What Is a Land Trust? How To Set Up One

what is a land trust

A land trust is a form of trust that is tied to real estate. This is a form of a living trust, which means it can be used to manage land and property ownership during your lifetime. A land trust’s terms can be tailored to your specific needs and the type of real estate it holds. Here we’ll see all about a land trust and how to set it up.

What Is a Land Trust?

A land trust is a legal institution made up of three parties: a grantor, a trustee, and a beneficiary. These are the same parties as in any other trust. The grantor is the landowner, and the beneficiary of a land trust is usually also the landowner. The trustee is the person or firm that acquires legal possession of the property, at least on paper.

A land trust might have several beneficiaries and co-owners. There is an extra benefit for grantors when a land trust involves numerous owners. If one of the owners is sued, the trust can protect the other owners.

The Background of Land Trusts

Our present idea of this fiduciary connection can be traced back to England during the Crusades. Feudal lords who traveled abroad would entrust their landed property to a trustee, who would handle it in their absence. Unfortunately, returning crusaders were frequently met with trustees who were unwilling to surrender the land. Many instances were presented before the royal courts, and a legal precedent based on the notion of trust was formed over time.

While feudalism and the crusades have come and gone, real estate land trusts have remained of particular interest to real estate investors and anybody looking to reduce some of the legal constraints and obligations associated with property ownership.

How Do Land Trusts Work?

The operation of a land trust is determined by the conditions of the agreement.

In an Illinois land trust, for example, the property owner can be both the trustor and the beneficiary, but this is not usually the case. In most circumstances, the trustor retains authority over the property’s usage, although there are some exceptions. Furthermore, Illinois land trusts are only legal in a few states.

In contrast, community land trusts and conservation land trusts are legal in all 50 states. Although these forms of land trusts are legal, the IRS has cautioned of abusive tax avoidance strategies by those who use community and conservation land trusts.

In fact, in 2019, Congress revived the Charitable Conservation Easement Program Integrity Act to combat the exploitation of conservation land trusts as tax shelters.

When establishing any sort of land trust, such schemes emphasize the importance of seeking advice from knowledgeable legal practitioners.

Types of Land Trust

Land trusts are classified into two types: title-holding and conservation land trusts. Individuals or entities can hold land anonymously through title-holding trusts. The main distinction with a conservation land trust is that the owner must give up some land use and development rights.

#1. Title-holding Land Trusts

A title-holding trust allows the property owner to preserve full rights to the property while remaining anonymous and directing the land trust’s actions. Because they were popularized in Chicago throughout the 1800s, these trusts are sometimes known as “Illinois land trusts.” Property owners were not authorized to vote on civic projects in areas where they held land at the time. To get around this law, affluent merchants and politicians would form land trusts to buy land secretly, preserving their voting privileges.

There is no legal structure in place in all 50 states for a title-holding land trust. Most states, however, defer to Illinois land trust rules if they do not have their own, which means that with adequate legal counsel, any individual can organize an “Illinois-style” land trust in any state.

#2. Conservation Land Trust

Conservation land trusts need the property owner to relinquish some control over land usage and development. A conservation land trust’s mission is to safeguard animals, historical or cultural places, and natural resources against commercial development or other activities that could cause disruption or contamination.

Title-Holding Land Trust Requirements

The landowner in a title-holding land trust executes a document known as a Deed in Trust, which transfers legal ownership of the property. The landowner (who is both the trust grantor and the beneficiary) can describe how the land will be administered, who will have control over it, and how any money generated will be dispersed when the trust is established. This means that, while the trust is the legal owner of the property, the landowner retains complete authority over it.

Property owners employ title-holding trusts to retain anonymity and keep significant assets out of probate. A land trust can also provide a variety of other estate planning benefits, such as asset protection from judgments or liens. This is especially advantageous for the ultra-wealthy, celebrities, and major corporations, who may wish to keep growth plans private.

Conservation Land Trust Requirements

The trust does not necessarily take over the land title in a conservation land trust unless the property is donated in its whole. Instead, a landowner might engage in a legally enforceable arrangement known as a conservation easement, in which they “donate” their development rights to the trust. The trust is in charge of enforcing the easement and, in some situations, maintaining the property.

Conservation easements can be adjusted to ensure that the landowner keeps ownership and usage rights—for example, the right to continue farming or raising livestock—while also assuring that the land remains undeveloped in perpetuity. Conservation easements “follow the land,” which implies that the provisions of the easement continue to apply even if the land is sold or passed down through generations.

How to Set Up a Land Trust

The first step in setting up a land trust is to select a trustee for the property. Landowners must be vigilant in selecting qualified, reputable trustees, given the fiduciary responsibility of a land trust and the legal and financial repercussions of a land trust that does not adhere to state statutes.

Once you’ve decided on a trustee, you’ll set up your land trust by signing a deed of trust and a land trust agreement. These two documents set up the terms of the land trust.

The specifics of how these contracts are executed, as well as the conditions of the documents themselves, are unique to the state in which the land trust is founded. In Illinois, for example, the deed in trust is recorded in the county where the property is located.

Because the details differ by state, you’ll need to consult with an attorney who is familiar with land trusts in your state. Please be aware that there will be fees.

Land Trust Examples

Disney’s resort in Florida is an example of a title-holding land trust. In 1965, a title-holding land trust was used to purchase the Walt Disney World Resort in Orlando, Florida. The original proprietors of the Florida swamplands on which the resort was developed had no notion that Disney (an already well-known name at the time) was behind the purchase. They would have raised their asking price if they had known who the customer was.

