Posted by David Butler on March 17, 2010 at 18:09:55:
In Reply to: Equitable Conversion; Merger issues? posted by DonWA on March 13, 2010 at 17:01:02:
Hello DonWA,
Thanks for the comments. Much appreciated. And will do what I can here.
Not sure which "Washington" you are referring to exactly, so I'll mention both briefly, then discuss the two legal doctrines you have inquired about.
The District of Columbia has no land trust statute. However, the D.C. Code Annotated /451101 implies support for the use of ANY trust, so long as the trustee has some power of actual disposition. As far as we know, there should be no problem using the land trust in Washington, D.C.
Washington state on the other hand, does present some issues. There is no specific land trust statute. The Statute of Uses requires some active duties, such as the payment of taxes and distribution of funds to beneficiaries. Those match up well enough with a well-drafted land trust agreement. However, much like Lousiana, Washington does not recognize the doctrine of equitable conversion. Thus, it is not clear whether the court will respect settlors’ intention of creating a personal property interest in the trust. This denudes the trust of much of its most important attributes in many respects, as we'll discuss below. Equally challenging is that our sources tell us that it is very difficult to get title insurance for land trusts in Washington. So, like we discussed in the Oregon string in this thread, it will take some homework with title companies.
In the meantime, when we get the time to do further research, we'll explore the issue of equitable conversion in Washington, and see if the issue has become more settled over the past few years. Perhaps we can get long-time real estate and note investor, and IRA SDRP investing author John Merchant J.D. (HOW TO USE YOUR IRA, 403b (TSA) OR PENSION PLAN TO BUY REAL ESTATE, NOTES, JUDGMENTS…) to give us a hand with some of that research up there. I believe he operates out of Washington. He's posted into this thread, so we'll see.
In the meantime, here's some background on the several doctrines:
Doctrine of Equitable Conversion - The most usual application, as it occurs in the case of a devise of land to a trustee with directions for its sale and the distribution of the proceeds of sale among persons named - is the effect being that the beneficial interests of the persons so named will be regarded, even before the sale, as personalty and not as land, and the disposition and devolution of such interests will be determined accordingly. And, conversely, if money is bequeathed with directions that it be invested in land for the benefit of particular persons, the interests of such persons will, even before the investment is made, be regarded as having the character of land rather than of money.
Equitable Conversion has quite frequently been applied in connection with conveyances of land to trustees, to be later sold by them, and in such case the interests of the persons beneficially interested in the sale are regarded as having the character of personalty from the time of the delivery of the conveyance to the trustee.
Equitable Conversion is not recognized in Louisiana (the beneficial interest under a land trust in Louisiana is considered realty and not personalty). Neither does Washington, as of our last research several years ago. So regardless of what the Trust documents say with regard to the beneficial interests being personalty, the state law will supersede those declarations. Consequently, benefits that may otherwise accrue due to the personal property status of the land trust vehicle, are illusory for the most part, in those states. In that relatively eviscerated state, the land trust loses a great deal its lustre - becoming more "vanilla", and similar to alternative ownership structures
Doctrine of Merger - has equally significant implications. The Doctrine of Merger of Estates is not new; it is a legal principle deeply rooted in the English common law.
A merger of estates occurs where the same person holds two legal interests, or “estates,” that coincide and are deemed to merge together. Under the common-law definition, which is generally accepted under modern law, Merger is the absorption of one estate into another, where a greater estate and a lesser estate coincide and meet in one and the same person - without any intermediate estate - whereby the lesser interest is immediately merged or absorbed in the greater interest. To constitute a merger, it is necessary that the two estates be in one and the same person, at one and the same time, and in one and the same right.
Originally developed to resolve real property disputes, the doctrine has also been applied to determine whether a trust is illusory. In the law of trusts, the term "doctrine of merger" refers to the fusing of legal and equitable title in the event the same person becomes both the sole trustee and the sole beneficiary of a trust.
