Join Jason Hartman as he and land trust specialist, Randy Hughes, talk about why and when land trusts should be used and how to use them effectively. Randy defines land trusts and explains some of the key elements of asset protection.
In the eyes of the IRS, a land trust is a pass-through entity, which is not taxed. Randy discusses the mechanics and some of his favorite reasons for using land trusts for single-family home investments, including anonymity, estate planning, ease of transferability and linking trusts together with other entities. Randy explains that land trusts are regulated state by state, with no federal regulation. He stresses the importance of understanding the different types of trusts, noting the beneficial interest for a land trust is in personal property and obtaining privacy. He also touches on the important psychology behind naming a trust.
Randy’s father charged the weekly groceries so that the family would have food on the table. There was no stable income for any future education much less the current needs of the family. No intellectual or financial direction was taught in his school or church. No blood relative had anything to offer other than “working for the man” at an hourly wage. Bank savings and financial security was what only the rich had. He was doomed for financial failure and unhappiness for the rest of his life. Randy knew that there MUST be a better way to live. Randy decided to break the cycle of poverty in his genes. Education came first. He began buying single family homes for rental while in college.
After he graduated from college, he tried many different types of businesses, but always came back to the Single Family Home as the IDEAL investment. Since purchasing his first rental house in 1969, Randy hasn’t looked back! Today, Randy has purchased over 200 houses. He has lived the life of having nothing and will not let that happen again.
His primary goal now is to teach others how to break the cycle of financial mediocrity. He has written a Privacy and Asset Protection book, 6 booklets, a bi-monthly Land Trust newsletter and 6 “HOW TO” real estate courses to help new and seasoned investors to be successful at investing in Single Family Houses for profit. Randy’s newest home study course on Privacy and Asset Protection teaches students how to be more private in their personal lives and to protect their investments from the most dangerous terrorist of the 21st century–the contingency fee lawyer.
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ANNOUNCER: Welcome to Creating Wealth with Jason Hartman! During this program Jason is going to tell you some really exciting things that you probably haven’t thought of before, and a new slant on investing: fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine, self-made multi-millionaire who not only talks the talk, but walks the walk. He’s been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it! And now, here’s your host, Jason Hartman, with the complete solution for real estate investors.
JASON HARTMAN: Welcome to the Creating Wealth Show! This is your host, Jason Hartman, and we are now at episode number two hundred and sixty-three; thanks so much for joining me today. Well, today let’s talk a little bit about asset protection. And here’s the thing about this, folks. And I have said it before. At the risk of repeating myself: I don’t know what it is about people that when they move their assets from one place to another—for example, if they moved them from a bank account to a real estate deal, that makes them think suddenly their whole asset protection picture changes.
Look, you can get sued and have your money taken from your bank account, or your stock brokerage account, or wherever you keep it, just like you can have it taken from your real estate. However, of course, real estate could, as an investment class, create additional liabilities for you. I totally understand that. Those additional liabilities, there’s a thing for them. A cure for the vast majority of those additional risks and liabilities, and it is called—you’ve probably heard of this thing—it’s called insurance. Yes, I try to have insurance on all my properties. I realize I’m being a little tongue in cheek here. And the reason I’m being that way—if you’re a regular listener, you kind of know my feelings about this. If you’ve come to our events, you know my feelings about this.
The reason I’m being sort of snarky about this is because people get so caught up in this thing, and it stops them from investing, and they miss opportunities because of it. Don’t be one of those people. I want you to take advantage of asset protection opportunities like the one our guest is going to talk about today, but I don’t want them to stop you from creating assets to protect in the first place! And that’s what I see so many people doing! I don’t know why. I don’t know why people’s brains get sort of mushy when they think, well, if I invest in real estate, I’ve gotta go spend $20,000 in two years, learning all about asset protection. No…if you have assets now, they are at risk.
And look, folks. The law does not want to let you be judgment-proof. We should not be judgment-proof, frankly. From the philosophical standpoint, people should be held accountable for their deeds and their things. Now, that doesn’t mean you shouldn’t be smart, and prudent. Of course you should. So, that’s my disclaimer. I’m not a lawyer, and I don’t believe our guest is a lawyer either. But we’re going to talk about asset protection. Take from it what you will. But the most important thing is that you take action, and invest in properties so that you can create more assets to worry about protecting! Okay? So, that is my somewhat snarky message on that. And no, I cannot give legal advice; I am not an attorney, I cannot give tax advice either, I’m not a tax adviser. So there are my disclaimers.
But boy oh boy, I’ll tell you—I just got back from Houston last night, and I was talking with one of our local market specialists in the Houston area, and he was saying that his biggest problem is sourcing inventory. It is getting really, really challenging to source properties nowadays. The market has radically changed in the past six months. There were signs of it changing a year, a year and a half, 12, 18 months ago. Even 24 months ago we could see it coming. And now it is changing dramatically. More buyers than sellers, at least in good markets, and good price segments in investment property markets. It’s a constant dynamic; it’s a constant thing we’re trying to balance and equalize in our business here with my company. And this is just a constant challenge, the supply and demand continuum. The teeter-totter; to balance that teeter-totter.