Meanwhile, there are several instances of conservation land trusts around the United States, including the Ozark Land Trust, which oversees dozens of projects across 28,000 acres in the Ozark region. The trust is a non-profit organization that assists landowners in preserving and protecting land in the Ozarks from urban expansion. The Ozark Land Trust contributes to this by creating nature preserves and conservation easements.

The Advantages of a Land Trust

There are various advantages to using a land trust to hold real estate assets. While a living trust is normally used to safeguard assets from creditors or to reduce estate taxes, you may want to explore a land trust if:

  • You’ll maintain your real estate investment property distinct from the rest of your assets.
  • You seek privacy and anonymity since assets kept in a land trust are owned by the trust and listed in public records under the trust’s name rather than your own.
  • You desire assets held in a land trust to avoid probate after your death.
  • As a property owner, you seek improved liability protection or protection from creditors, specifically liens or judgments.
  • You wish to be able to buy or sell real estate assets without having to reveal the transaction price to the public.

Land trusts can be handy if you don’t want people to guess your true net worth or if you’re investing in real estate on a larger scale and want to keep those transactions distinct from the rest of your personal affairs.

Disadvantages of a Land Trust

While land trusts have many advantages, they also have some minor downsides, which are as follows:

  • Lenders may demand you place the property in your name to secure financing. The property can then be transferred back into the trust to obtain the loan.
  • Does not provide legal protection – For lawsuit protection, you may need to name an LLC as the beneficiary.

How Land Trusts Maintain Privacy

Two legal instruments compose the land trust:

  • A trust agreement exists between the settlor and the trustee. This contract establishes the parties’ rights, powers, duties, and obligations; and
  • The trustee receives a deed from the settlor.

First, you must sign the trust agreement. The trustee deed is then recorded. Once completed, the recorder’s office will no longer expose you to the public that you are the property’s owner. Furthermore, the trust agreement is kept private (in your file cabinet at home). As a result, no one will ever know that you own the property. In other words, public documents will not reveal this information.

Litigators are often unwilling to sue people who have no assets. What is one of the simplest ways to determine whether or not someone has deep pockets? You look up real estate ownership in public records. This search might leave a big fat target on the backs of successful real estate investors. A land trust, while not a real asset protection trust, is an effective privacy instrument. It contributes to a litigator’s inability to find big resources.

Asset Protection with an LLC and a Land Trust

To begin, keep in mind that a land trust is a privacy instrument, not a business company. As a result, land trusts do not have the same liability protections as corporations or limited liability firms. The beneficiary may be held accountable if someone slips and falls on the property. As a result, we form a corporation, LLC, or limited partnership to serve as the beneficiary.

Second, the property can normally be transferred into a land trust tax-free. This is addressed under the internal revenue code. The federal government will treat the property as though the beneficiary owned it outright. Furthermore, in many states, the transfer of property to a revocable trust is exempt from transfer or recording taxes.

Finally, many investors discover the following: The majority of attorneys and accountants are unaware of what a land trust is or how it functions. While this can be aggravating, there is a positive. Consider this. As a result, many of your community’s litigators will be unfamiliar with land trusts. A considerable percentage will terminate their hunt for deep pockets at the county recorder’s office, which is located after the public records trail.

How to Raise Money for a Land Trust

To fund a trust, a deed must be transferred to the trust. A land trust contains assets in the form of land or property by definition.

Land Trust Financing: Can They Get a Mortgage?

If you do not intend to pay cash for your preferred property, you may be able to secure a mortgage from a lender. Banks have traditionally avoided lending money to those who intend to take their name off the title. That is beginning to change. Some banks, particularly community and regional banks, will make a loan in the name of a Grantor Trust.

Who Buys the Land in a Land Trust?

The land is typically purchased by an individual or business, who subsequently transfers ownership to a land trust. The individual or institution that establishes the trust and transmits the property is known as the grantor of the land trust.

Who Should Be a Land Trust Trustee?

It depends on the aim of the land trust, but most people set them up for secrecy of ownership. As a result, we shall approach the question as if the aim of the trust is anonymity. In this scenario, the trustee should not be the settlor or someone with the same surname as the settlor. As a result, the trustee could be a trustworthy friend or relative.

Even better, we frequently set up LLCs to act as trustees of a land trust. As a result, if the settlor is the manager and/or a member of the LLC, he or she retains power. Furthermore, we have seen uninformed trustees become rather uneasy while working as trustees. Many trustees are concerned about personal culpability (rightly or erroneously, and mostly wrongly).

How Long Can a Land Trust Exist?

Land trusts are typically established for a set period, such as 20 years. When the trust term expires, it is up to the beneficiary to extend it; if they do not, the property is sold.

Land Trust Tax Implications

A properly established land trust should be categorized as a grantor trust for income tax purposes, according to Internal Revenue Code Section 677. If this is the case, all income and deductions are distributed to the beneficiaries in proportion to their stakes in the trust estate. If the beneficiary is a partnership, the partnership agreement governs the eventual tax treatment. A company may also be the beneficiary.

Conclusion

A land trust is comparable to other types of trusts, but they are only for real estate. It should be noted that they can also own other real estate-related assets such as mortgages and notes. Any land can be utilized for a land trust, although it is most commonly used for land protection or development.

Land Trust FAQs

Who owns the property in a trust?

As fiduciary for the beneficiary or beneficiaries who are the equitable owner(s) of the trust property, the trustee is the legal owner of the property in the trust. As a result, trustees have a fiduciary duty to operate the trust in the best interests of the equitable owners.

What Is the Purpose of a Land Trust?

A land trust is intended to set up landowners’ liability and privacy. A land trust is used by real estate investors, individuals, and entities to help set up personal finances and property.

How many land trusts are in the United States?

According to the Land Trust Alliance’s most current National Land Trust Census, which was issued on December 1st, there are 1,363 land trusts across the United States.

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