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Arizona Land Trusts:  Deal or No Deal?

Unsubstantiated Sightings of Bigfoot & Arizona Land Trusts

by Richard Keyt, Arizona Real Estate Lawyer

Some people claim to have seen a large hairy beast called "Bigfoot."  Others claim to have spotted the elusive Arizona land trust.  Because our space is limited, this article will only discuss the little known creature referred to by real estate gurus as the "Arizona land trust."

Why I Would Never Use an Arizona Land Trust

A lot of Arizona real estate investors ask me what I think about land trusts.  I usually say:

1. I would not touch an Arizona land trust with a ten foot pole.

2. Unlike Illinois and Florida, states that have case law or statutes that sanction something called a "land trust," Arizona does not have any land trust statutes or court cases.  Arizona law does not recognize any difference between a "normal" trust and a land trust.

3. Most trustees of trusts that have current beneficiaries other than themselves fall into one of three categories:  (i) trustees of revocable living trusts the beneficiaries of which are the trustees and/or their close family members, (ii) trustees who are in the business of being a trustee for compensation of trusts for unrelated beneficiaries, and (iii) trustees who are fools.  One of the quickest and easiest ways to be sued and to lose is to be a trustee of a trust because trustees owe fiduciary duties to all the beneficiaries of the trust.  Fiduciary duties are a higher standard of care than normal.  Why would a person with assets risk being sued for breach of a fiduciary duty and risk losing his or her personal assets because of acts or omissions while serving as a trustee of somebody's land trust?  Caution:  Do not become the trustee of a trust that has a beneficiary that is not you or a very close and trusted family member without understanding and accepting the risks and potential liability that comes with the job.

4. I was a partner in one of the largest law firms in Arizona that had a twelve lawyer real estate department at the time and not one of the real estate lawyers had ever had a client that used a land trust to hold investment real property Arizona.  My former firm represented some of the largest land owners in Arizona.  You can be sure that if there were any valid reasons to put Arizona real property into land trusts, the firm's wealthy property owners would not have spared any expense to do it.

5. I have been practicing real estate law in Arizona since 1980, but I have never found another Arizona real estate lawyer who used or recommended using a land trust to hold Arizona investment real property.  The only people I've heard of that recommend putting Arizona real property into land trusts are out of state real estate gurus who peddle seminars, tapes, CDs, DVDs, and other products.

6. Not being adverse to charging clients fees, you can be sure that if there were a bona fide reason to use a land trust to hold Arizona real estate, Arizona real estate lawyers would not miss the opportunity to tack on additional fees and sell the concept to their clients.  Query:  Why don't Arizona real estate lawyers recommend land trusts?  I believe the answer is because they do not work in Arizona.

Those are my stock answers.  Below is an in depth discussion of why I believe that anyone who is considering using a land trust to own Arizona real estate should be very, very cautious and only do so after doing proper due diligence and confirming that all is well in land trust la la land.

Why Create an Arizona Land Trust?

The most frequent alleged sightings of the Arizona land trust occurs at real estate seminars, especially seminars taught by non-Arizona real estate gurus.  These gurus are rarely familiar with Arizona law, but are usually very familiar with the common variety of Illinois or Florida land trust.  They frequently preach that the Arizona real estate investor should form an Arizona land trust to hold title to Arizona investment real estate because it allows the sophisticated investor to:

1. hide the true beneficial owner of real estate

2. buy land for little or nothing down

3. avoid credit checks

4. have “bulletproof” asset protection

5. avoid due-on-sale clauses in loan documents

6. get all the benefits of wraps, land contracts, lease options, and equity sharing without the disadvantages of those financing techniques

I submit that most, if not all of the advertised reasons for creating an Arizona land trust are just as illusory as Bigfoot.  Let us look at these alleged benefits of an Arizona land trust.

1. The land trust hides the true owner of real estate.  Maybe in Illinois or Florida, but not in Arizona.  Arizona Revised Statutes Section 33-404 requires that every deed that conveys an interest in Arizona real property: (i) identify the trust that is a grantor or a grantee, and (ii) disclose the names and addresses of the beneficiaries of the trust.  If the deed does not satisfy these requirements, the deed is voidable by the other party to the conveyance.  ARS § 33-404.E.  Therefore, a person who acquires an interest in Arizona real estate and puts the property into a land trust of which the person is a beneficiary using a deed that does not disclose the name and address of the person / beneficiary has created a situation where the grantor / seller has the legal right and power to void the deed.  I do not know about you, but I am not going to buy land if my deed can be set aside because of a violation of Arizona law.  This statute is the reason title insurance companies will not insure title obtained by a deed that has a trust as a grantor or a grantee unless the deed satisfies the requirements of the statute.  See ARS § 33-404.