And now it has in this, what I’m going to name—and I don’t know if I’ve mentioned this before in prior episodes, but—I’m going to name this the nominal recovery. No, it is not a real recovery. It is not a recovery in real dollars. It’s just like the stock market shortly after Obama’s election; we had a nominal recovery in stocks. It’s not a real recovery. It’s just responding to a massive amount of money printing, of fiat money creation. That is what has propped up the stock market for the last three years, and it’s fake. It’s not a real recovery. And now, finally, that fake, not real recovery has hit the real estate market, and it’s because we’ve got dramatically, ridiculously low interest rates, and we’ve got money sloshing around, and money that has been waiting on the sidelines to do something. And now it has entered the market, and is having dramatic, dramatic effects on the income property market.
And before we get to our guest, let me just share something with you. Here is what is basically going on. It is amazing to me that this is even going on in markets that don’t really make any sense, like Southern California. Southern California doesn’t make any sense from an investor perspective. At least not yet. But it’s even heating up there. I mean, multiple offers on properties, inventory diminishing, it is really, really amazing. Can you believe this is happening? After years and years of having all of this foreclosure activity—we’ve still got a foreclosure pipeline, and there are still a couple million foreclosures coming down the pipe. But largely, it is turning.
What are the reasons it’s turning so much? Well, interest rates—so low that you’re getting paid to borrow right away, because real inflation is much higher than current interest rates. And even the officially quoted inflation today is at par with interest rates, that you can borrow for three decades. Institutional investors, hedge funds, private equity groups, are out there buying anything and everything. Homeowners. Homeowners who are upside down on their properties—they’re not putting them on the market like they were, and I’m gonna tell you something really interesting about that in a moment. Very, very few properties are being built. There’s very little new home construction, however there is a little bit; that’s definitely picking up. But remember, it takes a long time to ramp that construction machine up.
So, the builders are out there, and amazingly, they’re coming back. I’ve talked about that on prior episodes. My email box, it’s like it was 4, 5, 6, 7, 8 years ago, where it is starting to fill up with new homes being built, being offered. Remember, I’m in the real estate business. I have a real estate license. So I’m on all these email lists that the builders send out. Broker co-op, they call it, where they’ll pay real estate commission to a broker, and they’re trying to woo brokers and agents into bringing their buyers into new home tracts. Wow! That’s happening like crazy all of a sudden. It’s amazing. And then just the regular advertising that you see from developers, from real estate developers, toward potential new home buyers. And owners that are upside down on their properties that are underwater, that don’t have equity—well, they’re not putting their homes on the market like they used to. They’re kind of thinking well, hey. Many of them aren’t even paying their mortgage, so what’s the urgency? Why should we sell, right? They’ve been either defaulting by necessity, or they’ve been strategically defaulting. And the lenders are still very very slow to boot them out of the property.
And I’m going to tell you an amazing story about that here in just a moment. Owners who have equity in their homes, but if they’ve seen that equity decline, in the bad market, they’re waiting out the market. And they’re kind of seeing multiple offers now, so they’re not running out to sell their properties, because hey! They’re thinking, we’re on the verge of seeing some real price appreciation. Now, by the way, that’s—I should catch myself on what I just said, right? Why should I catch myself? Well, because real—it’s not real price appreciation. It’s nominal price appreciation. It’s a nominal recovery, created by inflation. But that doesn’t mean that the way I recommend we invest—we can profit from that dramatically! And many of the people listening to this show are following my plan. I’m following the plan. And we’ve got some really, really good times ahead, don’t we? We really, really do.
Well, let me share a little article. And, have you heard those commercials on talk radio? They’re playing all over the country, because when I’m traveling around to the different markets, and I’m in the rental car listening to AM talk radio, I’m hearing the commercials. And of course in Phoenix, and on my I
And I think that is the same guy who was the author of this article I’m about the share with you, and that’s Dr. Steve—and forgive me, I cannot pronounce the last name, but it’s Sjuggerud. And he’s kind of in this sort of group of Internet marketers that is kind of the Agora Financial type group, and I’ve interviewed a lot of those people on prior episodes, and you know, they’ve got a really interesting take on things. And I like to follow their work. But again, I have my disagreements with them as well. But in this article that he published back in February, okay, so it’s a few months old, he says, the greatest opportunity is about to pass you by. And it says, you are foolish if you do not do everything you can to take advantage of this. It’s probably the greatest opportunity for you for the next ten years, and it is here now. Time is a wastin’.
Actually, you’re about to miss the best moment if you don’t get on it. Right now the “V” bottom, as I call it, where you can get the very best prices, is passing you by. I can’t know for certain, of course, but I’m more convinced of what I’m saying than I have been about any other investment in my two decades of studying investment. My friends, the time has come. It’s time for you to buy a house. Now, here’s where I part with his advice, by the way. He says, preferably a primary residence. No excuses, no delays, just figure out how to make it work. Already have a house? Go get another, and rent out the one you’re in. Upside down on the one you’ve got? Do as Karen Farley did. Farley was upside down by $200,000 in her house, and hadn’t made a mortgage payment in a year. Now, folks, my comment: haven’t I been talking about this on prior episodes? And here is yet another example of what I’ve been talking about.
Back to the article. Her mortgage company sent her letters saying, “You could sell your home, owe nothing on your mortgage, and get $30,000.” Farley told Bloomberg News, “I wondered why they would offer me something like that, and not just give me the boot. Instead, I’m getting money!” According to Bloomberg, Farley is “also approved for an additional $3000 through a federal incentive program. Farley gets her $30,000 check today, plus the $3000, and she’ll use the money to cover moving costs and a deposit on the new place she lives in.” No joke, the full Bloomberg story is worth reading. I’m sure you can Google that, folks, and find that story. But look. And this is me talking. It’s not like I haven’t been talking about that on several prior episodes. It’s not just Farley, of course. Literally millions of upside down homeowners are eligible for these types of deals.
