In Massachusetts, we often see the use of “nominee trusts” to hold title to real estate. Yet there are many misconceptions about these devices. This article will provide a simple overview of nominee trusts: what they are and what they are not.
Trust Law 101
At its most basic, a trust is an arrangement in which one person, the Trustee, holds title to property for the benefit of another, the Beneficiary. The Trustee is said to hold “legal” title, while the Beneficiary holds “equitable” or “beneficial” title. Under the Massachusetts Uniform Trust Code, Trustees are generally empowered to make all decisions, in good faith, with respect to trust management, and trust instruments frequently provide Trustees with extensive authority, including the power to sell, lease, and mortgage trust property. The Beneficiary typically has no authority to direct the Trustee, particularly where the trust is intended to shield the Beneficiary from tax liability, or to put trust property beyond the reach of the Beneficiary’s creditors.
Not a True Trust
This brief lesson in trust law is provided to emphasize the first and perhaps most important rule of nominee trusts: a nominee trust is not a true trust. Rather, it is an arrangement whereby the Trustee has no management authority over trust property except as directed by the Beneficiary. The Trustee is a mere agent of the Beneficiary, who is the real party in control of the trust property (the real estate). The Trustee is said to hold “bare title” and nothing more. Hence the term “nominee” trust. Consequently, because the Beneficiary retains control, the trust property is not beyond the reach of the Beneficiary’s creditors, and the trust does not necessarily shield the Beneficiary from liability for acts of the Trustee. Moreover, the trust, and the Beneficiary’s interest therein, may be treated differently than a true trust for Massachusetts and Federal tax purposes (a topic beyond the scope of this introductory article).
Why Use a Nominee Trust, and Why Not?
There are two primary reasons owners of real property use nominee trusts: (1) anonymity of ownership, and (2) ease of transferability. A nominee trust instrument will contain a provision that the beneficiaries are set forth on a “Schedule of Beneficial Interests.” Remember, these beneficiaries are the “true owners” of the property. However, when the trust instrument is recorded in the registry of deeds, the Schedule of Beneficial Interests is not included and the identity of the beneficiaries thus remains “off record.” Only the Trustee is identifiable in public records. While this anonymity is not absolute (the identity of the beneficiaries is discoverable under the right circumstances), the process of obtaining such information is much more burdensome to the seeker and will not be revealed in a simple title search.
Beneficial interests in the trust can be transferred by simple amendment to the Schedule of Beneficiaries. This not only keeps property transfer information off record, but also avoids payment of recording fees. Transfer of a beneficial interest also may avoid triggering an acceleration clause in a mortgage, because title is not technically transferred (this would depend on the specific language of any given mortgage). Lastly, the ease of transferability afforded by a nominee trust can be desirable where a property is owned by a large number of beneficiaries, who need not be involved in every transfer of beneficial interest. But there are clear attendant risks: since the unrecorded Schedule of Beneficial Interests is the only document memorializing the identity of the true owners, a lost, damaged, modified, or altered Schedule can give rise to disputes of ownership.
Nominee trusts also give rise to a risk of unauthorized transfers by Trustees. Nominee trust instruments must contain a provision that any third person (e.g. buyers, lenders) may rely on the Trustee’s authority to sell or mortgage the trust property without inquiring as to whether the Trustee has been properly authorized by the Beneficiary. This provision is essential to the purpose of maintaining anonymity of ownership. However, this enables the Trustee to make an unauthorized sale or mortgage of the property, leaving the Beneficiaries with a claim against the Trustee. Therefore, selection of Trustee(s), and careful drafting of Trustee provisions, is an essential aspect of creating a nominee trust.
If you own or are buying real estate and have questions about setting up a nominee trust, give is a call or send us an e-mail today.