Important Asset Protection Concept #1:  Every asset protection plan must have a business purpose.  Hiding the fact you own property could be the kiss of death if your creditors sue you and you get to court.  I have been to many asset protection seminars taught by asset protection lawyers whose audience was other lawyers.  Asset protection lawyers frequently say, "simple and open is better than complex and hidden."  This is Important Asset Protection Concept #2.  No asset protection plan will be successful if challenged by a creditor unless the debtor can show the business purpose behind the plan.  What is the business purpose for hiding the fact you own real estate?  When you testify under oath in front of the jury and the creditor's lawyer asks you why you violated Section 33-404 and why you created a land trust to hide that fact you owned Arizona land, what will you say to convince the jury it should not give your property to the creditor?  What do you think will happen if you answer that you created the land trust to hide your ownership of your land so that you could prevent your creditors from being paid the amount owed on a lawful debt?

2. The land trust lets you buy real estate for nothing down.  So what?  This is not a reason to use a land trust.  There are lots of ways to buy real estate with no money down, including, but not limited to a simple subject to purchase in which the buyer obtains legal title.

3. Land trusts allow you to avoid credit checks.  See number 2 above.  Is this a good thing or a bad thing if it is the other party's credit check that is being avoided?

4. Land trusts have “bulletproof” asset protection.  Not likely.  People who say that you can transfer property to a trust you create for your benefit and defeat the claims of your creditors lack an understanding of basic asset protection law.  It has been a fundamental fact of English and United States common law for hundreds of years that a person cannot defeat the person's creditors by putting property into a trust for the person's benefit.  See Asset Protection Trusts.  This type of trust is called a "self-settled trust" and the person who creates the trust and transfers property to the trust is called the "settlor."  The concept that you cannot create a trust to defeat your creditors is codified in Arizona Revised Statutes Section 14-7705.A that states, "If the settlor is a beneficiary of a trust created by the settlor and the settlor's interest in the trust is subject to a provision restraining the voluntary or involuntary transfer of the settlor's interest, the restraint is invalid against transferees or creditors of the settlor."

Important Asset Protection Concept #3.  Any power possessed by a debtor can be acquired and exercised by the debtor's creditor.  Every power possessed by a beneficiary of a land trust can be acquired and exercised by the beneficiary's creditor.  If as a beneficiary of your land trust you have the power to cause the trustee to convey the property, your judgment creditor can step into your shoes and exercise your right to order the trustee to convey the property to satisfy your debt.

Section 548 of the Bankruptcy Code allows a bankruptcy trustee to avoid any transfer of an interest of the debtor in property that was made on or within 10 years before the date of the filing of the bankruptcy petition, if: (A) such transfer was made to a self-settled trust or similar device; (B) such transfer was by the debtor; (C) the debtor is a beneficiary of such trust or similar device; and (D) the debtor made such transfer with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted.  This new federal law will make it more difficult for people to protect their assets by conveying them to a self-settled trust.

5. Land trusts avoid due on sale clauses in loan documents.  I do not believe that a typical land trust actually allows a seller to transfer title to real property without violating a due on sale clause in loan documents as some real estate / land trust gurus claim.  The Garn-St. Germain Depository Institutions Act became a federal law in 1982.  It pre-empted state law and provides, "Notwithstanding any provision of the constitution or laws (including the judicial decisions) of any State to the contrary, a lender may . . . enter into or enforce a contract containing a due-on-sale clause with respect to a real property loan." 

Land trust proponents base their claim that a transfer of real estate to a land trust does not violate a due on sale clause in a loan document because transfers to a trust are exempt under subsection (d)(7) of the Garn-St. Germain Act.  This statement is a misleading half truth.  Title 12 United States Code Section 1701j-3(d)(7), the exemption in question actually states, "With respect to a real property loan secured by a lien on residential real property containing less than five dwelling units . . . or on a residential manufactured home, a lender may not exercise its option pursuant to a due-on-sale clause upon . . . a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property . . . ."  Read the text in red several times.  If your land trust meets the requirements set forth in that language, then your deed to your land trust is exempt and the lender may not call the loan.  If your land trust involves a change of occupancy from the borrower to anybody other than the borrower or if the borrower is not a beneficiary of the trust, the transfer is not exempt under Section 1701j-3(d)(7).  I submit, however, that the typical land trust does not satisfy the requirements for the exemption from the due on sale provision in the loan documents because the borrower is not a beneficiary of the trust and/or the borrower does not retain occupancy of the home.

In general, the law does not elevate form over substance.  Usually the substance of a transaction is what is important to a court. What this means is the courts usually look at all the facts and circumstances and ask "what is actually going on" before they reach a conclusion.  The fact an owner creates a trust is not really relevant in answering the question "did the owner sell or dispose of an interest in the land?"  The courts will look at the facts and circumstances of your particular transaction and decide if there was or was not a sale or a disposition of an interest in the land.

