Title Holding Trusts
Related: Estate Planning Overview
Related: Estate Planning FAQ
What Is A Title Holding Trust?
A Title Holding Trust is a trust by which the real estate is conveyed to a trustee under an arrangement reserving to the beneficiaries the full management and control of the property. The trustee executes deeds, mortgages or otherwise deals with the property at the written direction of the beneficiaries. The beneficiaries collect rents, improve and operate the property, and exercise all rights of ownership other than holding or dealing with the legal title. The arrangement is created by two instruments: The trust agreement is executed and the deed into trust conveys the real estate to the trustee.
While legal title to the real estate is held by the trustee, the beneficiaries retain the power-of-direction to deal with the title, as well as the exclusive power to manage and control the property, and to receive proceeds from sales or mortgages and all rentals and avails on the property. The trustee agrees to deal with the trust only upon the written direction of the beneficiaries or the persons named as having power of direction. The trustee has no duties in respect to management or control of the property, no duties to pay taxes and insurance, and no duty to be responsible for litigation. The only duties the trustee has are to execute deeds or deal with the property upon the direction of the beneficiary.
The beneficiaries agree to indemnify the trustee for any expenses incurred by the trustee on account of holding legal title, including any situation where the trustee is a party to any litigation. The Title Holding Trust agreement forbids its recordation in the Recorder’s Office and forbids disclosure by the trustee of the name of any beneficiary.
A Title Holding Trust may also be referred to as a Land Trust or as a Celebrity Trust.
Title Holding Trust Distinguished From Standard Living (Estate Planning) Trusts
By the terms of a standard living trust, the settlor (person setting up the trust) typically wears two hats as both the trustee and beneficiary of the trust. In a standard living trust the settlor in both the trustee and beneficiary capacities holds both legal and equitable title to the real estate in the trust.
However under a Title Holding Trust agreement, the trustee is the only party holding title to the property and all active managerial powers are reserved to the beneficiaries. The only duty of the trustee is to deal with the trust when and as directed by the beneficiaries, and to convey the property, or to cause it to be conveyed or sold when the trust terminates.
Distinctive Features Of Title Holding Trust
• Both legal and equitable title are vested in the trustee and the beneficiary has contract rights but not legal or equitable title to the real property.
• The trustee has no duties or powers other than to convey, mortgage, or deal with the real estate as directed by the beneficiaries, or to sell or liquidate the property at the termination of the trust.
• The rights of possession, management, control and operation of the property, as well as the right to rents, issues, profits and proceeds of sale or mortgage financing are vested in the beneficiary.
• The rights, privileges, and obligations of the beneficiaries are not interests in real estate but are expressly characterized as personal property.
7 Advantages Of A Title Holding Trust
1. Privacy Of Ownership
The only recorded instrument when using a Title Holding Trust is the deed into trust. This discloses the name of the trust, the name of the trustee, and the date the trust agreement was signed. It does not disclose the names of the beneficiaries or the identity of those who have the actual authority and power of management and direction of the property. There is no reason why real estate ownership should be any more public than is ownership of securities or bank accounts.
2. Attractive Defendant Protection
By titling each real estate parcel in a separate Title Holding Trust, an owner of multiple properties can decrease the risk of being named in a lawsuit, requiring more than a quick check of the grantor-grantee index at the county recorder’s office to identify the actual owner of the property or to identify multiple properties owned by that same owner.
3. Limits in Exposure to Judgments and Liens
The title to the real estate held in the trust is not subject to judgments or tax liens against the beneficiaries. This insulates title to the real estate from the inhibiting effect of a judgment, a protection where the ownership of real estate is shared by more than one owner.
4. Insulation From Problems of Individual Ownership
The title to the real estate held in the Title Holding Trust is not subject to problems affecting the personal life of the owners; death, insanity, bankruptcy, and marital disputes do not affect the title.
5. Transferability of Beneficial Interest
The beneficial interest of the property characterized as personal property may be assigned and transferred by a simple assignment that does not need to be recorded in the grantor-grantee index at the county recorder’s office. Such an assignment does not disturb the legal and equitable title held by the trustee. The beneficiaries have the rights by virtue of the contract (the trust agreement), to possession, operation, management, maintenance, and control of the real estate; they have the right to direct a sale or financing; and they have the right to the proceeds of any sale, rental or lease.
6. Partition Unavailable
Partition is not available among beneficiaries to a Title Holding Trust, so title held by multiple owners is protected from loss of the property by innocent co-owners because of a judgment against another co-owner.
7. Estate Planning
By designating in whom one’s beneficial interest should be vested upon the death of the beneficiary, the Title Holding Trust may be used in estate planning and to avoid the formal probate process.
Relationship Between Trustee & Beneficiary
• The Trustee is not the Agent of the Beneficiary
Title Holding Trusts expressly restrict the powers and rights of the trustee, so that acts by the beneficiary cannot create liability against the trustee. Additionally, when contracting on behalf of the trust, the trustee is authorized to preclude any liability personal to the trustee. Process against a beneficiary as a principal cannot be served on the trustee as an agent.
• The Beneficiary is Not the Agent of the Trustee
In operating the property, the beneficiary acts individually and cannot create liability against the trustee. Accordingly, all contracts for supplies, repairs, and other undertakings by the beneficiaries are enforceable against them alone and not against the trustee or against the legal or equitable title of the trust’s property.
• Relationships to Third Parties
The beneficiaries, in dealing with third persons, act in their individual capacity. Any obligations or undertakings by the beneficiary are enforceable against the beneficiary personally, and actions in contract or specific performance may appropriately be directed against them.
• Transferability of Beneficial Interest
The beneficiary in his own right, can contract with respect to the beneficial interest in the trust of which he is the owner. This interest is personal property. Thus the beneficiary can contract to sell his beneficial interest or to direct the trustee to issue a deed of trust and the beneficiary may use the beneficial interest as collateral to secure a loan.
Improper Uses Of Title Holding Trusts
• Attempting to hide assets from a spouse during a divorce proceeding.
• Short sale buyers (“Flippers”) using a Title Holding Trust to avoid simultaneous closings.
• Transferring of real property to a Title Holding Trust if made within 4 years of being named in a lawsuit (considered to be a fraudulent transfer).
• Avoiding Proposition 13 reappraisal by having the seller of real estate deed the property to a Title Holding Trust, and then having the seller name the new buyer as the beneficiary of the Title Holding Trust.
Trusts & Estates P.C. provides comprehensive Title Holding Trusts and professional trustee services to California apartment owners, real estate investors and homeowners.