CAN YOU TRUST A LAND TRUST…?

In the investment world, we regularly hear of unique financing and new ways in which people hold title.  In most cases, I am impressed with the creativity by which people implement to get their deals done.  If necessary, I am able to tweak their ideas to make them legally enforceable, I am happy to help.  There are certain cases, however, that I always stay away from and dealing with land trusts is the most common one.  Undoubtedly, I always get people trying to convince me of the benefit of land trusts.  However, in my practice I usually see land trusts as a part of a fraud or relating to someone who has held property in certain other states.  To those investing or buying properties in Arizona, tread carefully when title is held in a land trust.

Here is an important disclaimer before you read any further: a land trust may be used in other states, such as Illinois and Florida.  However, as this is the Arizona Real Estate Investors Association, I am only concerned with what is going on in Arizona; and Arizona is not the place for land trusts.

Whenever someone asks me about land trusts, they immediately list off all of the alleged benefits.  Most importantly, people claim that a land trust provides anonymity.  This is because the true owner can put title in the trust and then have another person serve as the trustee.  The true owner is only the beneficiary.  There is no state law on point requiring a trust to be registered, unlike limited liability companies which have to be registered with the corporation commission.  Therefore, people think that when they take title, they only need to list the name of the trust and the trustee on the deed.

While this sounds great, it ignores a state statute directly on point.  A.R.S. § 33-404 provides that any interest in property “in which the grantee is described as a trustee or acts as a trustee shall disclose the names and addresses of the beneficiaries for whom the grantee holds title.”  Further, “any conveyance of real property or an interest in real property which does not include the disclosures required by this section with respect to the property so conveyed is voidable by the other party to the conveyance.”

Additionally, unless you are paying cash, your lender will require you to sign a deed of trust which will be recorded with the county recorder.  Of course, a lender will require an actual individual to sign the document so that the lender has a person to pursue in the event of a default.  This means that your personal name will be listed on the deed of trust which will be easily found via search of the county recorder’s website. In other words, while land trusts are supposed to hide your name, state law requires it be disclosed.  If anonymity is the main concern, an investor may want to research Delaware limited liability companies.

More importantly, there is no law in Arizona guiding land trusts.  Therefore, you are doing business with an entity that is not necessarily recognized under state law.

You can ignore what I have put forth in this article as the thoughts of just one attorney (though I don’t know any real estate attorneys that are involved with land trust formations).  However, what may be more important than my humble opinion, is that of the title companies.  I spoke with DiAnna Jackman of Chicago Title Agency (602-667-1135), who has been involved in the title and escrow business for over 27 years and is a long time member of AZREIA.  She not only confirmed that her company would not issue title insurance on a sale when a land trust is involved, she wasn’t aware of a single Arizona title company that would insure title regarding land trusts.  This fact alone should scare buyers enough to not use such entities to hold title.  Remember, insurable title equals good title.

By Mark Zinman