For an in depth discussion of due on sale clauses, see the "The Truth about Getting Around Due-on-Sale Clauses" by John Reed.  For Reed's view of land trusts and due on sale clauses, see Reed's article called "Analysis of Bill Gatten's Pactrust."

6. Land trust offer all the benefits of wraps, land contracts, lease options, and equity sharing without the disadvantages of those financing techniques.  Right!  Saying it does not make it so.  Don't you think that if this statement were true, the land trust would be used by everybody, including Arizona real estate lawyers, instead of the traditional documents?

What the IRS Says About Land Trusts

The following is taken from the Internal Revenue Service's website:

In Illinois, and in five other states, legislation has been enacted that creates a special type of trust, commonly referred to as an "Illinois Land Trust".  These trusts are designed to house real estate within a grantor trust and provide limited access to grantor or beneficiary information contained in the trust instrument or known to the trustee.  Once a land trust is established, the ability to trace property transactions becomes limited as state law establishes the right of the trustee not to disclose the true owner of the property or those with a beneficial interest.  The "land trust" has no special distinction in the Internal Revenue Code and would be a simple, complex, or grantor trust depending on the terms of the trust instrument. Filing requirements would depend on the type of trust.

Note that the IRS did not state that Arizona is one of the six states that recognize land trusts.  Also, Arizona Revised Statues Section 33-404 negates confidentiality of transfers of land to and from Arizona trusts.

States that Recognize Land Trusts

Because this article is about "land trusts" used to hold Arizona real property, I have not researched the law of any other state to determine the states that do recognize land trusts.  Note the IRS' statement in the preceding section that land trusts have been enacted in six states.   

In an article called "Use of Special Purpose Entities in Real-Estate Financing Transactions," nationally known real estate attorney John C. Murray states:

Florida, Hawaii, Illinois, Indiana, North Dakota, and Virginia have statutes that permit land trusts, while states such as California and Kansas have permitted the creation of land trusts through court decisions. The majority of states do not permit the recognition and use of land trusts.

Note again the absence of Arizona.  Until somebody shows me evidence to the contrary, I am going to believe that John Murray knows which states recognize land trusts.  Jack's biography found on the First American Title Insurance Company website states:

Benefits of an Illinois Land Trust

Chicago Title Land Trust is an Illinois company that provides Illinois land trust services.  The following are only benefits Chicago Title Land Trust lists on its website as the benefits of a land trust:

1. Succession and Probate Avoidance

2. Owner protection – When property is owned by more than one person, the land trust can prevent title problems caused by death, disability, divorce, judgments and litigation affecting a co-owner.  A judgment against one of the beneficiaries does not automatically constitute a lien upon the real estate held in trust.  Note:  This is not asset protection.

3. Ease of conveyance – A land trust avoids the need to have all of the beneficiaries and their spouses sign a deed when conveying title. 

4. Privacy of ownership – Illinois law prohibits the trustee from disclosing the identity of the beneficiaries unless it is required by law.  This is the opposite of Arizona law that requires that the names and addresses of the beneficiaries be disclosed on the deed to the property.  ARS § Section 33-404.

5. Disposing of part interest – A land trust makes it easy to dispose of a partial interest in the property.

If you are a land trust advocate, don't you think it is very interesting that of the five benefits of a land trust listed by an Illinois commercial land trust company (an affiliate of Chicago Title Insurance Company) only one is a benefit touted so highly by the real estate gurus who push land trusts?  Could it be that Chicago Title Land Trust is simply ignorant of all the many other benefits of land trusts despite being in the commercial land trust business in the state that originated the land trust?

What is an Arizona Trust?

Under English and United States common law, a trust must have three components:

1. A trustee that holds the trust assets and administers the assets according to the terms and conditions of the trust agreement.

2. One or more assets.

3. One or more beneficiaries for whom the trust is intended to benefit.

A trust exists where a person or entity (the trustee) holds property (the asset) for the benefit or use of another person or entity (the beneficiary).

Arizona Revised Statutes Section 14-7231.2 defines a trust as follows:

"Trust" means an express trust created by a trust instrument including a will, by which a trustee has the duty to administer a trust asset for the benefit of a named or otherwise described income or principal beneficiary, or both. 

Note that Section 14-7231.2 codifies the common law requirement for the three mandatory trust components.

A trust agreement may be oral unless, but anybody who creates a trust with an oral agreement instead of a written agreement is crazy.  An oral trust agreement is an invitation for the trustor (the creator of the trust), the trustee and the beneficiary to each have their own interpretation and belief as to what the terms and conditions of the trust are.  An oral trust agreement is an invitation to litigation, especially for the trustee who lacks any tangible proof of his required duties.

What is Not an Arizona Trust

Arizona Revised Statutes Section 14-7231.2 tells us what is a trust in Arizona.

