Posted by David Butler on June 29, 2010 at 23:37:38:
Hello Again multitasker,
There are a lot of variables presented in your question here. Unlike a simple trust (family or estate planning Settlor only trust), a lease-option will typically involve at least two sets of beneficiaries - the property owner (Settlor), and a Co-Beneficiary (who at some point would become a tenant of the trust property under a lease agreement). The use of a trust as an alternative to a lease-option, or similar risky financial models, necessitates a multiple-beneficiary trust.
Such a trust presents several more complicated issues in the mix as a result. In addition, it usually involves transactional consulting to some degree, at a minimum, depending on the objectives of the parties in relation to overall transaction, and the desired outcomes in relation to both the primary goals, and any secondary benefits related to estate planning, tax planning, or investment planning being integrated to the maximum extent possible. Other trust costs are related to various requirements in the individual states, and any consultation related to working with the title company, when necessary.
Obviously, these costs will vary by what is actually done, and who is providing what services. There are different services in the mix, different fees for different services, and generally, different providers for those services. These services may consist of:
- transaction consulting services (elective);
- document preparation services;
- legal review services for validating sufficiency of trust;
- clients independent legal and estate planning services when necessary
- trustee services, which are a function of the trust documents and duties imposed on the trustee; which will vary for:
a) simple trusts;
b) multiple-beneficiary trusts, and
c) related ancillary services listed in a given trustee’s cafeteria-plan fee schedules.
In some cases, there are providers (usually attorneys) who offer overlapping services. Also, not all services are necessary for all transactions. So far as the trustee fees side of the equation, we rely on the comparisons of trustee fees and services as illustrated in the survey/schedule offered by David J. Lanciotti, Vice President & Trust Counsel, Chicago Title Land Trust Co., in his publication “Land Trust Administration” (2009), as a benchmark.
I can give some recent examples illustrating the disparities that may come into play.
Example 1# - alternative to lease-option
Professional working couple both had job transfers taking them to another state. A self-employed individual, obtained through a job related contact was looking to control a home for his personal residence. He liked their home. He liked it better once he learned there was a fixed-rate loan with $310k balance at 6%, with 27 years remaining. The challenge was structuring a trust transaction that would deliver the benefits of a lease-option, land contract, or wrap… without the substantial legal challenges in the mix. At the same time, both parties also wanted to avoid the equally risky challenge of inadvertently triggering the DOS clause in the existing loan. The trust was structured for permissible estate planning purposes. Based on the preliminary consultation, we anticipated trust set-up costs to be approximately $3,000. This cost included estimated time of approximately 14 hours consultation (and providing the knowledge necessary during that time), toward:
- managing escrow and assuring proper title insurance - being put in place for transfer into trust,
- assisting in preparing properly drafted documentation and legal review of same,
- account set-up with trustee and cost related thereto;
- assisting preparation of assignment of Co-Beneficiary interest and related Beneficiary Agreement between the parties,
- subsequent attorney preparing lease agreement, and - coordinating second escrow through trustee.
Along the way, as is often the case in transactions, the parties neglected to give full information on factors that may effect the transaction. They also did some things between them that would cause problems on the other end. One example was the fact that the property was listed with a Realtor, and the listing included protection from property owner leasing the property to a third-party during the listing period?!! Another was that the property owner had to be moved out of state by the 15th of June… and the proposed tenant was already set to move in. They had home listed for $400k, on market three months, no offers. Because of time frame concerns, they negotiated with listing broker to cancel the listing and pay $3k commission for cancellation, in order to allow lease up of property. There were also a couple of other snafus that each of the principals made despite being advised not to, resulting in changes to paperwork and delays in completing necessary notices and escrow work. Additional costs included half escrow costs that would have occurred in sales transaction, 90% reduction in title costs. Additional costs include trustee fee of $142 per month, which includes collection of rents and making mortgage payments.
Outcome - Additional $400 in consultation charges ($3,400 total consulting fee with included costs outlined above). Reduced title costs, paying only $217 for required endorsement to trustee, as opposed to $2,017 in new policy charges. A $21,000 savings in real estate commissions in this instance. Subsequent lease generating full PITI on mortgage, plus $200 monthly rental income over five year life of trust.
Example #2 - simple Settlor-only trust for family estate planning
Real estate investor has nine LLC’s. Wants to buy future properties into trust primarily for anonymity, secondarily for additional ownership structure, operational, and estate planning advantages. He is in contract now for $300k tri-plex he wants to put into land trust. Settlor only beneficiary in trust. Holding property for rental income into LLC. Total estimated consultation cost $650. This cost included estimated time of approximately three hours consultation (and providing the knowledge necessary during that time), toward:
- managing trust portion of escrow and assuring proper title insurance being put in place for transfer into trust,
- assisting in preparing properly drafted documentation and legal review of same,
- account set-up with trustee and cost related thereto;
Additional costs will include $12 monthly trustee fees, for just being the trustee and supporting the minimal recordkeeping necessary to maintain a valid trust from the trustee side.
Other costs that may or may not be the mix are driven by whatever state laws effecting real estate fees and taxes are, and variations in different states’ title company charges
Outcome - Investor will go into property title in complete anonymity, his primary objective in this instance. He has also put himself in a more flexible position to do some additional creative maneuvers in the future, for the purpose of taking advantage of what other structural, operational, estate planning, or investment planning objectives he may want to avail himself of at that time. Does the end justify the $650 he invested to put himself in this position, at this point in time? Only he can answer that.
As you can see, there are two widely different scenarios, and cost situations in play in the above two examples. Obviously, there is a huge variety of additional scenarios that could be in the mix in other examples.
But this should give you relative “birds-eye view” of what can be in play relative to the cost perspective.
Hope that helps.
David P. Butler
Nascent Equity &
Hotspur Investment Group