My comment: these are the types of deals where the bank is actually paying you to do what they call a cooperative short sale. They are giving you checks for up to $30,000 to do a short sale. It is mind-boggling, it’s upside down, it makes no sense, it’s rewarding the wrong behavior. But folks? That’s what’s going on out there! So if you’re in that position, I urge you to listen to my prior episode on strategic defaults, and learn how you can make that work for yourself, okay? And watch those letters coming in the mail from your lender.
So, back to the article. Banks desperately wants to get rid of these properties at any cost, now. And the government desperately wants to help homeowners now. it’s doing everything from passing out checks, to reducing mortgages, and more. Here’s the latest. You can just sit back and complain about these people who live beyond their means and are getting off way too easy. But the smarter thing to do is to go out and take advantage of the situation. The deals happening now are ridiculous. A friend of mine just bought a five bedroom three bath house in a decent neighborhood for $70,000. He bought it in a foreclosure auction.
Now, folks, I think you gotta be really careful of these auctions. That auction hype is overblown. There can be unknown liens against the property; the auction business is largely for professionals. But heck. You can buy the properties from those professionals. Of course, you’ll be paying them a little bit of a premium for their services, but it’s still worth it, because you’re going to be buying from our market specialists far below the cost of construction, right?
Back to the article: he’s going to put a coat of paint on it and price it well below market for a quick sale at $129,000. This is just one example. The point is, banks are finally willing to get rid of this stuff, and investors, like my friend, are willing to step up. Buyers and sellers are finally seeing eye to eye. That means—my comment—we are in a market of equalization there, where buyers and sellers are seeing eye to eye. This is your moment. The opportunity for you to get a really great deal is just about to end. I believe this is the greatest opportunity you will have in the next ten years of investing, as far as risk versus reward.
You see, your downside risk is extremely low, as homes are selling way below their replacement cost, and you’re essentially getting the earth itself for free. With homes dramatically below replacement costs, and with mortgage rates at record lows, below 4% for a 30 year mortgage is some cases, houses in the US are more affordable than they’ve ever been. And we all know the recent housing bubble was the greatest in American history, but what most people don’t understand is that houses are more undervalued right this second than they were undervalued during the bubble. The median house price in the US is about $165,000. In order for homes to return to “normal” values, they’d have to rise 55% to $256,000. I’m assuming that mortgage rates and income stay flat, and affordability returns to normal at 130 on the affordability index. That’s a gain of $91,000. If you bought a home with 20% down, you’d have put $33,0000 down to make a gain of $91,000. Not counting any other costs, that’s a profit of a whopping 175%. The gain will happen; I have no doubt in my mind. The only question is when. Will it take three years? Five years? Or ten years? I don’t know. But it will happen.
Even better if the property you buy is your primary residence, he says. You basically have nothing to lose. Even if I’m completely wrong, he says, and home prices go nowhere, you’ve at least lived rent-free for a few years. Now, I disagree with that, because you can own an investment property, and you would have done far better. And listen to his next point. Again, I think he misses it. He says, but if I’m not right, as your primary residence, this 175% profit would be completely tax-free. Gains on your primary residence are basically the last legitimate tax-free shelter. Well, actually, I disagree with that too. Because on an income property, you make it a much more multi-dimensional asset, and it performs far better than your primary residence. And you can do a 1031 tax deferred exchange, and basically, defer the tax for the rest of your life. But the first question is, why would you even sell it anyway? If it’s producing income and phenomenal returns, keep it! Don’t sell it! Actually, I believe you would do even better than this, the article says, if you buy right now—and I mean, right now! You should be able to get in below market prices.
You gotta do this in the right market, folks, obviously. You get a property from a desperate seller; the better value you get right up front, and when things return to “normal,” and yes they will—housing is cyclical. We go through periods of overbuilding and under building. Now is the time in the cycle you want to buy.
When will things return to normal? I do not know the answer, he says. But again, this is a potential for a 175% tax-free gain. And the article goes on and on, but I agree with most of it. You should be buying up property like it is going out of style. Because folks? The balance has tipped. And it’s a nominal recovery, it’s not a real one. Why isn’t it a real one? Because the dollar’s being devalued at the same time, and that means all of these people out there who do not buy with leverage are going to be hurt as their dollar buys less and less over time.
So, get into the market as quickly and as deeply as you can. Follow my 10 Commandments of Successful Investing. Diversify, use leverage, and take advantage of the greatest, most tax-favored asset in America, the most historically proven asset class. And that is income property. So keep listening. We’ve got a lot of future shows on that. But let’s go to today’s guest, and let’s talk a little bit about land trusts, and how you can use them as a simple asset protection vehicle. And we will be back with that in just a moment.
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ANNOUNCER: Are you interested in a property outside of our network? Do you need a second opinion? No problem! Let Jason’s experts evaluate the deal. Our deal evaluator is only $50. For more information, go to www.jasonhartman.com now!
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JASON HARTMAN: My pleasure to welcome Randy Hughes to the show! He is an expert in land trusts, and of course real estate investing. He’s been investing for about 40 years. He’s been using land trusts for about 30 of those 40 years, and we’re going to learn about his techniques today. Randy, welcome. How are you?
RANDY HUGHES: Thank you, thank you. I’m very good.
