Introduction to Land Trusts
Trusts
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.
