According to the most recent census data, there are approximately 1,363 land trusts in the United States. Put simply, a land trust is a tool used in estate planning to help real estate assets avoid probate. If you’re wondering what a land trust is and how it works, keep reading. Armed with this knowledge, you’ll have a much better idea of whether creating a land trust is the right move for you.
What is a land trust and how does it work?
By definition, a “land trust” is a legal entity that takes responsibility for a piece of property on behalf of the owner of the property. Typically, land trusts are used in estate planning. Specifically, they help manage the transfer of property to avoid probate and limit how much is paid in estate tax.
Land trusts are exclusively for real estate assets. They can contain real property, such as a rental unit, commercial building, or plot of land. Alternatively, they can also be used for mortgage notes.
However, it’s important to mention that they are revocable trusts, which means that they can be changed at any time, and each trust arrangement will be unique.
Land trust examples
The most famous example of a Florida land trust is Walt Disney World. In 1965, Walt Disney purchased the swamp land on which the famous amusement park would one day be built. However, he did so using a land contract, which meant that the parties selling the land had no idea that he was behind the purchase. Rumor has it that he used the move to orchestrate a better purchase price.
Still, while Walt Disney World may be the most famous land trust in real estate, it should be noted that these trusts are more commonly used to help preserve natural resources. Specifically, many organizations used them to ensure land and wildlife conservation. The Ozark Land Trust, for example, uses nature preserves and conservation easements to protect nearly 28,000 acres of land from urban encroachment.
How does a land trust work?
Land trusts typically have three key components:
- Grantor: The person who creates the trust, sets the terms of the trust, and transfers the title of the property, if necessary.
- Trustee: The person or entity in charge of managing the day-to-day operations for the property and carrying out the terms in the land trust agreement.
- Beneficiary: Any person or entity with a beneficial interest in the trust.
Take a rental property, for example. Once the grantor sets the terms of the trust, the trustee would be responsible for managing the property according to those terms. They might need to collect rents from tenants and handle maintenance requests. The beneficiary, on the other hand, is the one who would collect any excess rental income.
What are the different types of land trusts?
Now that you have a better understanding of how a land trust property works, the next step is to learn about the different types that exist. In total, there are three types that you should know:
Illinois land trust
Also known as a “title-holding trust,” this type is commonly used by real estate investors who want to remain anonymous in public records. This type of trust agreement allows the property owner to maintain all rights to the property and direct the actions of the land trust, all while operating under the trust’s name.
It’s called an “Illinois land trust” because the concept first originated in Chicago in the 1800s. However, it’s a concept that is still commonly used today.
Community land trust
Community land trusts, on the other hand, often focus on providing housing to low-income families. Often, this is done by separating the ownership of the land from any building that is constructed on it. The trust will own the land and then enter into renewable lease agreements with individuals who qualify for their housing.
At the end of the lease, the trust keeps the property and uses it to assist another low-income family. For their part, the individual who rented the property will be given any increase in value that occurred during their tenancy.
Conservation land trusts
Usually, these use conservation easements to denote acceptable kinds of development for the land. For example, farming may be permissible, but building additional structures on the land may not be allowed. The goal is usually to protect land, wildlife, or a historical or cultural site from further development.
From a personal finance standpoint, you should know that forming this type of trust can render you eligible for a significant deduction or credit on your federal and state income tax returns.
How to create a land trust
The process for setting up a land trust is fairly similar to the process for forming any other type of trust. For the guarantor, the bulk of the work will be deciding what land or property belongs in the trust, coming up with the terms of the trust, and naming a trustee and beneficiary.
However, once the framework is established, it’s often simply a matter of creating a trust agreement, which will officially enter the property into the trust. An estate planning attorney is typically the best person to assist with drawing up these documents. They will be able to help walk you through the process from start to finish.
Benefits of a Land Trust
Privacy of ownership
Land trusts offer anonymity to property owners. The public record only shows the trust’s name, not the individual owners, providing a layer of privacy for the actual beneficiaries.
Ease of transfer
Besides, transferring property interest within a land trust can be simpler and more private than traditional methods, as it often only requires changing the trust agreement, avoiding the need for public recording.
Since the trust holds the title to the property, it can help avoid probate proceedings upon the death of a beneficiary, allowing for smoother and more private transition of ownership.
Protection against judgments
Moreover, in some cases, because the beneficiary’s interest in the land trust is personal property, it may offer some level of protection against liens and judgments against the beneficiary.
Ease of real estate planning
Finally, land trusts can be structured to fit into broader estate plans, potentially offering flexibility in managing and planning for future real estate holdings.
Cons of a Land Trust
Land trusts don’t provide the same level of liability protection as other entities like LLCs or corporations. The beneficiaries might still be personally liable for certain issues related to the property.
High set-up and management costs
Setting up and maintaining a land trust involves legal and administrative costs, which can be higher than direct ownership. Managing a land trust, after setting it up, especially in compliance with state laws and tax implications, can be even more complex.
Also, financing a property in a land trust can be more difficult. Lenders might be hesitant to offer loans for properties in trusts, or they might have stricter terms.
Additionally, beneficiaries often have less direct control over the property because the trustee manages the property. This could lead to disagreements or conflicts among them, especially in trusts with multiple beneficiaries.
FAQs about land trusts
What assets can go into a land trust?
Land trusts only extend to real estate assets. However, they can hold physical properties, plots of land, and mortgage notes.
Who owns the property in a trust?
Ownership depends on the type of trust being discussed. In an Illinois trust, the original property owner still owns the asset. In a community trust, the owner is usually a non-profit corporation. Then, in a conservation trust, the original owner can maintain ownership of the property or it can be donated.
Can a land trust get a mortgage?
Yes, it is possible for a land trust to get a mortgage. Typically, the grantor will apply for the mortgage and then the trustee will sign the note on their behalf.
The bottom line
At the end of the day, using a land trust in a will or giving a land trust as part of an inheritance is a useful tool to help your real estate assets avoid probate and minimize the amount of estate tax that will be owed. With that in mind, if you have significant real estate assets to your name, consider getting in touch with an estate planning attorney. They can help you sort out the details of what to do next so that you can rest assured that your assets will be passed along to the next generation.
That said, if you don’t want to have to worry about the rigmarole of setting up a land trust, consider getting in touch with an expert mortgage buyer like Amerinote Xchange instead. We can help you leverage your assets and get the most value out of your mortgage notes.