A land trust is a contractual vehicle for transferring the title of a property to an appointed trustee and is typically used for estate planning. The original property owner does not lose their claim of ownership on the property, but the trustee becomes the titleholder for legal purposes. There are many reasons why setting up a land trust can be beneficial.
What Is a Land Trust?
A land trust is a legal entity that carries ownership of, or authority over, a property at the behest of the property owner. Living trusts allow land trusts to manage the property of the owner as he or she lives. Yet, like other trusts, there are terms specific to each type of land trust and they can be tailored to suit individual needs.
Land trusts’ advantages are fairly clear – landowner anonymity and keeping property out of probate. But these protections aren’t always guaranteed, and you could lose your redemption rights, and get disqualified from secondary market loans.
How a Land Trust Works
For estate planning, land trusts, trusts connected to real estate, are often used. Revocable trusts are basically trusts which are revoked or can be terminated and which are used by you to manage the properties during your lifetime. Real estate (e.g., buildings, homes) or property notes and mortgages may be included in land trusts. They are usually used for land being used in conservation or wildlife purposes or real estate development purposes.
What Is the Purpose of a Land Trust?
Land trusts are meant to create liability and privacy protections for landowners. Real estate investors, individuals, and also, entities use land trusts to help create separation for personal finances and property.
Types of Land Trusts
There are several types of land trusts, but the most common are title-holding land trusts, conservation land trusts and community land trusts.
Title-holding trusts
The FDIC lists use of title-holding trusts, also known as Illinois land trusts, for privacy, estate planning or in conjunction with borrowing arrangements. In a deed of trust, the landowner is signing as both the grantor and beneficiary, receives the deed of trust. And the trustee holds the title and no responsibility for use of the property. Land trusts are a kind that keep the assets out of probate court and allow the owner to conceal identity.
Conservation land trusts
Conservation land trusts are formed to preserve the natural resources of land through a conservation easement that donates development rights of a property. The landowner retains usage of the property (for farming, for example) and the title, unless it’s donated in its entirety. Givers benefit from federal income tax deductions and state as well as local credits.
Community land trusts
Community land trusts are nonprofit, community based organizations that most often seek to preserve long term housing affordability. Thus, they separate the ownership of the land on which a building (like housing) is erected from the building. Instead of a sale, trust takes permanent ownership of a parcel of land and enters into a long life renewable lease, usually 99 years, with homeowners. Just like other assets, when homeowners sell their specific house they only keep part of any increase in property value. Rest is maintained by trust, which maintains the affordability of the residential units to future low- to moderate income families.
Advantages and Disadvantages of Land Trusts
Pros
- Separate personal finances from real estate
- Privacy—anonymous property ownership
- Certain liability protections
- Ease of probate process
Cons
- Lose redemption rights
- May not qualify for secondary market loans
- No foolproof liability protections
- Privacy veil can be pierced
Conclusion
A land trust is something you may need if you’re a real estate investor or if you want to keep the property you own apart from other assets in your estate plan. Setting up a land trust can offer certain protections and privacy benefits, though you may need professional help with creating one to make sure your trust is legal and valid.
