Table of Contents
Table of Contents
Land trusts are used to anonymously own real estate. They provide privacy and asset protection not otherwise available. Changing title to a land trust does not trigger the due on sale clause when moving a property out of your name. This avoids accelerating a mortgage and is particularly useful when you've bought real estate using your personal name and now want the benefits of an LLC and some privacy.
Land trusts are not registered in Florida, or other states. They are a simple contract between three parties.
Land trusts represent a useful real estate tool for delivering asset protection as well as privacy related to the ownership. Trusts serve as your defense to protect you, as well as your loved ones, from the lawsuits that occur regularly.
If you try to do your own research, you will quickly learn that information regarding land trusts, both specific to Florida and in general across the country. Furthermore, very few attorneys will be familiar with the process of setting up as well as administering title holding trusts.
Forming Your Land Trust
To create your land trust to protect ownership and privacy, you should start by printing the basic agreement for land trusts. Printing a physical copy will help you go through and take notes on your draft before you fill it out electronically.
There are three preambles in your trust agreement, only one of which will apply to your situation. You can then delete those that do not apply. Take the applicable preamble and fill in the Trustee's name and the trust's name.
When naming the land trust initially, you can choose almost anything, provided it does not involve copyright infringement. When naming the Trustee, you will find it easiest to have the Trustee be in the state that the Trust Agreement is from, such as Florida for both. After a year has passed, you can change your Trustee to someone located within another state. This is the most private solution, especially if the Trustee's last name is different than yours.
Choosing Irrevocable or Revocable
As you create the agreement for your land trust, you will notice a decision as to whether it will be irrevocable or revocable. If you want to be able to adjust the agreement's terms via amendments in the future, you want a revocable agreement. If you want the terms to be unable to be changed, then you want an irrevocable agreement. In the case of irrevocable trusts, the trust will stay the same until it expires.
Keep in mind that irrevocable trusts provide additional asset protection compared to revocable ones. However, you may need to file tax returns separately, have tax identification numbers, and pay taxes at a higher rate compared with your individual taxes. As such, it is a good idea to always get legal as well as tax advice before you create a land trust that is irrevocable.
As you continue through your trust agreement, you will need to select the beneficiary. If you currently own the property in question and choose someone as the beneficiary that is not your spouse or you, there may be gift tax implications. Because of this, some experts suggest making the beneficiary your LLC, corporation, or trust for personal property. This can deliver additional asset protection in the future.
There is the option to go with multiple or single beneficiaries, depending on your situation. You must also name a successor beneficiary (or beneficiaries). This beneficiary will automatically become the beneficiary if the primary beneficiary dies.
Land Trust Taxes
There is some confusion in dealing with Florida land trust when tax time rolls around. How are they treated? Are they taxable? What about any income from them, such as in a strip mall or a rental situation? Let's dive in and take a look at taxes, trusts, and terminal responsibility.
Yes, You Still Owe Your Taxes
No matter what you do, you'll still owe Uncle Sam something by the end of the year. Whether it's in property taxes or income taxes (or any other form), the government will get its share. This courts for properties in land trusts, too. However, any property that is performing at a taxable income (for instance, such as renting a house out), will be taxes at a personal income level for the vast majority of the general public reading this article.
There are some differences when it comes to commercial rentals, but most of these will be handled by a financial consultant. State taxes will vary from place to place, and some commercial rentals may even have local taxes that need to be paid, too.
Land Trusts are Tax Neutral
Having a land trust does nothing to change the status of a taxable property's income taxes. If you are renting a property out or, perhaps, using it for something like space-sharing, you will be taxed your typical personal income taxes upon the incomes of the property. The trustee does not owe these numbers. We'll get into that in a moment.
Essentially, a land trust acts as a pass-through entity. It does nothing to your tax status and changes nothing about the taxable status income of the property that you own, no matter where the trust is held or who has their hands on it. Again, you are still responsible for your own taxes no matter who, publicly, appears to be the property's owner.
Your Trustee Is Not Responsible
Even if you write into the land trust that your trustee holds equal responsibilities for taxes of the property, it will likely be thrown out in court. And it should be. The trustee stands no way to inherit value nor any sort of income from the property; they are only there to provide a barrier between the owner and the general public. Why should they be taxed for, ultimately, being nothing more than a service provider who gains nothing taxable from the circumstances?
When having your trust written, be certain that your trustee is held unaccountable, in black and white, for the status of the property regarding its taxes and taxation. This will save you a legal headache, which you will loss, if you try to push any sort of tax-status agreement on your trustee. Just don't do it.
And remember, this goes for any sort of property taxes due to the county for your retainment of property rights, too. You pay those, not your trustee. Yes, that includes if you give the trustee the money to do it with. It is your responsibility. Do it right
The Sole Exception: Estates
Unless your property has made a taxable income, the only worry you need have on a property in a trust is a property tax... except for estates.
Estates are usually taxed the full amount of the property under inheritance tax. Though this typically only occurs once, and is very state dependent (and, honestly, constantly contested), it is stall something to consider. If you're going through the sad event of losing a relative or a friend and you happen to take on their real estate, or you inherit it under the clause of your land trust, you will need to file quite a bit of paperwork during the tax seasons.
Some county laws may supersede the situation. We recommend speaking to your county tax office. If you are in this situation, just to be certain that all of your I's are dotted and your T's are crossed
Final Thoughts on Taxes
In most cases, you will never need to file a personal tax return based around a land trust. However, if you do, it is generally treated as your personal taxes are and often lumped in with them. The sole exception is during an estate inheritance, in which you may be liable for quite a number of fees, costs, and tax monies involved with the property. A land trust does not change nor impact any inheritance taxes and you will be left relied upon for the full amount, even if you are already in a land trust for the property at the time of the owner's death.
Other Decisions in the Agreement
As you go through the agreement for the land trust, you will also need to decide and indicate:
- Who the Successor Trustee is.
- What to pay the Trustee.
- The period of your Trust Agreement.
- Which state's laws for land trusts to use.
Because of the complicated nature of land trusts, it is best to hire a professional to assist you with the process of forming these trusts.
Land Trust vs. Forming an LLC
Clients often wonder whether they both need a land trust and an LLC. The usual answer is that just an LLC will do, if it's anonymous LLC, but land trusts are often needed when restructuring and to avoid accelerating a mortgage. A land trust will also require a trustee. For privacy and asset protection, the trustee should be an LLC or you can use our nominee services. Contact us and we can provide your Florida land trust forms and help you form a Florida LLC.