JASON HARTMAN: Good, good. Tell us about your investing experience first! Have you always invested in just single family homes? Or have you done other stuff?
RANDY HUGHES: Well, I have done other things. I do have a commercial building, and I’ve tried restaurants and other things.
JASON HARTMAN: That’s a tough business, yeah.
RANDY HUGHES: But to tell you the truth, I got pretty good at losing money at everything except real estate, so over the years, I evolved into just the single family house as my one and only form of investing.
JASON HARTMAN: Okay, good! So, the single family home has really been the only tried and true investment for you then it sounds like, huh?
RANDY HUGHES: Yeah, it really has. And I know we’re in difficult times right now, as relates to single family homes. But there are good times in the future. It doesn’t seem like it right now, but there will be; the market will come back.
JASON HARTMAN: Listen, I tell you, you don’t have to say that on my show. I think this is a phenomenal time. What people don’t realize so many times, Randy, as you well know, is that income property is a multi-dimensional asset class. It’s not just about appreciation. You can make a fortune just off cash flow. I mean, the cash on cash returns—the property could, the value could go to zero, and as long as you’re getting that rent, and maintaining your expenses where they should be, the cash on cash returns on some of our properties are between 13 and 18%! Without any appreciation! And then you get tax benefits to boot—I mean, this is a phenomenal time. Anyway.
RANDY HUGHES: I’m glad you mention that, because the other benefit you can count on, even though you cannot count on appreciation, but you can count on amortization.
JASON HARTMAN: Yeah, of your loans, you mean.
RANDY HUGHES: You know, if you want to be a millionaire, go out and borrow your money in dollars, and have somebody else pay it off for you, and that’s your tenants, and you’ll be a millionaire if you never have any appreciation the rest of your life.
JASON HARTMAN: Yep, I agree.
RANDY HUGHES: So, there are lots of reasons to buy. And your listeners are going to look back, I predict, in 10 years, they’re going to look back and say, man, I wish I would have bought more back then in those days when the prices were so low.
JASON HARTMAN: Yep, that’s for sure. And when the interest rates were so low. And I don’t think it’s going to take 10years for them to look back regretfully at missing opportunities. So I hope they don’t miss opportunities, because the opportunities are pretty phenomenal now, no question about it. And I think, Randy, what this really comes down to is not just an issue of price, of course, but of the price of financing. And like you said, if you want to be a millionaire, just borrow a million dollars, and outsource the debt to your tenants. Let them pay it off for you, and that’s going to be paid off. And then you will have gained a million dollars. Even if you don’t have positive cash flow, if you don’t have tax benefits, which of course you do have all this great stuff. If you don’t have appreciation, which you will as well. So, with land trusts—I mean, why should this be attractive to people?
RANDY HUGHES: Well, especially in this market, I think a lot of people have come to realize the importance of privacy. And a land trust by itself is not a great asset protection tool. But it is a great privacy tool. And I use corporations and LLCs and all these other entities that investors and their attorneys recommend, but I always start with a land trust in title to the real estate first, because it hides ownership, it allows for a private transaction—in fact, there’s so many benefits, I wrote a book that’ called 50 Reasons To Use A Land Trust, and if your listeners would like me to send that to them for free, I would be glad to do that. Just send me an email. It’s [email protected]. Put in the subject line, 50 Reasons To Use A Land Trust.
JASON HARTMAN: So tell us what some of those reasons are.
RANDY HUGHES: Well, privacy certainly is the first thing. Because if nobody knows you own it, you can operate at the trust level, which is a great level to operate at, instead of everybody tracking your every move with your courthouse records. Whenever you sign a mortgage it gets recorded in your name, and then your competitors and your creditors and everybody else on the planet can track your activity. So, the first step in asset protection is privacy. And the land trust gives you that privacy.
JASON HARTMAN: Well, let’s talk about that, though. On the privacy note, and maybe now we have to take a break from the reasons, for just a moment here. We’ll get back to those. What is a land trust? I mean, how do you set it up? People can have some degree of privacy inside other entities like LLCs, especially if they’re in the privacy favorable states like Nevada. But, what is a land trust? Tell us what that is, and can you borrow money in it?
RANDY HUGHES: Yes. It’s nothing more than a few pieces of paper. A land trust is two documents. One is the trust agreement that does not get recorded, and that’s the agreement between the trustee and the beneficiary. And the other document is the deed in trust, and that does get recorded, just like any other deed. And that’s what funds the trust. So you can set up a trust by signing a land trust agreement, and have nothing in it. But if you then deed—record your deed to the property through the trust, now you’ve funded the trust, and there is a piece of real estate in there. Now, it’s that simple. You record the deed. Now, let’s pull back to what you just said about other entities. Yes, you could put your real estate into a Nevada LLC. But just think about that logically. What if you own more than one piece of real estate? Are you going to have the title held in one entity, or do you want to put every piece of real estate you own in a separate entity, to insulate it from the other entities—the other properties? I advise my students to put every piece of real estate into its own separate land trust, and don’t put anything else in that trust.
And just from a logical standpoint, think about it. If I was going to attack you, and I know you have one trust with everything in it, and I attack just one property in that trust that’s got 10 properties in it, and I win a judgment against you, I’ve got that whole trust all tied up, even though the problem only related to one property. You’ve just got it tied up 10 properties.
