Investing in real estate can be a thrilling venture, especially in the diverse and ever-changing Florida market. When a real estate investor decides to jump into this world, they have the following themes at the forefront of their mind: 1) is it a good deal? 2) how do I get the funds to acquire this deal? and 3) how do I protect this deal?

One essential but not well-known tool is the Florida Land Trust, which can and should be an essential part of protecting your deals.

Let’s discuss protecting deals and specifically address a tool that new investors ignore, but whose popularity is ever-increasing among seasoned investors. First, protecting a deal means limiting the risks that the asset you are going to acquire falls into unnecessary litigation or into the hands of your personal creditors. Unnecessary litigation includes probate and guardianship administration if you, the investor, die or become incapacitated, as well as mortgage litigation triggered by mortgage provisions in creative financing transactions. Your personal creditors include credit card companies, car accident claimants, professional liability claimants (if you’re a doctor, lawyer, or CPA, etc.), and spouses in divorce proceedings. When speaking with real estate investors about protecting their deals, they most often think of Limited Liability Companies (LLCs) or Corporations. 

One essential but not well-known tool is the Florida Land Trust, which can and should be an essential part of protecting your deals. Let’s explore seven aspects every real estate investor should know about Florida Land Trusts so that you can make them part of your investment strategy without making the common mistakes made by novices and experts alike.

1. Florida Land Trusts as an Asset Protection and Privacy Strategy:

Florida Land Trusts offer excellent protection of real estate assets. Owning your multiple properties in individual Florida Land Trusts can isolate real estate investments from each other and from their respective liability. Not only does it isolate properties from their respective risks, but it also isolates liability by separating the legal ownership of the property (which is held by a trustee) from the beneficial interest owner (who is not publicly disclosed). Investors can remain anonymous as the trust’s beneficiary, adding an extra layer of privacy. 

Common Mistakes: 1) naming yourself as trustee, 2) naming the beneficiary of the trust as trustee, 3) putting the title in the name of the land trust and not actually creating the written Florida Land Trust.

2. Florida Land Trusts as an Avoiding Probate Strategy:

Probate happens when assets are owned by individuals who then pass away holding the title to said assets, or who become incapacitated while owning assets in their individual capacity. If your real estate investment is owned in a trust structure, that asset is owned by a trust, and it may be able to avoid some probate or guardianship litigation because the third-party trustee holds legal title, and can sign leases, and sales agreements, and enter into other real estate transactions without a court order. 

Common Mistakes: 1) thinking that Florida Land Trusts will allow assets to fully avoid probate. Florida Land Trusts can only hold real estate assets; they are not designed to keep any other types of assets out of probate. 2) if you named yourself trustee and had no immediate successor named, then probate trust administration will be necessary to appoint a new trustee. 3) holding your homestead residence in a Florida Land Trust can result in you losing your homestead tax status, homestead creditor protection, and homestead protection for heirs. A Florida Land Trust is designed for real estate investments, not for your homestead (for which other types of trusts are a far, far better option to hold the title). 

Engaging a knowledgeable attorney with experience in Florida Land Trusts is essential. They can guide investors through the intricacies of structuring and administering the trust to ensure compliance with legal requirements.

3. Florida Land Trusts as a Strategy for Ease of Transferability:

This trust structure simplifies the transfer of property interests. Investors can easily transfer beneficial interests rather than transferring titles through a title company and paying for new title recordings and document transfer tax fees. This makes for a smoother transfer of real estate interests and can even assist with business continuity when beneficial interests are passed from one joint venture partner to another.

Common Mistakes: 1) ignoring planning for the income tax/realization consequences when selling/transferring beneficial interests in the trust. Always coordinate these transfers with your CPA. 2) not following the process required by the trust agreement to convey beneficial interests.

4. Florida Land Trusts as a Strategy for Flexibility in Management:

Florida Land Trusts are unique in that the trustee acts at the direction of the beneficiary or beneficiaries, as stated in the agreement. This way, real estate investors can retain control over the property and retain the right to make decisions regarding renting, buying, selling, or refinancing without the public eye on their management decisions. The trustee’s role is to ensure that the legal documentation is properly executed to bind the trust.

Common Mistakes: 1) not properly choosing a trustee with experience in Land Trusts and the level of beneficiary control said trusts provide. 2) when there are multiple beneficiaries, not having a separate joint venture agreement that expands upon management authority, profit and loss splits, and address the death or disability of a beneficiary.

5. Florida Land Trusts as a Strategy for Creditor Protection:

Assets held in a Florida Land Trust are protected from the personal creditors of the beneficiary, enhancing the security of investments properly held in these vehicles. Creditors are limited to the distributions of income from the Land Trust investment to the beneficiaries and cannot generally force the sale of Land Trust assets.

Common Mistakes: 1) ignoring the Internal Revenue Service’s ability to pierce grantor trusts to satisfy tax liabilities. Florida Land Trusts are usually grantor trusts, are revocable in nature, and are controlled by the beneficiary. While the Florida Land Trust code keeps most creditors isolated from trust assets, their natural characteristics make them available to satisfy federal tax liabilities, including estate tax liabilities. 2) acting as your own trustee. This is a fast way for creditors to perceive your deep pockets and encourage creditor litigation.

Understanding their intricacies and seeking expert legal and tax advice will empower investors to make informed decisions and maximize the benefits of this valuable estate planning and investment tool. 

6. Florida Land Trusts for Tax Benefits:

I’ve mentioned that Florida Land Trusts are grantor trusts. This means that they are passed through entities to the beneficiaries. They generally will not require a separate trust tax ID, or that tax filings be made under Federal Trust Income Tax rates. The tax savings of this aspect cannot be understated. Trust Income Tax brackets are far more painful than individual or corporate tax brackets. In 2023, a trust making $14,451 in income is subject to a whopping 37% tax rate. But when a trust is passed through, it is not taxed as a trust, and the income is taxed to the individual beneficiaries at their almost always lower income tax rates. 

Common Mistakes: 1) making a Florida Land Trust irrevocable in the written agreement can result in trust income tax rates and gift tax liability (if the transfer to the trust was not for full bona-fide consideration). 2) not discussing and planning for partnership tax issues with your CPA when there is more than one beneficiary in a Land Trust.

7. Florida Land Trusts as a Strategy for Avoiding the Due-on-Sale Clause:

When a Florida Land Trust is created for estate planning purposes, transferring property to a land trust should not trigger the due-on-sale clause on a mortgage provision, thanks to the Garn-St. Germain Act. 

Common Mistakes: 1) assuming that your creative financing deal will avoid sale triggers just because a Land Trust was used. 2) forgetting to account for insurance coverage when transferring property to a trust as part of creative financing (we live in Florida, so the trust should be insured, too!).

Florida Land Trust can be used for residential, commercial, and vacant land. Their revocable nature allows for flexible management and serious tax benefits. However, without the right professional guidance, costly mistakes have and will be made.

Florida Land Trusts are a powerful tool that real estate investors like you can use to protect assets, optimize taxation, and streamline property management. Understanding their intricacies and seeking expert legal and tax advice will empower investors to make informed decisions and maximize the benefits of this valuable estate planning and investment tool. 

Engaging a knowledgeable attorney with experience in Florida Land Trusts is essential. They can guide investors through the intricacies of structuring and administering the trust to ensure compliance with legal requirements.

For personalized advice tailored to your unique situation, I welcome you to reach out to me at LCO Law LLC, where our dedicated team is ready to assist you in every step of your real estate investment journey.