Real Estate Investing 101: Land Trusts

If you are a real estate investor then you need to know about Land Trusts, as no other revocable entity offers more asset protection.

Why do I need to use a Trust? For your privacy of ownership and asset protection.
What is a Land Trust? Nothing more than a few pieces of paper and a Deed to Trustee. But the the language has to be correct.
How do they compare with “Living Trusts”? For one thing, the Trustee will be somebody OTHER than yourself; another difference is that a Land Trust relates to only ONE specific piece of real property.

All three of these questions are very important to your long-term financial health if you invest in and own real estate. Land Trusts are the first line of defense to insulate yourself (and your family) from the millions of lawsuits happening every year. And if you live in California you have probably learned that litigation is a way of life here – trust me, I know, I’m a Real Estate Litigator, been there, sued that!

If you have learned of Land Trusts, you have probably noticed that it is very difficult to find any information about these title-holding trusts and how they operate. Most attorneys do not know how to set up and administer a title-holding trust (they receive only three hours of trust education, if any, in law school).

Illinois Trust law and Massachusetts business trust law set the foundation for all other states to follow. This is the reason why most of these trusts today are referred to as, “Illinois Type Land Trusts.” See Hart v. Seymour, 147 Ill.598 (Ill. 1893). Not every state allows land trusts, and only California, Florida, Virginia, Texas, North Dakota, Indiana, Hawaii, Arizona, and Ohio have statutes providing for Land Trusts.

What is an Illinois Land Trust?

Basically, an Illinois land trust is a mechanism used to handle ownership in real estate. Similar to a revocable living trust , title to the real estate is held by a trustee while the beneficiary (i.e. owner) of the property retains the ability to enjoy all the rights and responsibilities of owning the property. But as I mentioned above, a major difference is that you are not the Trustee; this is one of the features that give you Asset Protection – your name is not attached to the property at all.

Unlike a typical “Living”) Trust, it is the Beneficiary of a land trust, not the Trustee, that retains the right to end the trust at any time and transfer the property out of the land trust as well as the ability to direct the trustee when to act and what actions to take in relation to the property. And it is you the Beneficiary who can change Trustees at any time.

Now here is something amazing: when Real Property (real estate) is placed into a Land Trust, the interest is essentially converted to Personal Property. (Personal Property are movable objects like autos and jewelry, but can also be stock.) In this case, the property is treated similarly to stock in a corporation. The consequences of that characterization are that the property becomes simpler to manage and convey than an interest in real property.

What Are the Benefits of a Land Trust?

With a land trust, an individual or individuals can

have privacy of ownership and nonresident ownership.
avoid probate,
limit exposure to judgments and liens,
facilitate estate planning,
avoid marital interest in title,
insulate from the hazards of individual ownership,
easily transfer beneficial interest,
use beneficial interests as collateral,
prevent partition of the land,
protect in the acquisition, development, and operation of apartment developments, condominium apartments, or cooperatives, and
provide partnership, corporation, and agricultural land-use protection.

A. Privacy

Land Trusts were originally designed for privacy purposes. They hide ownership and keep the Owner’s (Beneficiary(s)) name out of the chain of title. This is the first line of defense regarding asset protection. The less people know about you, the less of a target you are for a lawsuit.

After property is placed in a land trust and legal title is passed to the Trustee, the identity of the true owner of the property is essentially hidden. That’s because the Deed in Trust on record with the county indicates that the property is owned by the land trust instead of in the individual’s name. Further, the trust agreement is a private document, so the identity of the owner(s) is never seen by the public. Privacy can be important for more than just asset protection. For example, an investor purchasing a number of properties for a special and potentially unpopular purpose may not want to shoulder the burden of negative public inquiries and perception, or have the public realize how important their parcel of land is to the buyer. This is exactly how Walt Disney purchased the hundreds of parcels of land that eventually became Disney World.

Most other business entities (i.e. corporations, LLCs, and some partnerships) must be registered with a governmental agency. The registration process divulges the owners and exposes them to public scrutiny. Most states, including California, do not require land trusts to be registered; the only document the public sees is the Deed, which does not reveal who the beneficiaries are. This is one of the main reasons to use a Land Trust as the first entity in a line of barriers to confound your adversaries.

B. Asset Protection

The first step in asset protection is privacy. Even before you have many hard assets (you at least have your future income to protect) you can benefit from being more private with your personal information. While it is true that following the chain of title could lead someone to assume that the previous owner is now the beneficiary of the Land Trust, it is not guaranteed. And if you purchase the property with title in the land trust, you will have that full privacy. While most Land Trusts are Revocable – and thus have less asset protection than irrevocable trusts – Land Trusts can be strengthened to be more of an asset protection tool via creative special protective devices placed in the Trust Agreement. And in many cases, there is also a tremendous benefit to using an out-of-state Land Trust to hold title to the property in your state.