Trust does not include a resulting or constructive trust, a business trust which provides for certificates to be issued to the beneficiary, an investment trust, a voting trust, a security instrument, a trust created by the judgment or decree of a court, a liquidation trust or a trust for the primary purpose of paying dividends, interest, interest coupons, salaries, wages, pensions or profits, or employee benefits of any kind, an instrument in which a person is nominee or escrowee for another, a trust created in deposits in any financial institution or other trust the nature of which does not admit of general trust administration.

A document that names a person or entity as trustee to hold title to and to administer an interest in Arizona real property is probably a trust under Arizona law, but what would the legal consequences be if an Arizona court found the arrangement to be an investment trust or an instrument in which a person is a nominee or escrowee of another?  We do not know.

Simple vs. Complex Trusts

A trust can be simple or complex.  For example, the following is a simple trust agreement:

I give my Arizona home to my brother as trustee to hold in trust until my son is 21 at which time my trustee is to convey the home to my son.

The trust agreement contains all three required components for a trust.  It has a trustee (my brother), an asset (my home) and a beneficiary (my son).  The trustee holds title to real estate so does that mean it is a "land trust"?

For an example of a complex trust, see the 72 page sample revocable living trust created for an estate plan (the trust starts on page 8 of the pdf and ends on page 80).

Clearly there is a world of difference between my two line trust agreement above and the 72 page sample revocable living trust.  The only things the two trusts have in common are that they each have the three required components of a trust.  The point is that every trust agreement must be carefully drafted to contain the terms and conditions that are necessary to accomplish the goals of the trust.  You cannot take a form you find on the internet and use it in Arizona as a land trust agreement.  A land trust is a type of trust that has very specific goals. 

If you want to create a land trust for Arizona real property, you must make sure your trust agreement is a land trust agreement that has been customized for use in Arizona by somebody who knows what they are doing.  I do not know where you can find a land trust agreement customized for use in Arizona.  I have never seen one.  Nor do I know of an Arizona real estate lawyer who could customize a trust agreement for use as an Arizona land trust agreement.

If you have a land trust agreement and insist on using it to create a trust to hold Arizona real property, I recommend that you first have your title insurance company review the trust agreement and give you a letter that says that if you use the document to create a land trust for Arizona real property, the title insurance company will insure title to the real property.

Florida Land Trusts

People in Illinois know what an Illinois land trust is because there are Illinois court cases that define it.  People in Florida know what a Florida land trust is because it is defined and provided for in Florida Statues Section 689.071. 

People in Arizona, however, do not know what an Arizona land trust is because Arizona does not have any court cases on the subject nor does it have any statutes that create a land trust.  Note the following differences between terms that are defined in the statutes of Arizona and Florida.

Note that Florida requires that the trust agreement designate the person or entity (the trustee) to hold legal and equitable title to property of a land trust.  Arizona general trust law provides that a trustee holds legal title, but the beneficiaries hold equitable title, which is contrary to Florida Section 689.071(2)(e).  What is the legal significance of an Arizona land trust agreement that states the trustee holds legal and equitable title (required for a Florida land trust) or that fails to make that statement?  I do not know, but if I had an Arizona land trust, I would be concerned. 

In addition to the differences between defined terms cited above, the Florida land trust statutes contain the following important provisions, none of which exists under Arizona statutory or case law:

1. OWNERSHIP VESTS IN TRUSTEE.--Every . . . instrument . . . transferring any interest in real property in this state . . . to any person or any corporation, bank, trust company . . . as trustee, without therein naming the beneficiaries of such trust . . . is effective to vest . . . in such trustee full rights of ownership over the real property or interest therein, with full power and authority as granted and provided in the recorded instrument to deal in and with the property or interest therein or any part thereof; provided, the recorded instrument confers on the trustee the power and authority either to protect, conserve and to sell, or to lease, or to encumber, or otherwise to manage and dispose of the real property described in the recorded instrument.

2. PERSONAL PROPERTY.--In all cases in which the recorded instrument, as hereinabove provided, contains a provision defining and declaring the interests of beneficiaries thereunder to be personal property only, such provision shall be controlling for all purposes when such determination becomes an issue under the laws or in the courts of this state.

3. TRUSTEE LIABILITY.--In addition to any other limitation on personal liability existing pursuant to statute or otherwise, the provisions of s. 737.306 apply to the trustee of a land trust created pursuant to this section.

4. LAND TRUST BENEFICIARIES.--

   (a)  Except as provided in this section, the beneficiaries of a land trust are not liable, solely by being beneficiaries, under a judgment, decree, or order of court or in any other manner for a debt, obligation, or liability of the land trust.

   (b)  Any beneficiary acting under the trust agreement of a land trust is not liable to the land trust's trustee or to any other beneficiary for the beneficiary's good faith reliance on the provisions of the trust agreement.

