What Does a Land Trust Mean?
A land trust is a private legal contract whereby a property title is transferred from the owner to a trustee. The transfer of title notwithstanding, a land trust allows for the grantor to retain all rights to the property. This means the grantor can continue to derive benefits from the property. Such benefits may include the right to build, sell, rent, or transfer the property to their heirs.
A land trust is also sometimes referred to as an Illinois Land Trust. This is because the first such contracts can be traced to the city of Chicago during the early 19th century. When the validity of land trusts was challenged later in the century, the Illinois Supreme Court ruled in favor of its legitimacy. The ruling stipulated that a land trust was valid for as long as the trustee was given a legitimate task in the administration of the trust.
As stated above, land trusts are legal in all 50 U.S. states. At the current time, there are only eight states that have laws addressing land trusts. These are the following: Florida, Georgia, Hawaii, Illinois, Indiana, Montana, South Dakota and Virginia. These states acknowledge the land trust through statutes contained in their state law books. Other states allow the use of land trusts via common law. Common law is based on custom and judicial precedent rather than written statutes.
How Does a Land Trust Work?
Under a land trust, it is the beneficiary who holds and wields the real power. This is why grantors are also often the beneficiaries of trusts that hold the title to their property. It’s true that the trustee holds the title to the trust property. However, their involvement in the trust is limited to the terms contained in the trust agreement. Any subsequent or further duties the trustee takes on will always be subject to the consent of the beneficiaries.
For example, if the property in a land trust was a rental property, a trustee typically deals with day-to-day matters. This would include making repairs, dealing with tenant concerns, and other such issues. They don’t normally handle matters concerning the sale of the property. Neither do they take the lead in negotiating for a loan on behalf of the trust. These activities require the approval and involvement of trust beneficiaries.
The trustee to a land trust is often a corporation or LLC. This serves a practical purpose as a corporate fiduciary does not die, retire or move away.
Advantages of a Land Trust
One of the main benefits of a land trust is the tremendous measure of privacy that beneficiaries enjoy under its protection. As stated above, a land trust is a private contract. The deed conveying the property to the trust does not name the parties involved in the transfer. For this reason, conglomerates and other large buyers use land trusts to privately procure vast tracks of property. This is done when public knowledge of the purchase could send land prices skyrocketing and potentially wipe out any benefits the buyers could derive from their purchase.
A land trust can also help the heirs of a deceased beneficiary avoid a probate. Since it is regarded as a revocable grantor trust, a land trust’s property is considered outside the probate process. This means the property passes directly to the legal heirs of the deceased beneficiary.
Judgments
A land trust can be especially beneficial when there are several beneficiaries and a judgment is issued against only one of them. The trust can protect the other beneficiaries against judgments and liens against one beneficiary alone. A judgment will not constitute a lien on the trust property itself. Rather, it is only a judgment on the interest of that specific beneficiary. The trust can continue with its normal operations without suffering any legal fallout from the judgment. Similarly, a land trust protects unaffected beneficiaries against the legal incapacity or personal bankruptcy of one beneficiary.
Another advantage of a land trust is that it can protect a property against a partition proceeding. Sometimes a beneficiary may wish to liquidate his or her interest by forcing a division or sale of the property. However, the property in a land trust is owned by the trustee, not the beneficiaries. Thus, without the trustee’s explicit approval, no sale or division of a land trust’s property can take place.
Drawbacks of a Land Trust
The main drawback of land trusts is its relative obscurity. Since it’s not legally recognized in majority of the states, some lending professionals may be unfamiliar with them. Some title companies raise questions before they issue a policy when a property is held in a trust. Even if you reside in a homestead state, there may be extra steps to get full homestead exemption for properties held in a land trust. Government personnel in states without land trust legislation may not be equipped to handle the issues that come with land trust properties. Because of this, professionals practicing in these states tend to be unfamiliar with properties held in land trusts.
A land trust’s asset protection features are not particularly strong. This is because a land trust is a type of a revocable grantor trust. As seen above, a land trust beneficiary continues to exercise extensive control over the trust assets. Should a judgment be issued against a lone beneficiary, the courts may force him or her to use that control to alter the terms of the trust to benefit or satisfy a creditor’s claim. (If there are other beneficiaries, their interests will be protected by the land trust.) The same action may not happen if the property was held in an irrevocable trust. This is because the terms of such an irrevocable trust cannot be altered after it has been properly set up. This restricts the court from giving orders to the grantor to make changes to the trust against his or her wishes.
LLC + Land Trust for Asset Protection
To address this, land trust grantors can assign the benefits to a limited liability company (LLC), rather than to themselves directly. They can be members of the LLC and receive the benefits from the LLC, and not directly from the trust. When a judgment is issued against an LLC member, the member cannot be forced to alter the terms of the land trust agreement. This is because the LLC, not the member, is technically the beneficiary of the trust. Assigning beneficial interest in a land trust over to an LLC is very common.
Do not assume that the privacy afforded by a land trust is absolute. It is certainly potent and effective in most cases. In can help prevent lawsuits. That is, if a contingent fee attorney is looking for a deep-pocket to sue, holding real estate in land trusts may make you look poorer than you really are. However, mounting criminal and civil complaints can compel a court to order the full disclosure of a land trust’s ownership.