The 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.
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