   (c)  Chapter 679 applies to the perfection of any security interest in a beneficial interest in a land trust. The perfection of a security interest in a beneficial interest in a land trust does not impair or diminish the authority of the trustee under the recorded instrument, and parties dealing with the trustee are not required to inquire into the terms of the unrecorded trust agreement.

   (d)  A beneficiary's duties and liabilities may be expanded or restricted in a trust agreement or beneficiary agreement.

   (e)  Any subsequent document appearing of record in which a beneficiary of a trust transfers or encumbers the beneficial interest in the trust does not diminish or impair the authority of the trustee under the terms of the recorded instrument. Parties dealing with the trustee are not required to inquire into the terms of the unrecorded trust agreement.

   (f)  An unrecorded trust agreement giving rise to a recorded instrument for a land trust may provide that one or more persons or entities have the power to direct the trustee to convey property or interests, execute a mortgage, distribute proceeds of a sale or financing, and execute documents incidental to administration of the land trust. The power of direction, unless provided otherwise in the land trust agreement, is conferred upon the holders of the power for the use and benefit of all holders of any beneficial interest in the land trust. In the absence of a provision in the land trust agreement to the contrary, the power of direction shall be in accordance with the percentage of individual ownership. In exercising the power of direction, the holders of the power of direction are presumed to act in a fiduciary capacity for the benefit of all holders of any beneficial interest in the trust, unless otherwise provided in the land trust agreement. A beneficial interest is indefeasible, and the power of direction may not be exercised so as to alter, amend, revoke, terminate, defeat, or otherwise affect or change the enjoyment of any beneficial interest.

   (g)  A trust relating to real estate does not fail, and any use relating to real estate may not be defeated, because beneficiaries are not specified by name in the recorded deed of conveyance to the trustee or because duties are not imposed upon the trustee. The power conferred by any recorded deed of conveyance on a trustee to sell, lease, encumber, or otherwise dispose of property described in the deed is effective, and a person dealing with the trustee is not required to inquire any further into the right of the trustee to act or the disposition of any proceeds.

   (h)  The principal residence of a beneficiary shall be entitled to the homestead tax exemption even if the homestead is held by a trustee in a land trust, provided the beneficiary qualifies for the homestead exemption under chapter 196.

Florida law specifically addresses important fundamental land trust issues.  Arizona law is totally silent.  I believe there is a big problem with creating a land trust in Arizona if: (i) three key land trust terms that are defined in the Florida land trust statute are not defined under Arizona law, (ii) the three terms that Florida law and Arizona law have in common have different definitions, and (iii) many important provisions of Florida's land trust statute are not part of Arizona's trust law.

Without case law or statutes for guidance, how is an Arizona appellate court supposed to rule when confronted with its first land trust case?  Do you think an Arizona court is going to make new law and adopt land trusts?  Do you want to be a pioneer and litigate the first Arizona appellate court case that discovers that Arizona law provides for land trusts like (pick one): (i) the law of Illinois, (ii) the law of Florida, or (iii) new Arizona law that is a combination of Illinois, Florida and Arizona law?

You may think the lack of case law and statutes is a minor detail, but I do not.  I do not recommend to my clients that they engage in cutting edge activity that has not yet been approved by an appropriate appellate court.  We all know what happens to pioneers.  They are found out front of the wagon train face down with arrows in their backs.

Illinois Land Trusts

Land trusts originated in Illinois and commonly referred to as an "Illinois Land Trust." Hart v. Seymour, 147 Ill. 598 (1893); 35 N.E. 246 (1893), is the seminal land trust case.

The Illinois land trust was created by Illinois courts, not by statutes enacted by the Illinois legislature.  One Illinois Court described the Illinois land trust as follows:

An Illinois land trust is a unique creature of Illinois law whereby 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. . . . While legal title to the real estate is held by the trustee, the beneficiaries retain 'the power of direction' to deal with the title, to manage and control the property, to receive proceeds from sales or mortgages and all rentals and avails on the property.  The trustee agrees to deal with the res of the trust only upon written direction of the beneficiaries. . . .The trustee is not required to 'inquire' into the propriety of any 'direction' received from the authorized person.

Robinson v. Chicago National Bank, 32 Ill. App. 2d 55, 58 (1961).

One of the features of a land trust is that the trustee holds both the legal and equitable title to the real property.  Robinson v. Chicago National Bank, 176 N.E.2d 659,661 (1961).

There is a long line of court cases in Illinois that clearly define the Illinois law with respect to land trusts.  There are no Arizona appellate court cases that deal with Arizona land trusts.

