For those who have extensive wealth and property holdings, protecting those holdings and delegating management can be an important part of your overall wealth management. They are a great way to assign control and management of a property or piece of land to a party or group of trusted individuals, which can then also manage other matters related to the property, such as mortgage maintenance and donation management. Many people that own land or other property may be unsure about how they work, though.
A land trust is a formal legal entity that is formed by a property owner. This legal entity then owns and has full authority over a piece of land as a result of the individual's estate planning processes. Each land trust can be tailored to the owner's needs and are a revocable trust.
There is a lot to know about land trusts, and while they do deal exclusively with real estate, they have other limitations that many other trusts may or may not have, which set them apart from other trusts. We're going to take a close look at what exactly a land trust is, what qualifies to be placed in a land trust, the different types of agreements, and even what happens if the trust isn't extended at the end of its life.
What Type Of Asset Is Held In A Land Trust
Land trusts are a form of trust that is tied exclusively to real estate. It is a trust that has three essential parts, the grantor, the beneficiary, and the trustee. The party that initially creates the trust and transfers the property to the trust is the grantor. The beneficiary is the party that gains the primary benefits of the land trust, and the trustee is the individual or group of individuals that are tasked with managing the trust.
This means the grantor will not only create the trust and set the terms by which it is bound to operate, but they will also be the party that transfers the real estate assets to the legal entity of the trust. The trustee is tasked with the management of the property, from "big picture" management to the mundane or intimate details of the property. In the example of a land trust for an apartment building, the trustee would be responsible for arranging for rent collection, maintenance, and so on.
What Is A Land Trust Property
A land trust property is any property or associated assets that are managed by a land trust. Unlike many other types of living trusts, a land trust is used exclusively for real estate. There are additional assets that can be part of a land trust, however, but they are required to be associated with the land itself. The types of assets that can be made part of a land trust include:
- Commercial buildings
- Other land and buildings
- Property Notes
What Is A Land Trust Agreement
Land trusts will be split into two primary groups based on their characteristics. They are commonly known as conservation land trusts and title-holding land trusts or "Illinois land trusts" after the state where they first gained widespread use.
Title-Holding Land Trust
A title-holding trust is also commonly known as "Illinois land trusts" due to their initial popularization in 19th-century Chicago. They were initially created to circumvent a prohibition on property owners voting on city projects in the same city in which they owned the property. A title-holding trust enables property owners to maintain all rights over the property, as well as to direct the actions of trust with relative anonymity.
While this may sound like a significant benefit, the downside is that not all states have the legal provisions in place to allow title-holding land trusts. Those that don't, however, will often defer to Illinois trust and probate laws if they lack their own, which will still allow a grantor to create a title-holding trust.
In order to begin a title-holding land trust, the owner of the property must sign a document called a Deed In Trust, which is a legal mechanism for transferring ownership of the property from the grantor to the trust entity. In a title-holding trust, the landowner will act as both the grantor and the beneficiary, making it relatively unique in the context of the trust framework. This is why the individual can specify land use conditions, controlling practices, and income distribution, while also maintaining anonymity. It also allows the trust to stay out of probate while providing other benefits like asset protection from liens or judgments.
Conservation Land Trust
A conservation land trust is different from a title-holding land trust. They require the landowner to give up some of their rights over the development and use of the land. A conservation land trust is created with the goal of preserving the land, protecting wildlife, safeguarding cultural or historical sites, and more, from development or construction. During development or construction, land can be polluted or damaged, and conservation land trusts are designed to help prevent that.
A conservation land trust is unable to fully take over the land title unless the landowner donated the property completely and entirely. However, the landowner does essentially give up their right to develop the land and give those to the trust. This is done by entering into a binding, legal agreement called a conservation easement. Once that's done, the trust is responsible for enforcing the easement and even tasks related to property management.
Conservation easements are able to be highly customized and tailored to the needs of the landowner to ensure that they are still the legal owner of the land and able to use it. This could allow the landowner to continue to live on the land, or to continue homesteading, growing crops, keeping livestock, and more. Additionally, conservation easements will remain effective even if the land is subsequently sold or passed on to beneficiaries or heirs.
Land Trust Benefits
There are many benefits that go along with creating a land trust for your real estate holdings. Most people may simply think that the best benefit of a land trust is that it can prevent creditor access or taxation, and while these are true, there are additional benefits you may want to consider.
- Land trusts can provide a distinct separation between personal assets and real estate investments.
- Land trusts can provide a significant degree of privacy and anonymity, particularly since public records will show the land belongs to a trust and is not held in your name.
- Entering the property into a land trust can keep it away from the probate process in the event of your passing.
- A trust can increase the protection from liabilities, judgments, liens, and creditors.
- A land trust can assist in the selling or buying of real estate assets being disclosed publicly.
Setting Up A Land Trust
If you have decided to set up a land trust, the steps will be very similar to setting up other forms of trust. Just as with other forms, the first step to setting up a land trust is to pick one or more individuals to serve as the trustees. You will also need to identify with assets you want the trust to hold and determine who will be the beneficiary of the trust. In the case of a land trust, your beneficiary can be an individual, living trust, or an LLC, which can offer increased liability protection.
Then you will need to create the legal trust documentation. This is generally a step that will require an estate planning attorney. The attorney will also be able to help validate the final document and update any insurance beneficiary information for the trust asset. If you feel like multiple land trusts may be needed for multiple property collections, they can also provide guidance on whether to group them or have a trust for each asset.
Land Trust Lifespans
In nearly all cases, a land trust will have a predetermined lifespan, after which it must then be extended. In most cases, a land trust will last for about 20 years. Once that initial trust period is over, it is the responsibility of the beneficiary to extend the trust. If the beneficiary does not extend the trust term by the time it expires, the property will be sold off. In many cases, once the term has expired and the trust has not been extended, there is little recourse beyond allowing the sale.
Understanding A Land Trust Can Help Manage Your Property For Years To Come
Land trusts are similar to many other types of trusts that you may want or need to establish but specifically deal with real estate property. They are capable of holding other types of assets as well, providing they are related to real estate, such as mortgages or promissory notes. Knowing how to properly set up your land trust and how to keep it functional ensures your land assets will be managed appropriately for many years.
Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.