Land Trusts in California

In California, the general trust law is found in Probate Code §§15000-19403. There is no specific land trust statute in California, unlike the Illinois land trust law (765 ILCS 405/410/415/420), the Massachusetts business trust law (MBT) (MGLc182, §2 ) and Virginia land trust law (Va. Code Section 55-17.1).

Therefore, land trusts created in California for California property are based on the general law of trusts in the aforementioned California Probate Code. But an out-of-state land trust could be formed that would hold title through the trustee of a California property, to take advantage of more beneficial laws and case law from another state. In fact, the Virginia Supreme Court in Air Power, Inc v. Thompson, 244 Virginia. 534, 422 SE 2nd 786 (1992), has confirmed that Va. Code Sec. 55-17.1 grants the trustee of a land trust legal and equitable power of real estate, which protects the privacy of the beneficiaries.

In fact, since California does not have a specific land trust statute, there is no legislative history or developed case law 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. In fact, the Illinois land trust statute (75 ILCS 435) requires that holders of the power of direction owe fiduciary duties to holders of beneficial interests. California’s general trust law does not have a similar requirement.

In any case, avoiding the probate of real estate in a land trust outweighs all difficulties in its creation.

I. California General Trust Law:

A. Creation of Trust:

California Probate § 15000 states that “(e) this division (Division 9 of the Probate Code) shall be known and may be cited as the Trust Law.” And § 15001(a) states that “(e) except as otherwise provided by law: This division applies to all trusts regardless of whether they were created before, on, or after July 1, 1987.”

Among other methods of creating a trust, a trust may be created by: “(b) (a) transfer of property by the owner during his lifetime to another person as trustee” pursuant to California Probate Code § 15200(b) . And “the trust is only created if there are trust assets”, according to sec. 15202 of the same.

“A trust may be created for any purpose that is not illegal or contrary to public order,” according to sec. 15203 of the same. A land trust does not serve an illegal purpose or against public 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,” according to sec. 15205 of the same.

B. Real Estate and Personal Property Trust:

In order not to violate the Fraud Statute, which requires a written instrument to be enforceable, §15206 provides that “a trust in connection with real property is invalid unless proven by one of the following methods: (b) By an instrument writing convey the trust duly signed by the settlor, or by the settlor’s agent if authorized in writing to do so.

And under § 15207(a) thereof, “(l) the existence and terms of an oral personal property trust may be established only by clear and convincing evidence.” According to § 1528 of the same, “no consideration is required to establish a trust…”.

Finally, “a trust created pursuant to this chapter (1, part 2, Division 9 of the Probate Code) that relates to real property may be registered with the county recorder’s office in the county where all or part of the trust is located.” of real estate is located”, under sec. 15210 of the same.

II. Mechanics of a land trust:

A. Advantages and benefits:

(1.) Privacy:

One of the most advertised advantages of a land trust is that a deed of trust for a trust property in the name of a different trustee (private or institutional) can be recorded with the County Recorder, but the land trust agreement land indicating the names of the settlor/trustor/investor and the beneficiaries are not recorded.

Therefore, the creator/grantor of the land trust: the settlor/settlor who invests in real property can keep his name, as well as the names of the beneficiaries, off the books of the County Recorder and County Assessor, since a to some extent hide the investment from public view.

But a judgment creditor of a settlor/settlor or a beneficiary may subject the latter to answer written interrogatories about his assets, or to an examination of the debtor under oath in court to determine assets, and not simply rely on the Registrar and County Assessor. asset searches.

The land trust agreement may also use a name for the land trust that is different from the name of the settlor/settlor who created it. This is another asset protection benefit. And if the beneficiary thereof is also the same settlor/settler, the latter can designate their living trust or wholly owned limited liability company as beneficiary to avoid gift tax issues.

(2.) Avoidance of probate:

In addition, just as successor trustees may be designated in the land trust agreement, successor beneficiaries may also be selected to avoid interruptions in the distribution of trust assets upon termination of the trust, outside of probate proceedings.

A land trust can be created as revocable (the terms of the agreement can be changed) or irrevocable (cannot be changed), but the latter requires the filing of separate tax returns and is taxed at a rate higher than the rate of the settlor/settlor individual tax. , unless you consider a simple trust in which all income created is taxed to the beneficiaries. For federal income tax implications, if the grantor/settlor is also the beneficiary, the IRS classifies it as a grantor trust which has tax consequences that flow directly to the settlor’s Form 1040 and state return .

(B.) Drawbacks and Pitfalls:

(1.) Separate Agreement for Each Property:

To preserve the privacy of the investment or transaction and the asset protection benefits of the land trust, only one piece of real estate can be included in it. Therefore, a different land trust agreement is created for each property. This could be cumbersome, although the same settlor/settlor, trustee and beneficiary can be named in each agreement.

(a) Simple alternatives:

The easiest alternatives are to purchase investment or rental properties through a Limited Partnership (LP) or Limited Liability Company (LLC), or to transfer such properties to a more flexible living trust that does not require tax filing. separately, or transfer ownership interests in an LLC (not title to the property) to a living trust.

An LLC can also create a land trust by transferring title to a property to the trustee and designating itself (LLC) as the privacy beneficiary of the property. Sometimes, less is more; because, in fact, creditors can see through and have recourse against the avoidance of the execution of the judgment on properties through asset protection schemes. And property ownership transfers can result in tax assessments.

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