Illinois land trusts commonly use documents entitled "Trust Agreement," "Warranty Deed in Trust," "Quit Claim Deed in Trust," "Letter of Direction," "Direction to Convey," "Assignment of Beneficial Interest," and "Acceptance of Transfer of Beneficial Interest."  If you are creating an Arizona land trust, do you have a set of the documents listed in the prior sentence?  If not, why not?  If so, have the documents been customized by an Arizona real estate lawyer for use in Arizona?  If not, why not? 

Arizona Statutes Impose Duties on Trustees of Trusts

Arizona Revised Statutes Section 14-7233 states, "In the exercise of his powers including the powers . . . a trustee is subject to the standards provided in section 14-7302 and has a duty to act with due regard to his obligation as a fiduciary."  Arizona law provides that trustees of trusts are subject to the following duties (the text shown below that is not in brackets is the exact text from the applicable statute):

1. [the trustee has] the general duty . . . to administer a trust expeditiously for the benefit of the beneficiaries. . . .  ARS § 14-7301.

2. the trustee shall observe the standard in dealing with the trust assets that would be observed by a prudent man dealing with the property of another, and if the trustee has special skills or is named trustee on the basis of representations of special skills or expertise, he is under a duty to use those skills.  ARS § 14-7302.  "Prudent man" means a trustee whose exercise of trust powers is reasonable and equitable in view of the interests of income or principal beneficiaries, or both, and in view of the manner in which men of ordinary prudence, diligence, discretion and judgment would act in the management of the property of others.  ARS § 14-7231.1

3. the trustee shall keep the beneficiaries of the trust reasonably informed of the trust and its administration.  In addition:

1. Within thirty days after his acceptance of the trust, the trustee shall inform in writing the beneficiaries currently entitled to receive income, of the trustee's name and address.

2. Upon reasonable request, the trustee shall provide the beneficiary with a copy of the terms of the trust which describe or affect his interest and with relevant information about the assets of the trust and the particulars relating to the administration.

3. Upon reasonable request, a beneficiary is entitled to a statement of the accounts of the trust annually and on termination of the trust or change of the trustee.

ARS § 14-7303.

4. A trustee need not provide bond to secure performance of his duties unless required by the terms of the trust, reasonably requested by a beneficiary or found by the court to be necessary to protect the interests of the beneficiaries who are not able to protect themselves and whose interests otherwise are not adequately represented.  ARS § 14-7304.

5. A trustee is under a continuing duty to administer the trust at a place appropriate to the purposes of the trust and to its sound, efficient management. ARS § 14-7305.

The Arizona Prudent Investor Act

Arizona Prudent Investor Act provides that "A trustee who invests and manages trust assets owes a duty to the beneficiaries of the trust to comply with the prudent investor rule requirements of [Arizona Revised Statutes Title 14, Chapter 5 Article 6]. . . . The prudent investor rule is a default rule, and may be expanded, restricted, eliminated or otherwise altered by the provisions of a trust."  ARS § 14-7601.  Does your land trust agreement eliminate the Prudent Investor Act?  If not, the trustee of your land trust is obligated to comply with the Act or be liable to the beneficiaries of the trust for damages.

The following provisions are from Arizona's Prudent Investor Act:

1. A trustee shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements and other circumstances of the trust.  In satisfying this standard the trustee shall exercise reasonable care, skill and caution. . . . A trustee's investment and management decisions respecting individual assets shall not be evaluated in isolation but in the context of the trust portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust.  ARS § 14-7602.  [This statute states many circumstances that a trustee must consider in making investment decisions.]

2. A trustee shall diversify the investments of the trust unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying.  ARS § 14-7603.

3. Within a reasonable time after accepting a trusteeship or receiving trust assets, a trustee shall review the trust assets and make and implement decisions concerning the retention and disposition of assets, in order to bring the trust portfolio into compliance with the purposes, terms, distribution requirements and other circumstances of the trust and with the requirements of [the Prudent Investor Act].  ARS § 14-7604.

4. A trustee shall invest and manage the trust assets solely in the interest of the beneficiaries.  ARS § 14-7605. 

5. If a trust has two or more beneficiaries, the trustee shall act impartially in investing and managing the trust assets, taking into account any differing interests of the beneficiaries.  ARS § 14-7606. 

6. In investing and managing trust assets, a trustee shall only incur costs that are appropriate and reasonable in relation to the assets, the purposes of the trust and the skills of the trustee.  ARS § 14-7607. 

Trustee Liability for Breach of Fiduciary Duty

The fiduciary duties a trustee owes to all beneficiaries of the trust create a very high standard of care that the trustee must satisfy.  Trustees may be sued by a beneficiary if the trustee breaches a duty owed to the beneficiary.  As you can see, the partial list of fiduciary duties listed above is quite lengthy and imposing and should not be taken lightly.  When you are a trustee, you greatly increase your risk of being sued and of losing the lawsuit because of the numerous high level fiduciary duties imposed by Arizona law on trustees of trusts.