JASON HARTMAN: Okay, so separation and firewalling—some people do that with multiple LLCs, or they do it with the series LLC, that’s got 16 parts to it. And so that certainly makes sense—segmentation. But the thing I’m concerned about, and this is really the problem with LLCs—and I find, Randy, it’s unbelievable how many investors—I just think they overcomplicate a lot of this stuff. They’ll come to one of my live events. They’ll be listening to the show. And they’ll somehow ask me, maybe at a break at a live event or whatever—well, I’m being told that I should set up a couple different LLCs and all this stuff. And I say look, do you own any property? No. They’re just starting out. They’re like beginning investors, and they want to put the cart before the horse, and worry about all this asset protection stuff.
And with the LLCs, what they don’t realize is that financing becomes a problem. Insurance becomes a problem. Because, I’ve got an LLC that I buy single family homes in, and I gotta tell you, the only reason I have it is because it’s inside my IRA, and I want it self-directed like that. But it’s a hassle every time I buy one of those, because insurance costs a lot more. There aren’t many insurance companies that want to write insurance in the name of an LLC. Now, if you do properties that are over four units, that classifies them as commercial properties. So if it’s a five-plex, or a 200-unit apartment complex, then it’s easy. Because all of the lenders, all of the insurance companies, expect you to use entities. But in these single family homes, it’s just problematic. Or a triplex, or a duplex. So, does the trust solve that problem?
RANDY HUGHES: Well, yes and no. Let me briefly explain. If you’re financing that piece of property through a loan that’s gotta qualify for the secondary market guidelines—in other words, you’re going to Bank of America, or Chase, or any of the big boys, and you’re getting a loan—they are going to make that loan subject to the secondary market guidelines, and those guidelines say that you cannot close a deal using a land trust. You can put it into the trust the day after closing, but you gotta be there, and you sign all the documents the day of closing. So, of course, you’re limited to 9 or 10 of those loans, and then it doesn’t matter if you want to buy an 11th piece of property, you can’t qualify for a secondary market loan anyway. So now you’re forced to go to the commercial lender, the portfolio lender, and those are the guys I like anyway, because they make their own guidelines, and they don’t have to meet all these huge federal government standards.
And they will let you close taking title directly from the seller to your trust, which keeps your name out of the chain of title. And that’s another key element to asset protection, is to never take title to the property. Now, in reference to financing, let’s look at the other side of it. Let’s say you’re going to sell the property, and you want to sell on a contract, and it’s in an LLC. That presents an entirely different set of problems, whereas if you have it in a separate land trust, you can sell the beneficial interest on a contract, and if default occurs, you can repossess that beneficial interest instead of having to foreclose, which will save you at least a year in the judicial system. As for the professional crook, they will string you out for a year, and they’ll foreclose you, and declare bankruptcy, and string it out another 6 months. That doesn’t happen when you sell the beneficial interest of the land trust. And that’s one of the big, big reasons to use these trusts. Especially if you’re ever going to be selling property on a contract.
JASON HARTMAN: So, financing, though. You can’t do financing, mainstream financing, through a bank, and use the trust, right?
RANDY HUGHES: Not if they’re gonna sell the loan in the secondary market.
JASON HARTMAN: So meaning, if they sell it to Fannie Mae, Freddie Mac, etcetera. So, what about insurance?
RANDY HUGHES: Insurance is—and I explained this, I’ve got a home study course, and I’ve got a whole chapter on how to insure a land trust. But the short version is, the insurance policy needs to be in the name of the owner of the property. Which sounds logical. Well, the owner of the property is the trustee, because when you put your property in the land trust, the trustee has full legal and equitable title to the real estate. So, sometimes the difficult part is making your agent understand that you are not the owner; that the trustee is the owner, and that the name insured on the policy needs to be the trustee, and then we go to take a step further, and we say, the trustee and all beneficiaries as their interest may appear—that prevents you from having to put your name on the policy as a beneficiary, and exposing your privacy element. So, it works like a dream, but sometimes it takes hitting your agent over the head with a hammer to get him to understand. The bigger companies—State Farm, Westfield Insurance, Cincinnati Insurance, they all understand how the game works, and it’s not a problem.
JASON HARTMAN: Okay. And, what if someone listening has properties now, and they want to put them into a trust? Would that trigger a tax liability? Would it trigger a due on sale clause, would it trigger any other financing or insurance problems? Or maybe like the leases on the properties need to be rewritten too, because now it’s a different entity they’re paying? Do you set up a bank account for your trust? Lots of questions there.
RANDY HUGHES: Yeah. Just the mechanics, yeah. No, we don’t set up specific accounts for each trust. You could if you wanted to, but they’re still going to ask for your personal social security number from the bank, when you open those accounts. A land trust is a pass-through entity in the eyes of the IRS. That means you don’t get an [unintelligible] number for it, you do not file a tax return for it; you file all of the information from that property that’s in the trust, directly onto your 1040 tax return, Schedule E, the same place where you had it before, you put it in trust, that same information that was on your Schedule E, it will continue to go on your Schedule E after you put it in the trust, because the trust is a pass-through entity. In reference to financing, when you get a loan with a trust, the trustee signs the mortgage; that gets recorded in the name of the trustee. The beneficiary will typically sign either a note, or a guarantee that the banker keeps in his file, and does not get it recorded, so his anonymity can be continued as it relates to that property. What’s really interesting about this is that one of the byproducts that you don’t think about until you’ve done a few of these is, if you run, let’s say, run Jason’s credit report, and everything he’s ever bought, he bought in the name of a trust, that debt isn’t gonna show up on your credit report.
