Land Trusts in Colorado | Boulder Real Estate Attorney
As a Boulder real estate attorney James Newell routinely helps clients with issues related to revocable living trusts and, occasionally, the far less common land trusts.
Broadly speaking, a land trust is a relationship between the person who creates and funds the trust (settlor), the person who administers the trust (trustee) and the person who benefits from the trust (beneficiary), created for the purpose of administering the ownership and use of land. There are conservation land trusts in which a trust is set up by a municipal or charitable organization for the benefit of the public for specific, conservation oriented uses. There are also family trusts that are used to hold title to real estate. For the purposes of this article, we will be discussing the use of land trusts primarily by investors as a means of asset protection. These land trusts are typically known as “Illinois type” land trusts.
What is an Illinois type land trust? A typical Illinois type land trust is one in which a real estate investor (grantor) grants a property to the trustee of a trust for the benefit of the grantor. Later, the grantor often assigns the beneficial use of the real estate to a business entity (usually an LLC) wholly owned by the grantor. That business entity, through the grantor (the business entity’s sole officer), retains the power to make decisions regarding the real estate.
Why might an investor want to use a land trust? There are many reasons but the primary reason is that placing real estate into a trust can help prevent people who would otherwise be interested in suing you from understanding the extent of your assets, which may lead them to decide not to file suit against you in the first place. There are limits to the logic of this reasoning but this seems to be the primary reason nonetheless.
Why would an investor looking for properties in Boulder and across Colorado ever choose a land trust rather than grant the property to an LLC? The main reason is this: if a deed of trust (akin to a mortgage except in how the foreclosure process takes place) encumbers the real estate the borrower is typically required to get permission from the lender (bank) before conveying the property to an LLC. The reason permission is required is because within almost every deed of trust encumbering almost every piece of real property in Colorado there is a “due on sale” clause that allows the lender to accelerate the loan (i.e., make the entire unpaid sum payable at once) if the property is ever transferred to another person or entity. The lender may refuse to allow a transfer to a limited liability company. But by conveying the real estate to a trust in which the grantor retains beneficial use, the grantor takes advantage of the Garn St. Germain Act of 1982, which prevents lenders from enforcing due on sale clauses when a borrower’s real property is conveyed into a grantor trust (i.e., a trust in which the grantor retains the ability to use and control the property).
Determining whether a land trust is right for you is a complex analysis requiring an in-depth understanding of the law, the implications of the law, business practices and the client’s goals.
If you believe a land trust may be beneficial to you and are looking for a Boulder Real Estate Attorney with a results oriented approach tailored to your matter’s specific needs, contact Newell Law. We have the experience and knowledge to ensure your documents are drafted with precision.
