The Illinois Land Trust

This week, we continue our series on Land Trusts. Today, we are focusing on the Illinois Land Trust, the trust agreement that forms the basis for all modern American Land Trusts.

The Illinois Land Trust

Any discussion of Land Trusts would be incomplete without a discussion of The Illinois Land Trust. Now, as we learned last week, Land Trusts date back to Roman times. However, Illinois was the first US state to formalize land trusts, and all Land Trusts in the US are based on the Illinois Land Trust. They have influenced US Land Trust development so much that ALL land trusts in states without specific statutes to support them refer to any land trust as an Illinois Land Trust.

The Illinois Land Trust Model

The mid-1800s were notable for the development of railroads across the US. Railroad Magnates were some of the first American businessmen to begin utilizing land trusts for property acquisition. The land the companies needed to lay the actual tracks was very often put into a land trust.

In the late 1800s, the city of Chicago began expanding. This period saw the first skyscrapers being built in the city, and the local aldermen had to consider numerous building project proposals. Many of these aldermen wanted to grab their own piece of the proverbial pie and invest in the burgeoning city. Unfortunately, aldermen were banned from voting on any project in which they held any type of financial interest. Additionally, they couldn't vote on any project if they owned land nearby. In order to skirt this rule, the aldermen began using Land Trusts to hide these financial interests.

Of course, this led to the validity of such trusts being questioned. Litigation ensued, and the Supreme Court of Illinois upheld the trusts' validity. However, the court decreed that in order for these trusts to be valid, the trustee must have an active, rather than a passive role. The trustee must have some sort of duties, however minor, for the set up to be valid. Thus, the trustees doing what the beneficiaries direct them to do is considered enough of a “duty” to constitute an active role.

The Illinois Land Trust is based on common law, originally English, but widely followed in the US in the 1800s. It has been further refined and validated by case law over the last century. The Illinois Model is a revocable trust, with its primary purpose being to hold title to property. Its primary purpose is NOT to operate a business or to make money under the law. Thus, it is not eligible for things like Chapter 11 Bankruptcy Reorganization. The Illinois model differs from the common law model in that in an Illinois land trust, the trustee has both legal and equitable title. (In the common law model, the trustee has legal title, while the beneficiary has equitable title.) In the Illinois Land Trust, the beneficiary has a personal property interest only.

The Illinois Model was the first to define a Land Trust, as well as state it consists of a Trust Agreement and a Deed in Trust. Typically, the Illinois Land Trust is for a 20 year period. Historically, banks acted as trustees, but few do this any more. In Illinois, there is a title company whose sole business is to act as trustee. In many cases, a lawyer may act as trustee. It is appropriate for an entity to receive a nominal fee for acting as the trustee.

Over the last 100+ years, the Courts in Illinois have continued to uphold the validity of land trusts. Some notable cases are: Robinson vs. The Chicago National Bank (1961), Chicago Federal Savings and Loan Association vs. Cacciatore (1962) and BA Mortgage vs. Aerican National Bank and Trust (1989.)

The Illinois Model in Other States

Of course, the Illinois Land Trust is the basis of statutes in the State of Illinois. But Illinois is not the only state to have statutes relating to Land Trusts. Now, Illinois, Florida, Georgia, Hawaii, Indiana, North Dakota, and Virginia all have state statutes relating to Land Trusts. Arizona, California, and Ohio have upheld Land Trusts through case law. (In California, Land Trusts are referred to as “Title Holding Trusts.”) Montana, Kansas, and Massachusetts have also upheld Land Trusts in court cases. In most states, the validity of Land Trusts is supported by common law. Only Tennessee and Louisiana specifically do not recognize Land Trusts.

Whether you live in a state that has a specific statute or not, it is ALWAYS best to speak with a qualified attorney when contemplating a Land Trust. And this attorney needs to have a specific expertise in Land Trusts, as opposed to just trusts in general. This attorney should know about how local courts have ruled in Land Trust cases, as well as how courts across the country have treated Land Trusts. Again, the Illinois Land Trust forms the basis of case law in all states, but especially in states without their own specific statutes. In states with specific statutes, it is imperative your lawyer is familiar with all the nuances of the state-specific laws as well as court precedents.

The Illinois Land Trust and Real Estate Investors

Despite the fact its stated purpose is “to hold title to property,” there is nothing that precludes an investor from using a Land Trust. In fact, many Real Estate Investment Clubs (REICs) form trusts with the members being the beneficiaries. Florida does place some different restrictions on corporate owned Land Trusts, but these exist only to clarify legal responsibilities for different land-associated liabilities. They are not designed to deter the use of a land trust in any way, shape, or form. Walt Disney would never have acquired the land needed for Disney World without the use of a Land Trust. In fact, we specifically recommend Real Estate Investors consider using Land Trusts in conjunction with real estate investments. Later posts will elaborate on why Land Trusts for investors are a very good thing.