JASON HARTMAN: Right. Yeah, that’s—well, that’s mostly good. It’s bad in the sense that if you want to establish more credit that you’re paying on, you want it to show up, actually. That’ll improve your FICO score. But, who are those loans through? They’re not going to be major bank loans anyway. So are they going to be private financing? Who do you get to finance, for the trust?
RANDY HUGHES: Regional bank. A regional bank—I live in the Midwest. I love Midwest banks. For example, out in the country, you’re driving down the road, and you see a bank come up out of the ground, and you just stop in and meet the president, shake his hand, they make a loan to you, to your trust, you guarantee it, and there are lots of regional banks. You don’t have to be in the Midwest. There are lots of them in California and Florida and all over. I just don’t deal with the big boys—the Chase, the Bank of America, because they’ve got too strange of guidelines. And we’re backing up a little bit to answer your question about people that already have property in their names, Jason. I get this question all the time. Well, should I even bother taking it out of my name if it’s already in my name? And the answer is yes. Because of those 50 reasons to use a land trust—you may miss out on one of them because you didn’t put it into the trust from day 1, but you’ve got 49 other reasons to still use a land trust. For example, selling the property on a contract. Or, avoiding due on sale, or avoiding reassessment upon sale. If I still use the official interest in a land trust, Jason, that does not get recorded anywhere. So if I sold it to you for more money than I paid for it, the taxing body isn’t aware of that, to reassess and increase your real estate taxes.
JASON HARTMAN: Your property tax, is what you’re talking about. Yeah.
RANDY HUGHES: That’s right.
JASON HARTMAN: But even if they’re not aware of it, don’t you have to tell them? Don’t you have to proactively tell them, or you might get in trouble?
RANDY HUGHES: Well, it depends on what state you’re in. Some states do have that rule. They have that law, like in Florida, they’ve got the law there. And Illinois, they have that law. But most states don’t have that law. So it just depends on what state you’re in.
JASON HARTMAN: Okay. So there were 49 other reasons that we didn’t even discuss yet. Give us a few of your favorites.
RANDY HUGHES: Well, I like the ease of transferability, and the ease of linking these trusts together with other entities. From a transferability standpoint, as I mentioned, I could sell you the beneficial interest in my land trust, and we could do that deal this afternoon, and we don’t have to run down to the courthouse. Nobody knows what you paid for it. So if I’m selling it for more than I paid for it, that profit is not made public. It’s a one page document to assign that beneficial interest to you when you buy it from me. And the title remains in the same trustee’s name, although you could change it if you wanted to, to the new beneficiary. You could certainly change that trustee if you want to, or just keep my trustee. So, very easy to do transactions that are below the surface, where people aren’t tracking it. And we talked about the linking together of land trusts with other entities. I like LLCs. I like the series LLC, I like the [unintelligible] corporations, I like Wyoming LLCs. But I don’t title anything in the name of those LLCs or corporations. The title goes first into a land trust, then the beneficiary of the land trust might be my Delaware series LLC.
JASON HARTMAN: Now, why do you do that? Just to have two layers? Tell us about that.
RANDY HUGHES: Well, number one is asset protection. I’ve got another layer. And when you really get into the study of this subject, which I teach—I have a basic course and an advanced course on my website. And in the advanced material, we get into the benefits to having multiple layers of ownership. But one really interesting point here is that I have—I had a seminar the other day in San Francisco, and right front and center was a CPA. And he and I tangled right away over the subject of, do I have to register my LLC in California if it’s the beneficiary of a land trust that owns property in California? Now, if you title California real estate into a LLC, directly into the name of the LLC, you have to register that LLC in California, no matter where the LLC is [unintelligible], and pay the wonderful $800 a year that they’re going to assess to you in California.
JASON HARTMAN: California is the rip off state of the Universe.
RANDY HUGHES: That’s true.
JASON HARTMAN: The Socialist Republic of California.
RANDY HUGHES: If you title that California real estate into a California land trust, and then the beneficiary of the land trust is your Delaware LLC, you do not have to register in California. That just saved you $800 a year. Because—and here’s the reason. This took about two hours of—finally the account raises his hand, and he says, I’ve been thinking about this, and you’re right. And he—the reason why is, the beneficiary of a land trust is not doing business in California. The trustee is doing business, because he owns real estate in California. But the trustee of a land trust is not required to be registered in the state of California! Or any other state. See, the big picture here, Jason, is there’s no federal land trust law. It’s all state by state. And some states have better laws than others. And you can set up a—you can set up a Virginia land trust, for example, to hold title to property in California! And from an asset protection standpoint, now you’re really getting a leg up, because you’ve now taken it out of state. That the legal issue has now gone out of state, instead of being an in-state issue during a lawsuit. So, linking these trusts together with other entities is very, very valuable to you from an asset protection and privacy standpoint.
JASON HARTMAN: Let me take a brief pause; we’ll be back in just a minute.
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JASON HARTMAN: Did you know that you can call in to the Creating Wealth Show? Yes, you can call me and talk to me direct, for later broadcast on the show. The number is 949-200-8009. Or via Skype, JasonHartmanROI. Please make sure you have a good connection when you call. Get your questions answered, participate in the show, and share your experiences with other investors. Call in, 949-200-8009, or Skype, JasonHartmanROI, and participate in the Creating Wealth Show.