I began practicing law in Arizona in 1980.  During the time I have been practicing law, I many clients have asked me to be the trustee of their trust or a successor trustee of their trust.  I have always politely refused because I do not want the substantial liability that goes with being a trustee.

Consider two situations:  (1) you purchase property and obtain title by a deed from the seller then lease it back to the seller, or (2) you cause the seller to convey title to a land trust you create that names you (or your friend or family member) as the trustee and you gives the seller a right to occupy the property.  Which scenario do you suppose exposes you to the most risk of litigation, loss and liability?  Do you really want to be the trustee of a land trust and become liable for the numerous fiduciary duties imposed on trustees by Arizona law. 

Will you tell your friend or family member that by becoming the trustee of the land trust he or she will be jumping out of the frying pan and into the fire of trustee's fiduciary duties and the substantial risk of liability to the beneficiaries? Who will your friend or family member look to if he or she gets sued by a beneficiary for breach of fiduciary duty while acting as the trustee of your land trust?  P.S. Friends do not ask friends or family members to be the trustees of trusts they create if unrelated parties are beneficiaries of the trust.

Does the Trustee Need a License from the Arizona Department of Financial Institutions?

The State of Arizona regulates trust companies.  Arizona Revised Statues Section 6-853.A states "A person shall not engage in the trust business without first obtaining a certificate from the superintendent" of the Arizona State Department of Financial Institutions.

The requirements to obtain a license as a trust company in Arizona are very stringent. The fee to apply for a license to engage in the trust business in Arizona is $5,000.  To obtain a license to engage in the trust business, the applicant must have at least $500,000 liquid capital.  ARS § 6-856.A.1.  Before issuing the license, the Arizona Department of Financial Institutions must investigate the "general character, reputation, financial standing, business qualifications, ability and integrity of the persons involved in the management of the applicant's business are such as to demonstrate that the trust company will be operated in a safe, sound and lawful manner."  ARS § 6-857.A.3.  The applicant must also have a $500,000 fidelity bond and appropriate insurance. ARS § 6-857.A.6 & 7.

The reason Arizona and all states regulate who can conduct trust business within their states is because trustees have legal title to assets and can easily defraud beneficiaries.  Because the states have an interest in reducing the risk that a trustee or a trust company will defraud a beneficiary, they have stringent requirements for obtaining a license to engage in the trust business.  No state will allow just any guy on the street to engage in the trust business.

Arizona Revised Statues Section 6-851.A.1 states "Trust business means the holding out by a person to the public at large by advertising, solicitation or other means that such person is available to act as a fiduciary in this state and accepting and undertaking to perform the duties as such fiduciary in the regular course of his business."  "Fiduciary means a . . . trustee . . . or other person who acts in a fiduciary capacity."  ARS § 6-851.B.7. 

Arizona Revised Statues Section 6-852.A.4 states, "a person does not engage in the trust business by . . . [h]olding trusts of real estate for the primary purpose of . . . sale, or to facilitate any business transaction with respect to such real estate, provided such person is not regularly engaged in the business of acting as a trustee for such trusts."

Does Section 6-852.A.4 exempt trustees of Arizona land trusts from obtaining a license to engage in the trust business?  Maybe.  Maybe not.  This is another question that is unanswered in Arizona.  I do not know if the typical land trust would be considered by an Arizona court as having the primary purpose of facilitating a business transaction with respect to the real estate.  Of course the answer depends on the exact facts at issue and the terms of the land trust agreement.  It is possible, however, that an Arizona court might say that a land trust involving an Arizona home is a consumer transaction, not a business transaction, and therefore not an exempt transaction under Section 6-852.A.4.

Is a person who is the trustee of two or more Arizona land trusts engaging in the trust business and required to get a license as a trust company from the Arizona Department of Financial Institutions?  I do not know, but if I were the trustee of more than one Arizona land trust, I would be very concerned about whether I needed a license as a trust company.  Note also the last part of  Section 6-852.A.4 that says the exemption applies only if the "person is not regularly engaged in the business of acting as a trustee for such trusts." 

In light of the above, the trustee of an Arizona land trust should consider if the trustee is engaging in the trust business and is required to obtain a license as a trust company from the Arizona Department of Financial Institutions.  Perhaps a trustee who is a trustee of only a single land trust involving a beneficiary other than the trustee is not in the regular course of conducting a trust business.  I'd be nervous, however, if I were a trustee of more than one land trust that involved a beneficiary other than me and if I were not licensed to engage in the trust business in Arizona.

A clever land trust believer may think that he or she can easily avoid the Arizona trust business license issue by forming multiple land trusts the trustee of which is a different person every time.  I do not think this approach will work if the mastermind behind the creation of the trusts controls the trustees.  If that is the case, the trustees are actually the agents of the mastermind and part of a scheme to avoid being subject to Arizona's trust company license law.

