Setting Up a Land Trust: Steps and Samples

Setting Up a Land Trust: Steps and Samples

Now that we understand the concept of Land Trusts, it's time to make things a little more concrete. Today we'll discuss the specific steps you need to take to develop your trust.  We'll also look at some sample templates that you can use to develop the trust.  As always, you really should consult with a qualified attorney when taking these steps.  

How To Set Up a Land Trust: Steps

Step 1: Draft A Trust Agreement

The second part of this post contains some sample trust agreements so you can see what a typical agreement looks like.  Although these samples are being provided to give you an idea of what a trust agreement contains, it is extremely important that you work with an attorney on this step.  Your attorney will know the specific verbiage needed in the state you want to establish the trust.  In fact, your attorney will help you to complete all of the steps described hereafter.  But it is important to know what the steps are so that you can bring the proper information and paperwork to your attorney. The next couple of steps talk about what you need to help your lawyer "fill in the blanks."

Step Two: Designate the Grantor and the Trustee

This is important: who is putting the land into the trust, and who will be the trustee? Now you may ask, aren't I the grantor?  Possibly.  However, investors often ask the seller to put a piece of real estate in trust when they contract to purchase.  When the property closes, the investor just amends the trust, naming himself/herself as beneficiary.  You personally may never take title to a property.  Rather, the property is moved into a trust pre-purchase, and the trust is amended upon closing.  In this case, the grantor is the current deed holder, rather than you.

The trustee is a very important decision.  Many entities can act as Trustee.  And the fees differ significantly according to who you appoint.  There are companies whose entire business revolves around being paid trustees for a Land Trust.  Banks, property managers, lawyers, and Investment Managers are other possible choices.    One of the biggest choices is will you use an institutional or a private trustee.  Institutional trustees usually have set fee structures, and these are usually higher than those charged by private trustees.  Costs are more negotiable with private trustees as well.

When meeting with your attorney to discuss developing the trust, you may want to inquire if s/he ever acts as a Trustee.  If the answer is yes, ask about his/her fee structures for doing so.  If the answer is no, ask who the attorney recommends you appoint as trustee.  If your attorney can neither suggest possible trustees nor personally acts as a Trustee, you may NOT have selected the appropriate attorney to develop your trust.  In this case, you may want to interview other attorneys before proceeding further.  (You can always contact us, The Law Offices of Heath D Harte.  We can help you with all your Land Trust needs.)

Remember, the trustee is the administrator or manager of your trust.  The trustee needs to be someone you can trust yourself, hence the name.  In addition, if you appoint a private Trustee, it should be a person with a different last name.  Your attorney will advise you whether the place you are setting up the trust requires that the Trustee be in the same State.  We cannot emphasize the importance of selecting the RIGHT Trustee enough.

Step Three: Name The Trust

Again, consult with an attorney while completing this step.  Ideally, you want to keep your name out of the trust.  However, in some jurisdictions, it is easier/preferable to use the beneficiaries' name(s) in the name of the trust.  If you are trying to keep ownership private, it is best to leave your name out of the trust's name.  A "classic" Illinois Land Trust generally uses a generic trust name.

Step Four: Determine Type: Revocable or Irrevocable

This is another crucial step, and will depend on your intents and purposes.  Most trusts are set up as irrevocable.  However, an irrevocable trust cannot be amended in any way.  You cannot change any of the terms until the trust expires or all its assets have been removed.

You may amend a revocable trust.  You may change beneficiaries, trustees, etc.  So if you think you're going to want to change anything at all, the trust must be set up to be revocable.  

We previously discussed the example of an investor asking a seller to put a property into trust before going to closing.  In this case, you would need a revocable trust.  However, in most cases, Land Trusts are set up as irrevocable.  Your attorney will advise you on what is appropriate for your specific situation.

Step 5: Name the Beneficiary

Again, this may not be as straightforward as it seems.  Depending on your intents and purposes, you may be the beneficiary, a corporation or LLC may be a beneficiary, or the beneficiary may be a number of people.   

The Chicago Land Trust Company has put together a sample list of "Beneficial Interest Designations" that show the types of beneficiaries a Land Trust may have.  It is embedded below:

As you can see, naming a beneficiary can be quite complex.  But a skilled attorney can help you match your named beneficiaries to your overall intents.