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JASON HARTMAN: On the credit issue, what you said about credit—how it doesn’t show up on your credit report—I mean, assuming you come up with financing, which you say you can with regional banks and such. Assuming you can get financing, it doesn’t show up on your credit report. When you said that, it was reminiscent of—I’ve heard those people talking about establishing business credit, corporate credit. A lot of those things I believe are scams.
RANDY HUGHES: Yeah, I don’t think that works.
JASON HARTMAN: Yeah, I think it’s something like where there’s some truth to it, and it could work in certain cases, but one thing I do know about it is that if you get the business credit, you do have to guarantee it, the way you said, with a land trust. Same thing. And it doesn’t show up on your credit report as debt, which is good and bad, depending on where you are, and how you need to manage your FICO score. But, if you default, it does show up on your credit report. So, the good part, when you’re paying the debts, never shows up. But the bad part, when you default on the debt, does show up. So that’s just sort of a little nuance.
RANDY HUGHES: Well, yeah. But eventually it would show up. Now, the foreclosure wouldn’t show up in your name; it would show up in the trustee’s name, if you were being foreclosed on.
JASON HARTMAN: Yeah, but just make a distinction there if you would. That means the foreclosure wouldn’t show up in the county records under your name. But it’ll still show up on your credit report, right?
RANDY HUGHES: Well, it depends what you signed. If you signed a guarantee, then they have to go through the entire foreclosure process, and then when the dust settles, they come after you as the guarantor. And if you don’t pay that, they can get a judgment against you in court, and then collect on the judgment. So, the judgment would show up as a filing of courthouse, ultimately. But the foreclosure doesn’t, because you never signed anything to be foreclosed on.
JASON HARTMAN: Okay, alright. Interesting. Okay, what else should people know?
RANDY HUGHES: Oh, gosh. Land trusts can be very beneficial from an estate-planning standpoint. For example, they help you avoid probate. Typically, if you die, you assets are gonna be probated, and tied up in court, and an attorney charging attorney’s fees to settle the estate. But if you own a piece of real estate in a land trust, and you are the beneficiary—Jason’s the primary beneficiary—and Jason makes his 20-year-old son the successor beneficiary, when Jason dies, that moment that Jason dies, his 20-year-old son becomes the beneficiary. It doesn’t have to go through probate; it’s automatic.
JASON HARTMAN: Right. So, you don’t pay the government and the lawyers a bunch of money. That’s good. There are so many different types of trust that you hear about. You hear about revocable trusts, and irrevocable trusts, and living trusts, and inter-vivos trusts, same thing, spendthrift trusts—there’s like a zillion names for these things. But trusts are really—there’s really just one kind of trust, right? And then—why do they get those other names tacked on to them?
RANDY HUGHES: Well, that’s a very good point, and that’s one of the reasons why it’s so difficult to get accurate land trust information anywhere, let alone from an attorney. Number one, they don’t teach lawyers trust law in law school. And after law school, most lawyers don’t learn it, because there’s not a lot of money in it, and I don’t blame them for that. But consequently, it’s very difficult to find anybody that can help you set up and administer your own land trust. Now, here’s a confusing [unintelligible], Jason. Those attorneys and practitioners and advisors that do study trust laws, study about most every other kind of trust, other than the land trust! And you can almost divide the world into all those other trusts, and land trusts.
JASON HARTMAN: Oh, okay.
RANDY HUGHES: Here’s how to understand the difference. All the other trusts, other than land trusts, are typically trustee-driven, and what that means is, the trustee makes the decisions as to what goes on with the property in the trust. And there’s a fiduciary relationship there between the trustee and the beneficiary; the trustee’s gotta look out for the beneficiary’s financial interests, or he can be in legal trouble. The land trust is beneficiary-driven. That means the beneficiary makes all the decisions; the trustee doesn’t do anything, unless he’s directed in writing to do so by the beneficiary. And that’s the significant difference between a land trust and other trusts.
In addition, land trusts are for real estate, and real estate related assets, like a mortgage, or a contract of sale, or an option on real estate. And of course, apartment buildings, office buildings, condominiums, single family houses, all pockets of real estate go into a land trust. You don’t put a motor home in a land trust. Now, having said that, I wouldn’t take title to a motor home either, in my name. In fact, in my advanced course material, I provide a very sophisticated personal property trust, because I would advise everybody to hold their personal property in separate personal property trusts as well. So, your car goes in one trust, your boat goes in another, your shotgun, your ladder—anything with liability to it should be in its own separate personal property trust. And the beneficial interest of a land trust is personal property.
So, for example, you could even hold title—you could hold the beneficial interest in your land trust, not in your name personally, Jason, but in Jason’s personal property trust number 234, and that adds another layer. So, it just depends on how sophisticated you want to get. You don’t have to get real fancy to at least get the anonymity factor. But I would really encourage your listeners to think seriously about getting everything out of their name, getting it into separate trusts, and then either being the beneficiary directly, or having one of their entities being the beneficiary of these trusts.
JASON HARTMAN: Now, how much does it cost to set up each trust? Or is it basically nothing to do it? because they’re not entities; they’re not recorded at a certain state. There’s no filing fee, right? Because you don’t record a trust?