Land Trusts & Title Insurance

Another issue that arises when you use an Arizona land trust is will the use of the trust prevent a future owner of the property from obtaining title insurance or cause a problem getting good title insurance? If so, the land trust could cloud the title of the land and make it difficult or impossible to sell without cleaning up the title problem.

A couple of years ago a client called me on a Friday and asked me if I could review his land trust agreement because he was planning on signing the document the next day.  I did not tell him that I do not review land trust agreements, but I got him on a conference call with an escrow officer I know.  I asked the escrow officer what he thought of land trusts.  He said, "we do not insure land trusts."  The client did not create a land trust.

I would never create a land trust unless my title insurance company assured me that it would insure title in the future or I knew that title insurance would not be a problem.  If your land trust trustee obtains title by a deed that does not show the names and addresses of all the beneficiaries, will a title company insure title later in light of the fact the deed is voidable under Arizona Revised Statutes Section 33-404.

Ask your title company if it will insure title to Arizona land held or formerly held in a land trust. The answer probably depends on exactly what was done with respect to the paper work and the trust and other proper documentation.

The Trust Agreement

Before using a land trust in Arizona, I recommend that you take all the documents you intend to use in connection with the trust and its activities to an Arizona real estate lawyer along with a written detailed description of exactly what you will be doing and how you will actually do it (your land trust business plan) and ask the lawyer to: (i) modify your land trust documents to comply with Arizona law, and (ii) give you an opinion on whether you must obtain a license as an Arizona trust company and if your plan and land trust documents will work from a legal perspective.  No lawyer can answer the question "Is it ok to use a land trust in Arizona" without knowing exactly what the pertinent documents say and exactly how the land trust will be used from start to finish.

I would also take the same documents and business plan to your title insurance company and ask it to confirm in writing that if you carry out your business plan to create a land trust using the documents you submit the title insurance company will it insure the title to the property when the trustee conveys the property out of the trust.

Conclusion

There is a lot more I could write about Arizona land trusts, but I will stop for now.  Check back in the future because I will supplement this article.

As a cautious real estate lawyer whose job includes keeping my clients out of litigation, I never recommend that they engage in any activity that has not been approved by statutes or state-specific appellate case law.  Using a land trust designed to work in Illinois or Florida for an Arizona land trust is just too risky for me.  I do not want my clients to be pioneers blazing new Arizona law at great monetary expense and risk of potential liability.

We have all heard the expression "if it sounds too good to be true, it is probably not true."  That is how I feel about the Arizona law trust.  It just sounds way too good to be true on first impression.  When examined closer, I do not think the Arizona land trust passes muster.

Land Trust Advocates - Submit a Contrary Article for Publication on This Website

If you disagree, I invite you to submit to me a scholarly article with supporting documentation and web links that explains why my analysis above is wrong and why the Arizona land trust is THE real estate structure that everybody in Arizona should use.  If you are the author and give me a license to publish your article, I will publish it on this website. 

For People Involved with an Arizona Land Trust Who Suffer Damages

If you are or were involved in a transaction involving an Arizona land trust and you believe you suffered damages as a result of that transaction, please do not contact me.  I am not a litigator.  I do not represent people in court.  If you were harmed in an Arizona land trust transaction, you need to consult immediately with an Arizona litigator who has experience litigating Arizona real estate transactions, preferably Arizona land trust transactions.  Please do not ask me for a referral because I do not know any Arizona litigation lawyers with experience in this area.

If you are successful in a lawsuit or the threat of a lawsuit involving an Arizona land trust, I would appreciate it very much if you would send me an email message and tell me about the underlying facts of your transaction.  With your permission, I might like to mention in this article what happened to you (without mentioning your name) because your experience might be helpful to other people who are involved with or considering becoming involved with Arizona land trusts.

This article was first published on August 20, 2006.

Richard Keyt is a business, transactions, contracts, real estate, estate planning and internet law attorney licensed to practice law in Arizona.  He has provided legal services to businesses and people in Arizona since 1980.  Formerly a partner at one of the largest law firms in Arizona, Rick now provides big firm quality legal services at small firm rates.  Rick can be reached by telephone at 602-906-4953, email at  rickkeyt@keytlaw.com and fax at 602-297-6890.  Rick's Arizona law, internet, e-commerce and domain name law web site is KEYTLaw, located at www.keytlaw.com.  Communicating with Richard Keyt via email or otherwise does not cause you to become a client or cause your communications to be confidential or subject to the attorney client privilege.

KEYTLaw does not guaranty that the Arizona Revised Statutes displayed on www.keytlaw.com are current or complete versions of Arizona statutory law.  The statutory information is furnished "as is" and it may not include the current version of the law or new Arizona statutes.  See the Arizona State Legislature's web site for more information about the most recent version of Arizona statutes.

This page was last modified on July 22, 2007.

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