In such a case, the trust is sometimes deemed to have terminated, with the result that the beneficiary owns the trust property outright. (This by the way, is the underlying basis of the main problem we are dealing with in Michigan, so far as the title companies are concerned.) Thus, if the sole beneficiary of a trust dies intestate and his interest passes to the trustee as his heir, merger occurs and the trust terminates. Similarly, if the trustee is also the life beneficiary of the trust, and if the sole remainder beneficiary, holding an indefeasibly vested remainder interest in the trust, assigns her interest to the trustee or dies and leaves her interest to the trustee, the trust terminates.
A fundamental essential to the existence of any trust is the separation of the legal estate from the beneficial enjoyment; and no trust can exist where the same person possesses both. If the legal and equitable estates come together in the same person the equitable estate is merged in the legal estate, and the trust is terminated. Absolute control and power of disposition are inconsistent with the idea of a trust. The trustee and the beneficiary must be distinct personalities, or, otherwise, there could be no trust, and the merger of [both] interests in the same person would effect a legal estate in him of the same duration as the beneficial interest designed. Thus, if the trustee has the power to use the trust corpus for his own personal use and benefit, without an accounting to the beneficiary, the equitable estate is merged in the legal estate.
The Doctrine of Merger is set forth in the Restatement of (Third) Trusts §69, which provides that if the legal title to the trust property and the entire beneficial interest become united in one person, the trust terminates. The comments to this section of the Restatement also states that if by inter vivos transfer, will, or operation of law the entire beneficial interest in trust property passes to the trustee, or the legal title passes to a sole beneficiary, the trust terminates and the trustee, or the beneficiary, as the case may be, holds the property free of trust. The doctrine of Merger of Estates must not be loosely applied, however. It is not sufficient to determine merely that the same person holds the legal and beneficial interests; rather, [M]erger applies only when the legal and equitable interests are held by one person and are coextensive and commensurate - i.e., the legal estate and the equitable estate are the same.
The component elements of the general definition have met with judicial approval. Thus, it has been emphasized that in order to effect a merger of estates, there must NOT be an intermediate estate. Moreover, there can be no merger of two estates... if a person holds one of the estates for himself and the other for another person.
Various courts have applied the doctrine of Merger of Estates to test the validity of a trust where the same person held the legal and beneficial interests. This application of the doctrine goes to the very essence of the legal existence of a land trust. The requirement that there be no “intermediate estate” means that there is no other right or interest in the trust held by a third party that would prohibit the merger of the greater and lesser estates held by the same person. U.S. Court of Appeals Seventh Circuit No. 96-1366 ESTATE OF HELEN E. BOWGREN, 105 F.3d 1156, 79 A.F.T.R.2d 97-660, 97-1 USTC P 60,257 (1997)
As with federal appellate Courts (ruling in conjunction with state laws applying to particular cases), and several state Supreme Courts (Illinois, Florida, California come to mind) have observed that such an intervening right or interest would prohibit application of the doctrine of Merger, even where the same person held the greater and lesser interests at the same time. The estates here brought in question may have been in one and the same persons at one and the same time, but by the very nature of the act creating them they were held by different right and for a different purpose. Such is the outcome of the land trust, as articulated by these Courts:
1) Both legal &equitable title vested in Trustee; Beneficiaries have no interest in either.
2) Right of possession, management of the property, as well as the right to rents, issues, profits and proceeds of sale or mortgage financing are vested in the Beneficiaries.
3) Rights, privileges, duties of Beneficiaries are NOT interests in real estate, but characterized as personal property.
4) Trustee has no duties or powers other than to execute deeds and mortgages or otherwise to deal with property as directed by holder of Power of Direction.
5) This Power of Direction is a property interest separable from the beneficial interest, provides the possessor with ability to direct trustee in manner in which to deal with the property.These Courts' recognition of the legal implications presented by items (2) and (5) are particularly important to land trusts with regard to Merger. Where recognized by statute or by case law - land trusts are a special fiction of law, allowing both the legal and equitable title of the real estate to pass to the Trustee, without creating a Merger. This is a primary feature differentiating the land trusts from other types of trust vehicles.
David P. Butler
Nascent Equity &
Hotspur Investment Group
- Prof. DB right again! John Merchant 13:06:14 03/25/10 (0)