Questions on Trusts and Trustees

By Jeffery S. Watson

Many real estate investors consistently use what I call a “grantor revocable title holding trust,” a more accurate term than “land trust,” to take and hold title to real estate they buy for investment purposes. Such trusts can be used to take and hold title whether the property is being held as a long-term rental or being bought to fix and resell as a quick flip.

While there is a lot of confusion and hype about trusts, here are some common questions I get when it comes to using them.

The most important component of a trust arrangement is the capacity and integrity of your trustee. He or she not only must be a person of impeccable character, but they must have enough business acumen and diligence to be able to perform the role of a trustee.

One thing that is frequently omitted when real estate investors talk about using trusts is that the trustee of a trust has a fiduciary duty to the beneficiaries of the trust.

A good definition of “fiduciary duty” is taken from Black’s Law Dictionary:

“A duty to act for someone else's benefit, while subordinating one's personal interests to that of the other person.”

I summarize it like this: When you only have time to do one of two things, you do that for which you have the fiduciary duty.

For example, if the banks close in five minutes, and you need to make deposits at two different banks, you go make the deposit for which you have the fiduciary duty rather than the deposit for yourself. It’s important to select a trustee who understands their fiduciary duty.

Something that was pointed out to me by my friend Quincy Long of Quest Trust Company is the importance of selecting the correct trustee to serve as a fiduciary when using an IRA-owned trust. The tax code is very clear in 26 U.S.C. 4975 that the trustee will become a fiduciary to the IRA that owns or is the beneficiary of the trust. This means that they, and often individuals associated with or related to them, become disqualified persons as to that IRA for future transactions. While great care should be taken in the selection of a trustee in any situation, it’s even more important in the selection of a trustee for an IRA-owned trust. This requires a lot of forward thinking and what-if questions.

Yes, a trustee should be paid a reasonable fee for their fiduciary duty and their time spent carrying out that duty. That fee is based on the totality of the circumstances involved, such as the amount of assets being administered, the complexity of what they are doing, the amount of time involved, and the knowledge, skill and experience required to do a good job.

For example, if someone as a trustee is holding title to a piece of property, and they are not being asked to do anything other than that, not much work is required, and the trustee fee should be nominal. If, however, the trustee is involved in activities on a weekly basis, that fee can be significant.

The trustee is protected in two ways. First, the trust agreement should agree to indemnify and defend the trustee with resources and assets from the trust. Then, in the typical situation where the trustee of a grantor revocable title holding trust is holding title to a cashflow-producing piece of real estate, that piece of property should be insured with a property and casualty insurance policy. The person or entity serving as trustee needs to be a named insured on that policy.

No. A grantor revocable trust is a contract, and a contract has no statutory or common-law basis for providing asset protection. This type of trust, however, does a very good job in providing anonymity and privacy. Other kinds of trusts, such as domestic asset protection trusts and some non-grantor irrevocable trusts (both of which are beyond the scope of this article) do provide some asset protection.

No! Any person who espouses this myth has clearly failed to read the GarnSt. Germain Act in its entirety to see the limited basis on which putting a property into an estate planning trust does not trigger the due-on-sale clause in a deed of trust or mortgage. Those who believe this are usually encouraging others to engage in the unauthorized practice of law and/or are creating trusts that have a potential massive defect.

When I refer to a trust as a “grantor revocable title holding trust,” that means the grantor or settlor who forms the trust or enters into the agreement with the trustee has the ability to amend, change or revoke that trust. The notion that having the homeowner from whom you are buying the property subject to an existing mortgage first create the trust and then assign the beneficial interest to you, the investor, is bad on both counts. First, you are engaged in the unauthorized practice of law by preparing a legal document for another person, and second, you are creating a trust that, if valid, could be revoked at any time by the grantor/settlor over whom you have no control or sway.

There is a correct way to use a trust in a subject-to deal. You can set up the trust that your buy-and-hold entity owns, and that trust can be the subject-to buyer.

I hope this article is making you say, “Oh, wow!” and not, “Yeah, but…,” and that it gives you some additional food for thought when determining whether you want to use a grantor revocable title holding trust to hold your property, or if you want to use an IRA-owned trust as part of your overall self-directed IRA investing plan.

Jeffery S. Watson is an attorney who has had an active trial and hearing practice for more than 25 years. As a contingent fee trial lawyer, he has a unique perspective on investing and wealth protection. He has tried more than 20 civil jury trials and has handled thousands of contested hearings. Watson has changed the law in Ohio four times via litigation. Read more of his viewpoints at WatsonInvested.com.