Many people (especially some attorneys) do not believe there are any benefits to using a Land Trust to hold title to your real estate investments. After 40+ years of investing in Single Family Homes (and using Land Trusts for 35+ of those years) I have found that the practical (and often unforeseen) benefits of using a Land Trust are not always obvious.
Using a Land Trust to hold title to your investments is like using a gun to protect yourself. Your adversary must ask themselves, “Is the gun loaded?” If the gun is not loaded there may or may not be much protection. But if the gun IS loaded does your adversary really want to take you on? A smart adversary will move on to the next target.
In my Land Trust seminars and home study courses, I talk a lot about the many benefits of creatively using the Power of Direction (POD) in a Land Trust. This article will address some specific advantages of the POD and how you might use it for privacy and asset protection benefits.
The Power of Direction is the steel hand inside the velvet glove. The Director of your Land Trust (which might be you as the Beneficiary or someone else who is not the Beneficiary) holds all power over the Trustee. Remember, unlike many other types of trusts, the Land Trustee cannot act without specific direction (in writing) from the person or entity that holds the POD.
Typically, when a Land Trust is formed the Beneficiary also holds the POD, but this is not mandatory. The POD can be designated to the Beneficiary at the inception of the trust or assigned to another (person, corporation, partnership, or another trust) immediately or subsequently to forming the trust agreement.
There are many strategies that you can employ when setting up your Land Trust and designating a director. If you do not trust any one person to hold the POD, you can set up a Board of Directors and mandate what constitutes a quorum as well as a majority before any directive can be issued to the Trustee.
For example, you might appoint 7 Directors who would only issue directives arrived at in formal meetings of at least 5 of them, with a three-fifths majority required to take any action. This would obviously take a lot of "friendly" people to construct and might not be worth the trouble unless a lot of money is involved.
One of the advantages of using a Board of Directors is that you could place younger inexperienced heirs on the Board and provide Land Trust training via the Board meetings. Eventually, the heirs would "graduate" to understanding the formalities of Land Trust administration and begin forming their own Land Trusts for privacy and asset protection.
Oftentimes a Land Trust has multiple Beneficiaries and to designate just one to hold the POD is a matter of convenience and possibly business acumen. A Land Trust will operate much more efficiently if only one person holds the power over the Trustee (especially if that person has more business and life experience than the other beneficiaries).
Occasionally, Land Trusts are established to hold income-producing real estate to provide support for minor children or mentally handicapped adults. In this event, the minor or incapable adult would serve as Beneficiary (receiving all the proceeds and avails from the trust property) and the parent or benefactor would serve as Director making all critical decisions over the trust assets.
The POD is a Property Right and as such is considered personal property. This Property Right can be assigned away from the Beneficiary temporarily, permanently, or conditionally. For example, if the Beneficiary currently holds the POD s/he could assign this right to another party for one day, for the life of the Trust, or until Bakersfield, California receives 10 inches of rain in a twenty-four-hour period. Conditional rights like this can be fun to create and a nightmare for your adversaries to penetrate.
It would be prudent at this point to mention that anytime the Beneficiary or holder of the POD is changed, the Trustee must be notified in writing. It is important to always protect the personal liability of your Trustee, and this can be done by written notification (to the Trustee) and acceptance (by the Trustee) of all changes to the Trust Agreement.
With partnerships and corporations or other trusts as single or joint beneficiaries, the POD can be assigned to a specific individual (in each) acting as a representative of the organization, or by the organization itself upon proper resolution of the individual partners or Board of Directors. Or the whole problem might be resolved with a Beneficiary Agreement.
A Beneficiary Agreement (BA) keeps multiple beneficiaries from suing each other over the POD of a trust. The BA would set forth rules for apportioning the POD among them, provide for the resolution of problems, and for the broad policy pertaining to the administration of the trust by the Trustee. Then the only Directives would be "as needed" exceptions rather than having every decision require a vote.
It is VERY important to note that when the Beneficial Interest of a Land Trust is transferred, that has the effect of canceling any previous assignment of the POD (unless the assignment was irrevocable) and it then belongs to the assignee. Because this POD is not based on any document other than the Trust Agreement, which is not made public or placed into the public records, it is an easy thing for lawyers and courts to overlook.
By adroitly controlling the POD through contingent transfers, assignments, and use of other Irrevocable Trusts (as holders of the POD) unique asset protection benefits can be obtained without public knowledge for the Primary Land Trust. For example, by designating the POD to an Irrevocable Trust any legal attack on the Primary Land Trust could trigger a contingent transfer of beneficial shares to another trust with another Trustee in another jurisdiction with another POD in another Irrevocable Trust.
Further asset protection benefits can be obtained via the POD by using non-citizens as co-directors. If a US court ordered the citizen co-director to make a disposition of the trust property (which would be against the best interests of the Beneficiary), the foreign non-citizen director could refuse to cooperate, and no legal directive would have an effect.
As you can see, the sky is the limit when it comes to creative uses of the Power of Direction over a Land Trust. And the POD is just one of the many parts of a Land Trust that will allow you to be creative in your structuring of asset-protecting concepts.