Property owned by multiple individuals can be subject to any number of problems due to the negligence, death, disability, or divorce of one owner, or a judgement against one owner. When the property is placed in a land trust, a judgment against one owner will not create a lien on the property, so the ownership interests are protected. While creditors may still have claims against the assets of a particular owner, a land trust provides an additional barrier they must clear in order to assert claims against the property.

C. Ease of Conveyance.

A land trust offers a convenient way to mortgage and sell property with multiple owners. Since all interests in the property have been transferred to the trust, it is unnecessary to obtain deeds from every single beneficiary and the release of spousal homestead rights.

D. Disposing of partial interests.

Since interests in real estate held in a land trust are deemed to be personal property interests, they may be assigned to other individuals. This includes assigning only part of the interest. Instead of transferring interests in the property by deed, interests in property held in a land trust are managed by modifying the beneficiary designations and rights under the trust agreement. This means that it is much simpler to have a large number of part owners of a property that may frequently change (like a group of investors) than it may be if the property is simple held outright in the names of the owners.

E. Succession of Ownership – Avoiding Probate

Upon the death of the original beneficiary, property held in a land trust passes to the contingent beneficiaries indicated in the trust agreement on file with the trustee. This means that probating the property is not necessary. The interest passes immediately enabling the new beneficiary (owner) to enjoy the property instead of having to wait a substantial amount of time for probate to close.

F. Ease of Administration

A Revocable Land Trust is generally considered a Grantor Trust (like a “Living Trust”) and is considered to be a “disregarded entity” by the Internal Revenue Service. The Beneficiary (whether it is an individual, corporation, LLC, or personal property trust) of a Revocable Land Trust does not have to file a special tax return (a trust tax return).

Insuring your Land Trusts is the same as insuring the properties that are held in your personal name, an entity, or another trust. Sometimes investors become so busy with other operations of their investment portfolio that they forget to address the updates necessary to keep the property insured accurately with the insurance company. If the exact name of the Land Trust is not reported to the insurance company, then they can deny the claim when a covered loss occurs. Make sure the name of the Land Trust is an exact duplicate of the named insured on your insurance policy.

How is a Land Trust Created?

Generally, a land trust is set up with these basic steps:

1) A contract known as a trust agreement is prepared by an attorney. Under the terms of the trust agreement you, the owner, instruct a trustee to hold title to your real estate. Among other things, the trust agreement also informs the trustee who has the authority to manage and control the property and who will become the new owner of the property upon your death. The best Land Trust Trustees are corporate entities that have a wealth of experience in their management, but knowledgeable business partner or family member can do just fine.

2) A Deed in Trust is drafted by your attorney and signed by you. The Deed in Trust is recorded with the Register of Deeds in the county in which the property is located and indicates the property has been transferred to the land trust.

Tricks of the trade for ultra asset protection: (a) Give the Trust a Random Name, e.g. “The Stranger Things Bingeable Trust”. (b) Only spell out the last name of the Trustee, e.g. “S.R. Simone.”

3) The trust agreement is filed with the Trustee and necessary fees are paid.

While setting up a land trust can often be a relatively simple procedure, it’s imperative to involve an attorney experienced with them. A small seemingly inconsequential error in its set up and create the potential for headaches down the road.

To Be Revocable or Not To Be Revocable, That is the Question

If you form an Irrevocable Land Trust you have a much stronger structure that judges are less likely to attempt to penetrate. However, aside from being irrevocable – meaning you cannot change them – Irrevocable Land Trusts can have some adverse tax consequences. Thus, most Land Trusts formed by individuals to hold title to their real estate are formed as Revocable. This gives you the flexibility to change the Trust Agreement at will. Not only can the verbiage of the Trust Agreement have teeth placed into it but, by combining the Revocable Land Trust with other entities (i.e. Personal Property Trusts, LLC’s and Corporations) and other legal jurisdictions, you can get benefits that most people can not comprehend.
While a Revocable Land Trust is generally considered a Disregarded Entity by the IRS, a trust tax return may be required for an Irrevocable Land Trust.
While it is true that an Irrevocable Land Trust has much more asset protection value than the Revocable type, the Grantor should be careful not to create a “gift” to the beneficiary (assuming the Grantor is not the Beneficiary) as this would create a taxable event. And the income tax rates for trusts are much higher than for individuals. Definitely seek competent tax and legal advice if you are going to form an Irrevocable Land Trust.

While the Illinois land trust is not for everyone or appropriate for every situation, it can offer a number of benefits to real estate owners. However, before attempting to transfer your property to a land trust it’s important to consult with an attorney (such as Simone Legal PC) familiar with them so that you can be sure it’s the right move for you and everything is done correctly.