¶ 3301
Overview
Scope of the chapter. Land is the oldest trust asset and still one of the most common. A family residence, a vacation house, a farm, an apartment building or a portfolio of commercial property may each end up in a trust, by funding during the settlor's life, by a pour-over at death or by purchase with trust funds. Real estate differs from a portfolio of securities in ways that shape the trust that holds it. It is fixed in one place, so the law of that place governs title, liens, taxes and the remedies of creditors whatever law governs the trust. It is recorded, so the trustee's authority must be proved to strangers who will not read the trust instrument. It is often mortgaged, and the lender's consent may be needed before title moves. It is taxed locally, often on an assessed value that a transfer can reset. It is occupied, rented and repaired, so the trustee becomes a landlord and an employer of contractors. And it can be contaminated, so the trustee may be named in an environmental cleanup action for conditions it did not create. This chapter examines each of those features and the drafting that addresses them.
Plan of the chapter. Paragraph 3310 examines how a trustee takes and proves title: the form of the deed, the certification of trust, statutes that protect persons dealing with a trustee of record, and land trusts. Paragraph 3320 examines entities interposed between the trust and the land, including single-property limited liability companies and series companies. Paragraph 3330 examines lenders and title insurers, including the federal limit on due-on-sale clauses and the continuation of title coverage after a transfer to a trustee. Paragraph 3340 examines property tax reassessment and the homestead, with a full discussion of Engelke v. Estate of Engelke. Paragraph 3350 examines the qualified personal residence trust. Paragraph 3360 examines leasing and management. Paragraph 3370 examines environmental liability under the Comprehensive Environmental Response, Compensation, and Liability Act, with full discussions of City of Phoenix v. Garbage Services Co. and Canadyne-Georgia Corp. v. NationsBank, N.A. Paragraph 3380 examines situs, foreign ownership and the income tax rules that apply to land held in trust, including like-kind exchanges and the withholding rules for foreign persons. Paragraph 3390 sets out model provisions and a checklist.
Relation to other chapters. Chapter 30 examines entities owned by trusts in general, including the trustee's duties at the level of the trust and the level of the entity. Chapter 2 examines governing law and situs, and chapter 20 examines the migration of trusts, which for land is limited by the rule that the law of the place where land lies governs title to it. Chapter 22 examines the rule against perpetuities, including Delaware's 110-year limit for real property held in trust. Chapter 31 examines retention clauses and the duty to diversify, which matter when a trust holds one large parcel. Chapters 36 and 37 examine spendthrift and self-settled trusts. The asset protection aspects of real estate, including tenancy by the entirety, judgment liens and the situs rule as it affects creditors, are examined at length in the companion volume, Lighthouse on Asset Protection, chapter 48, and this chapter refers to that treatment without repeating it.
The two questions. Every decision about land in a trust turns on two questions. The first is who holds title of record and how that person's authority will be proved to buyers, lenders, tenants, title insurers and taxing authorities. The second is who bears the liabilities that land generates: the mortgage, the tenant's injury claim, the property tax and the cost of an environmental cleanup. A trust instrument that answers the first question well and ignores the second leaves the trustee exposed and the beneficiaries uncertain. The chapter returns to both questions in each part.
Terms. In this chapter, a trustee of record is the person named as grantee in a recorded deed in the capacity of trustee. A wrapper is an entity, usually a limited liability company, that holds title to a parcel and whose interests the trust holds. A qualified personal residence trust is a trust meeting the requirements of Treas. Reg. § 25.2702-5(c). A fiduciary under the federal cleanup statute has the meaning given in 42 U.S.C. § 9607(n)(5).