RANDY HUGHES: The only cost, Jason, is the cost to record the deed. Now, your listeners need to learn how to do this, and learn from somebody that knows what they’re doing. And that’s why I put together a home study course that can be found on my website at www.realestateforprofit.com. www.realestateforprofit.com. Then you go there, and you get the basic course, and get the advanced course. Or a complete package, which is the basic and advanced together. And that’s all they’ll ever spend for the rest of their lives on land trusts, because that teaches them everything they need to know, and it gives them all the forms they need, and from there on out, the only continuing cost will be the cost of recording that deed, maybe 20, 25 bucks. Other than that, they just load it up on their computer, and they spit these things out all day long.
JASON HARTMAN: Who records the deeds for you? Your escrow officer, your title officer? Or, who can you get to do it?
RANDY HUGHES: Well, it depends on the transaction. Sometimes I’ll record it. Sometimes my attorney will record it. Sometimes Chicago Title, who’s a company I use exclusively. They’ll record it. So, it really doesn’t matter who does it, as long as you get it done.
JASON HARTMAN: Alright! Well, anything else you want people to know in closing, Randy?
RANDY HUGHES: Yeah, I would like to close with—land trusts are not as difficult as people like to make them. They are—my course guide, for example, is 106 pages. It’s not a lot of legalese. It’s written in down to earth, easy to understand language. You can learn this stuff—if you’re a real estate investor and you understand that, you can certainly understand this. And it’ll really set you apart from the whole rest of the town that you’re dealing in. Your competitors won’t be able to track you. Nobody will know what you’re doing. And it’s just a nice feeling; you go to bed at night, and your head hits the pillow, and you can go to sleep not worrying about what’s going on at the courthouse with everything that you’ve signed and then recorded. And people tracking what you’re doing, and following your every move. I think it’s important as a real estate investor to do things on a confidential basis. And certainly, you’d need to add—the more property you get, the more net worth you get; you need to add the asset protection element, and that’s where you learn how to link these trusts with other entities. So the land trust gives you the privacy; the other entities give you the asset protection, and you get the best of both worlds.
JASON HARTMAN: And Randy, I guess that leaves room for one more question, in closing here. Since privacy is the main benefit, any suggestions on naming these trusts? Because this name will be public record. And so it should not be The Hartman Family Trust, right? It should be something generic.
RANDY HUGHES: Jason, I’m so glad you brought that up. I could talk about trusts for days at a time. But, I have a whole chapter in my course material. One whole chapter, on how to name your trust. Because so many attorneys that will help you set up the land trust will say, alright, you have ten single family houses, let’s dump them all into this one land trust, and let’s name this the Randy Hughes Land Trust.
JASON HARTMAN: Yeah, not good.
RANDY HUGHES: Not good. I’ve even seen, Jason, social security numbers put in the name of the land trust.
JASON HARTMAN: Oh my gosh.
RANDY HUGHES: And then recorded!
JASON HARTMAN: Wow.
RANDY HUGHES: So, yeah. There’s a lot to just the name. And let me give you a quick example. If you were looking to sue a trust for whatever reason it might be, and you looked up that the name of the owner of this property was the California State Disabled Children’s Trust, you might think twice before you’d want to sue that trust.
JASON HARTMAN: Oh, interesting point, yeah.
RANDY HUGHES: You certainly would—it would certainly set you off balance from day one, as opposed to if I looked up the name of the trust was the Jason Trust, I’d say hey, I got the right guy! I’m going after him. But you can name these trusts whatever you want to, as long as you don’t infringe on copyrights—
JASON HARTMAN: Yeah, or trademarks.
RANDY HUGHES: Or trademarks. So, I could name it the Florida State Retirement Fund. Or the Chicago—I can call it the Chicago Lawyers’ Investment Account—
JASON HARTMAN: Oh, boy, they’re not gonna want to sue that one!
RANDY HUGHES: No, no, no, no. I wouldn’t think you’d want to take them on. So there’s a lot of psychology behind just naming it. And then there’s more psychology behind the number of the trust. Because I teach people to name and number their trust. And we don’t just number them 1, 2, 3, 4, or like a lot of attorneys do, they’ll say, put the address of the property in the name of the trust. Well, that’s really stupid. But, let’s think in reverse here, let’s put a little reverse English on that thought process—what if we named the trust the address of a property that’s not in the trust? So if the property that’s in the trust is on 123 Vine Street, what if we named it the 234 Harrison Avenue trust? That might really throw you off, and certainly make your attorney run up another 4 or $500 legal bill for you to pay, just trying to figure that one out. So, unfortunately, the legal system of America has run amok. It’s not about who’s right and wrong. OJ Simpson proved that to everybody. It’s a matter of who’s got the deepest pockets, and who understands the legal system. And I’m not teaching people this information to have them take advantage of anyone, but I do want them to learn how to defend themselves against what I call the terrorists of the 21st century, and that is the [unintelligible] lawyer. That’s where you’re gonna get yourself in trouble. And that’s who we’re trying to throw the dogs off on.
JASON HARTMAN: Good stuff. Well, Randy Hughes, thanks so much for this lesson today. Very interesting, and very good to have this knowledge, and everybody, I hope you’ll take advantage of it. you already gave out your website, so people know where to learn more. Thank you again, Randy. Appreciate it.
RANDY HUGHES: Thank you, Jason. Take care.
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ANNOUNCER: This show is produced by the Hartman Media Company. All rights reserved. For distribution or publication rights and media interviews, please visit www.HartmanMedia.com, or email [email protected]. Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate, or business professional for any individualized advice. Opinions of guests are their own, and the host is acting on behalf of Empowered Investor, LLC. exclusively.
Transcribed from David
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