Summary

In this article, we reviewed the Illinois Land Trust model, its history, and its applicability to Land Trusts in other states. We discussed how the Illinois Model provides the basis for Land Trusts in most other states.

We will continue to delve into Land Trusts in the coming weeks, and we will elaborate on the use of Land Trusts with investment properties. We will also focus a little more on the pros and cons, and what a Land Trust can and cannot do for you. As always, we recommend you consult an attorney when trying to implement anything you have learned here. This series can only cover generalities; nothing here should be construed as legal advice, and by reading this, you have not initiated an attorney-client relationship. We would be happy to discuss such a relationship, and should you wish to have one, you may contact our offices.

And again, please use the comment form below to ask us any general questions you may have about Land Trusts or anything contained in our blog posts. You may also reach out to us through G+, Twitter, or Facebook (links in the sidebar.) We look forward to continuing this journey with you in the coming weeks.

Introduction to Land Trusts

Introduction to Land Trusts

Trusts

Before getting into the specifics of Land Trusts, it is important to understand the concept of trusts. According to the dictionary, the legal definition of trust is “confidence placed in a person by making that person the nominal owner of property to be held or used for the benefit of one or more others.” (Dictionary,com) It lists “safekeeping, care, protection, and custody as synonyms.

Simply put, a trust is an arrangement that allows a third party, called a trustee, to hold assets on behalf of a beneficiary or beneficiaries. It is a legal document that spells out the rules for how you want assets handled. A trust separates the legal ownership of an asset from the enjoyment of that asset. The trustee has responsibility for managing and maintaining the goods, while the beneficiaries get to use those goods.

Trusts are separate legal entities, like a corporation or LLC is a separate legal entity. Trusts hold resources. They can help protect those resources from creditors. Trusts are also used to protect assets for heirs. Trusts dictate how and when assets pass to beneficiaries. They can help one avoid probate costs and avoid capital gains taxes. Trusts can also help one keep his chattel private. Trusts allow assets to pass outside of probate, thus keeping the assets out of the public record.

Trusts are revocable or irrevocable. An irrevocable trust cannot be altered by the grantor after execution. Conversely, a revocable trust is more flexible and may be dissolved at any time. However, revocable trusts are generally subject to estate taxes whereas irrevocable trusts usually are not. An irrevocable trust is generally protected from legal judgments against you as well. Thus, an irrevocable trust is generally preferred if your goal is to remove assets from your estate or to reduce estate taxes and probate costs for heirs.

Each state has different laws related to trusts. Thus, your first step in creating a trust is to consult with a knowledgeable attorney.

Land Trusts

A land trust is one specific type of trust agreement. Essentially, a Land Trust is an agreement in which a trustee holds title to real estate for the benefit of another party. And although a Land Trust is a legal agreement, it is not a “recorded document.” Instead, they are declared through a “deed to trustee.” Thus, the specific properties that form the trust are kept private. The deed conveying the property does not identify the parties involved, but rather just assigns the beneficial interest under the trust.

Land trusts have been around since the Roman Empire. During the Elizabethan era in England, Land Trusts were used to avoid Military service. During feudal times, land ownership came with many obligations, including fighting for the King. Nobles would form land trusts to hide their ownership, and thus, avoid its associated obligations. Today, land trusts provide similar shelter from owner identification. Likewise, the transfer of the property to the land trust does not require the payment of transfer or recording fees. You also retain tax benefits like seniors' exemptions or homestead exemptions even though the trust now owns the property. You retain all property owning rights, including the right to mortgage, rent, improve, or live on the land. However, activities associated with that land do not effect tor personal holdings any more. Financial transactions associated with the land will no longer effect your credit report. Liens and judgments against you will not attach to the property. Liens and judgments against the property will not attach to your personal credit.

Land Trusts can be especially beneficial when there are multiple owners of a single property. First, it makes it easier for one owner to sell their share of a property to another owner. Second, it protects co-owners from being impacted by another co-owner's financial distresses. It protects the other owners' interest should one investor need to file bankruptcy, as it takes the property out of that individual's asset pool. The trust dictates what happens to the shares should a shareholder pass away. And it makes completing all associated paperwork easier, as documents only require the signature of the trustor, rather than needing all involved parties to sign.

