The use of land trusts is becoming increasingly popular around the country, particularly among real estate investors. A land trust is primarily an anonymity tool. As a defensive tool, it provides privacy, keeping your name off of the public record. As an offensive tool, it has the powerful effect of slowing down those who want to sue you. It also seriously increases their costs of litigation. These notable advantages, along with the avoidance of probate make it an attractive option.
What Is A Land Trust?
The simple explanation is that a land trust is a contract where real property is conveyed to a trustee while reserving the control and benefits for the beneficiaries. It is often referred to as an Illinois land trust, where the land trust as we know it began to be commonly used. Only five states have specific statutes authorizing the use of land trusts. These states are Florida, Hawaii, Indiana, North Dakota, and Virginia. Interestingly, in Illinois, no statute has been passed authorizing the land trust. Instead, case law and some statutes that refer to the land trust govern the use. Some say that there is no such thing as a land trust in their state, but the validity of the land trust is protected under the U.S. Constitution as contract law, and they are used in every state. State courts apply general common law principles of trusts to decide cases.
There is no “legal” or statutory protection for a land trust such as that provided by a corporation or a limited liability company. That is why a corporation, an LLC or another entity should always be used as the beneficiary of the land trust to provide the best in asset protection - both privacy and statutory protections.
One key advantage is that land trusts provide privacy of ownership since the beneficiary’s name does not appear on the public record. They are easily transferable upon death to a successor beneficiary thereby avoiding the usually painful process of probate. This is particularly useful to those who own property out of state.
Other advantages to using land trusts include assisting with problems associated with minors owning property in their own name. Since minors have a practical problem in dealing with title, particularly when they attempt to sell property, a land trust can solve this problem. A parent serving as a trustee can avoid title and title insurance issues. If there are multiple owners, the personal lives of each owner can cloud the title to real property held in their individual names. The land trust protects the title of the property from these problems. If a co-owner wants to seek a partition action to divide the property, partition is not an option available to the beneficiaries of a land trust. This is because most state statutes require either a legal or equitable interest to pursue such an action, and in a land trust the beneficiaries possess neither. A beneficial interest in a land trust can be transferred by simple assignment. Gifting of the beneficial interest or portions of it can be made over a number of years such that no gift tax would be incurred or Unified Credit used. In divorce, title of real estate held in a land trust is not subject to some of the legal theories, such as dower.
There are many uses and benefits, but I don’t recommend using a land trust for your personal residence. You may lose your homestead exemption. Land trusts are not for everyone, but they are quite useful as part of a thorough estate planning and asset protection plan.