a character to the trustee, and designate itself (LLC) as the beneficiary for privacy of ownership. Sometimes less is more; for indeed, creditors can see by and have recourse against avoidance of execution of judgment on similarities by asset protection schemes. And transfers of ownerships of similarities may consequence in tax assessments.




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