Step Six: Name the Director

Think of the Director as the CEO of the trust.  The Director is the person who dictates how the trusts' assets are handled.  Typically, the beneficiary is named as Director.  If the beneficiary is an LLC, typically the director of the LLC would act as the Director for the trust.  This is probably the most straightforward step in the process, and the one that requires the least amount of consideration.

Step Seven: Name Successor Beneficiaries

As we saw in step 5, naming beneficiaries can be quite complex.  Adding to the confusion is the question of successor beneficiaries.  Successor beneficiaries can be thought of contingencies, should a "main" beneficiary die.  For example, an aging parent might name a child as a beneficiary, to help that child avoid paying Estate Taxes and probate costs.  That child's child may be named as a successor beneficiary, should something happen to the original beneficiary before the trust expires.

With a revocable trust, successor beneficiaries may be changed at any time.  However with an irrevocable trust, successor beneficiaries must stay the same throughout the period the trust runs.  Thus, this is another area requiring careful thought and consideration.  And it is another area that warrants thorough discussion with your attorney, particularly if you are using a Land Trust to help structure your estate.

Step Eight: Name Successor Trustees

Just as with the beneficiaries, you want a "Plan B" in place, just in case something happens to the trustee.  A primary trustee might become ill, retire, or just up and quit.  You need a plan in place should that happen.  This is especially crucial if you choose a Private (rather than Institutional) trustee.

Again, with a revocable trust, things can be changed later.  It is much easier to replace a trustee after a trust has been formed.  But things are more set in stone with irrevocable trusts.  You cannot amend the trustee once the trust has been established.  Even with an institutional trustee, you need a sucessor named.  Companies go bankrupt or out of business; you do not want your trust to go up in smoke just because the trustee does.

An attorney can be especially helpful when it comes to finding and naming successor trustees.  This is absolutely a step in the process that cannot be overlooked.

Step Nine: Designate the State

Your particular needs will dictate in which state the trust is formed.  It is not necessary in all cases to establish the trust in the state the property is located.  In many cases, it is advantageous to set up your trust in a different state.  And of course, the state in which the trust is established will form the basis for the statutes upon which it is based.

If all the land in the trust is in one state, it may be best to establish the Land Trust in that state.  If there are properties from different states in the trust, the issue becomes more complex.  Many investors choose to set up trusts in Illinois with institutional trustees.  Investors also prefer to set up their trusts in states with clear statutes.  Some states require the trust be established in the state where the land is physically located.  This is another area in which your attorney is key.  A skilled Land Trust Attorney should make the recommendation to you, once you have presented him/her with the parcels to be included in the trust.

Step Ten: List the Trust Assets

Finally, it's time to list the real estate that will form the Land Trust.  Some people prefer to set up individual Land Trusts for each parcel of real property.  Others include multiple properties in their trust.  The decision to set up one vs. many Land Trusts will, of course, depend on your purposes.  If your primary purpose is tax management, you will want to confer with both an accountant and an attorney before finalizing any trust agreements.  If it is more for estate management reasons, consulting with an attorney will suffice.

Step Eleven: Finalize the Paperwork

The process is finally reaching its end.  Once you have drawn up the agreement, named the Trust, appointed a Trustee, named successors, designated beneficiaries, named successors, designated a Director, listed the supporting state statutes, and listed all the assets, you should have the Trust Agreement in hand, ready to be executed, as well as the Deed of Trust.  (The Trust Agreement should be dated BEFORE the Deed of Trust.)  Now it is time to get everything signed and notarized. (Of course, always read the documents through thoroughly BEFORE signing the final papers.)

Now that the paperwork is signed, it's time to record the documents.  ONLY the Deed of Trust gets recorded.  The Trust Agreement remains private, locked up in the file cabinets of you, your attorney, and the Trustee.

Step Twelve: Insure the Properties

This is the final step in the Land Trust process, and a step that many people overlook: insure the properties.  Placing a property in a trust does not negate insurance obligations.  You have done this much to protect yourself and your assets; don't forget this important final step.

Land Trust Agreement Samples

Next week, we will continue this post.  Check back to see several examples of Land Trust Deeds and Agreements.  Again, we cannot stress the importance of consulting with an attorney when drawing up your own trust.  And remember, here at the Law Offices of Heath D Harte we are Land Trust Experts.  Contact us if you want to discuss your Land Trust plans.

As always, please use the comments section below to ask any questions.  You may also contact us through Twitter or Facebook.