Land Trusts are of particular interest to investors, as it allows folks to discreetly buy land. This may be a large tract of land for redevelopment purposes, or it may be a number of small parcels. (Rumor has it that Walt Disney used land trusts to purchase the needed acreage for his Florida theme park. By using the trust, it obscured his identity so that folks would not know Disney was planning a huge park, thus driving up the land costs.) Setting up a trust can be particularly helpful when buying land in many states, or land in a state in which none of the beneficiaries reside. Again, a Land Trust absolves one of individual responsibilities and instead, puts all of the burdens on the trust itself. The trust handles the taxes, paperwork, association fees, etc.; the beneficiaries just sit back and reap the benefits of enjoying the land.

Most land trusts are formed for a specific period of time. At the end of the period, they either expire or are extended. The trust agreement itself should specify what happens if the trust agreement is allowed to expire.

Like with any other trust, the first step in developing a Land Trust is consulting with a skilled attorney. You, of course, should be armed with the basic information, including who will be the trustor, the trustees, and the beneficiaries. In addition, you should have a good idea of the property or type of properties you will be including in the trust, whether these are properties you currently own or are hoping to obtain. You should have an idea of whether they are for personal use, or if they will be used commercially or rented. Your attorney will then prepare the trust agreement, as well as handle the deed transfers and document recording. It is important to select an attorney skilled in preparing Land Trusts, as few are trained in this area. Depending on where you live, your attorney may suggest you establish your Land Trust in a different state. (This will all be explored in greater depth in a later article.)

In sum, a Land Trust is a simple legal agreement that moves ownership of real estate from an individual to a separate legal entity, while allowing you to retain all of the benefits associated with owning the land. Responsibilities move from the individual to the legal trust. You are no longer associated with that property in any legal way; instead, the trust entity assumes all the legal obligations of property ownership. You are no longer listed as owner in any property databases, and the property essentially separates itself from your estate. Still, you still enjoy all the benefits of owning that particular piece of real estate.


This article discussed the general concept of trusts and Land Trusts, and it introduced some of the reasons one might want to form a land trust. Subsequent chapters will discuss these reasons a little more in-depth. Later chapters will also delve a little more into the history of land trusts, including the Illinois Land Trust, state considerations, pros and cons, tax benefits, and frequently asked questions. Please follow this blog to be notified when additional chapters are posted. You may subscribe to the blog by using the form in the right sidebar, or follow us on Facebook, Twitter, or G+ to be notified when new chapters post. We look forward to exploring Land Trusts with you in the future.

Land Trusts

Land Trusts:

Prologue

Happy New Year to all of our readers.  To start the New Year, we'd like to introduce you to a guest blogger: Laurel Nevans.  She has been a Home Owner for decades, and now, she is considering becoming an investor.  However, she had never explored the idea of Land Trusts until recently. Laurel is interested in building a rental portfolio in Florida, an area particularly ripe for real estate investment.  When we asked her if she'd ever considered investigating a Land Trust, she confessed she knew nothing about them.

Laurel has generously agreed to work with us to inform our readers. As she learns all about the ins and outs of Real Estate Trusts, she'd like to invite our readers along on the journey.  As we open 2016, we'll all learn about  the ins and outs of Land Trusts.  We will start by reviewing exactly what is a land trust.  From there, we will learn about when it might be beneficial to set up a land trust, as well as when a land trust might not be the best choice.  We will review the pros and cons of land trusts, as well as a lawyer’s role in developing one.  We'll discuss some Frequently Asked Questions (FAQs) about Land Trusts, and we'll answer reader's questions.  We'll also discuss whether Land Trusts are good investment vehicles, and what are the limitations.  When we are finished, we will compile all of the information into an easy to reference ebook, including document samples.

Of course, none of this should  be construed as legal advice.    You should always consult with an attorney in your jurisdiction before taking action as a result of the information given to you here.  The information that will be given to you here will help prepare you to meet with an attorney and make informed questions as well as give you a better idea of what an attorney can and cannot do for you.

We invite all of our readers to take this journey along with us.  To be notified when new articles are posted, please follow us.  You may subscribe to the blog using the subscription form in the right sidebar, or you may follow us on Facebook, G+ or Twitter to be notified when new chapters are posted.

We also invite all of our readers to submit questions to be answered in future posts. Please submit questions using the comment section of this article.  You may also tweet us your questions or comment on the associated Facebook post.

Here at the Law Offices of Heath D Harte, we get a lot of inquiries about Land Trusts.  Although a lot of people are knowledgeable about real estate in general, we find few are aware of the benefits of Land Trusts or the intricacies involved with setting up trusts.  Hence, we hope you will take this journey with us to fill the gaps in your knowledge.  Please invite your friends and colleagues to join us.