Following are some reasons often identified for setting up a land trust.
Limited Liability in Case of Personal Injury
Some people want to set up a land trust believing it will limit their liability in the event anyone is hurt on the property. At a minimum, the trust will still be liable for such injuries. For public policy reasons a court may also disregard the trust, finding liability on the part of the true owner. In any event, the best protection from personal injury liability is to purchase liability insurance. Since even a trust should purchase personal injury liability insurance, the cost of setting up and maintaining a land trust may be outweighed by the perceived benefits.
To Avoid a Due-on-Sale Clause
Most loans in Washington – whether documented by a mortgage, note and deed of trust, or real estate contract – contain something called a due-on-sale clause. This clause provides that if the owner ever transfers the property, the full amount of the loan must be paid. Some people believe by setting up a land trust, the beneficial ownership of the property can be transferred without triggering the due-on-sale clause or alerting the bank to the transfer. Although it is true a trust may make it more difficult for the bank to learn of the transfer, many due-on-sale clauses are drafted to provide that transfer of a beneficial interest in a trust is a “transfer” triggering the due on sale clause.
To Avoid Probate
A land trust can be used to avoid probate. But to make this work properly, the owner really should consult with an attorney to ensure that this is done as part of a comprehensive estate plan. If land is included in a trust, but other probate assets are not, a probate will still be necessary. Even then, this may not be the best approach for everyone. Probate in Washington does not need to be a difficult or expensive process. In contrast, the cost of setting up and maintaining a trust can sometimes exceed the cost of a probate. Also, the complexities of maintaining the trust during one’s lifetime may outweigh the benefits.
To Avoid Judgment Liens
Some people want to put their land in a trust to avoid a lien in case they are sued. However, transferring property with intent to avoid a creditor may be a violation of Washington’s Fraudulent Transfer Act, even if the transfer took place prior to the lawsuit. If the Fraudulent Transfer Act has been violated, then the transfer can be undone, among other things.
If done correctly and for the right purposes, a land trust may be useful. However, there are often misconceptions about what a land trust can accomplish. In some situations, a land trust may not be the right solution to a given problem. Before setting up a land trust it is a good idea to discuss your goals and options with a real estate attorney.
Attorney at Law
Blado Kiger Bolan, Tacoma, Wash.