What Is a Land Trust?

Why Use a Land Trust in Estate Planning?

Out of all the types of trusts that can be established, creating a land trust offers various protections for landowners. It may be a valuable tool to you for several key reasons:

• Wealth Transfer: One excellent reason is to establish a land trust to transfer assets—real property—to your future heirs.
• Probate Avoidance: Land trusts are an effective estate planning tool to keep real estate assets out of the probate process.
• Privacy Protections and Landowner Anonymity: Because property owners' names with land trusts are not publicly recorded, their privacy and anonymity are maintained.
• Asset Protection: Land trusts' privacy and anonymity can deter lawsuits, which is their own form of asset protection.
• Property Development: Real estate developers often purchase large amounts of acreage and place them into a land trust as they are being developed. Establishing a land trust segregates and protects these pieces of real property from being connected to one's personal finances.
• Land Conservation: Through conservation land trusts, particular areas, such as historical or cultural sites, wildlife habitats, and lands with natural resources, can be protected from future commercial development.
• Housing Affordability: Another kind of land trust, a community land trust, enables communities to achieve long-term housing affordability for their neighborhood residents, who otherwise could not afford to purchase homes at regular market prices.

Determining the best means of asset protection for your property and how to leave a financial legacy of real estate for your future heirs can involve complex estate planning. Setting up a land trust may be one effective estate planning tool to achieve your long-term financial goals.

What Are the Types of Land Trusts?

Title-Holding Land Trust

One form of land trust is the title-holding land trust. Due to their popularity in Chicago in the 1800s, title-holding land trusts are sometimes called Illinois land trusts. A title-holding land trust provides privacy protections and anonymity to a property owner while they hold all rights over the property and determine the trust's directives.

When establishing a title-holding land trust, a landowner (both the trust grantor and the beneficiary) signs a deed of trust, transferring legal land ownership to the trust. In this case, the trustee holds the title without any responsibility to manage the property's use. The actual property owner, who retains legal authority and control over property, determines its management and specifies the distribution of any income produced.

Title-holding land trusts are popular because they can:

1. Play a key role in estate planning to keep real estate assets out of probate.
2. Protect assets from judgments or liens.
3. Help wealthy individuals, celebrities, real estate investors, and large companies keep their future land development plans private and away from public scrutiny.

Example: Walt Disney World Resort in Florida

Walt Disney is perhaps one of the most famous examples of a high-net-worth individual using a title-holding land trust to acquire land to expand his business empire. Disneyland Park in Anaheim, California, was the first park that Disney opened to the public in July 1955. After his success in California, Walt Disney wanted to expand to the East Coast and set his sights on Orlando, Florida.³

Conservation Land Trust

Conservation land trusts protect areas of historical or cultural significance, wildlife, and natural resources from commercial development. The landowner donates the development rights of a property to the trust via a conservation easement. The conservation land trust is responsible for enforcing the easement and, in certain situations, managing the property. 

Unless the property is donated in its entirety, the trust does not take over the title to the land. The landowner retains legal ownership and the right to continue using the property—for farming or raising livestock, for example—while the land remains undeveloped in perpetuity. Conservation easements are required to "follow the land," meaning that the terms outlined in the easement must remain in effect even if others sell or inherit the property.

Donors contributing property to conservation land trusts can benefit financially through federal income tax deductions and state and local tax credits.

Example: Middlebury Land Trust in Connecticut

Created in 1969 by Middlebury residents as a Connecticut nonprofit membership corporation, the Middlebury Land Trust, Inc., helps preserve the town's natural areas for future generations. Its main objective is to acquire and preserve land or conservation easements by either gift or purchase to be held in the conservation trust in perpetuity.⁴

Community Land Trust

The third common type of land trust is the community land trust, a nonprofit, community-based organization whose goal is maintaining long-term housing affordability for its residents. To achieve this, ownership of the actual land on which a residence (e.g., a three-bedroom home) is constructed is separated from the building itself.

The conservation land trust gets permanent ownership of a certain acreage of land. Subsequently, it begins a long-term and renewable lease — usually for 99 years — with homeowners instead of selling the land to them.

When a homeowner sells their property, the seller receives only a portion of any potential increase in the value of the real estate. The rest of the monetary increase stays in the trust to maintain the affordability of housing units for future residents who could not afford to pay regular market prices for houses in that neighborhood.

Example: Champlain Housing Trust in Vermont

Previously known as the Burlington Community Land Trust, the Champlain Housing Trust is the largest community land trust in the U.S., supporting the people of Northwest Vermont with about 565 ownership units and more than 2,200 rental units. This land trust provides shared equity programs to future homebuyers (with income limits and resale restrictions).^5,6

How Does a Land Trust Work?

Like other kinds of revocable living trusts, a land trust involves three different parties:

Grantor or Settlor: The grantor or settlor establishes the land trust and selects the real estate assets and mortgage notes to be transferred. The trustee managing the trust's assets must adhere to specific terms outlined by the grantor.

Trustee: The trustee manages the land trust according to the specific wishes of the grantor. For example, when a rental property is involved, the trustee might gather monthly rent payments from tenants, oversee the property's upkeep, and find new tenants whenever units become vacant.

Beneficiary: The beneficiary is the individual who benefits from the assets in the land trust. For instance, if a rental property is part of the trust, the beneficiary could obtain some or all of the rental income it produces or receive a portion or the entirety of the profits from its sale after a specified period.

Because a land trust is a revocable living trust, the grantor has the power to change or terminate the terms of the trust at any time while they are alive.

What Are the Benefits of a Land Trust?

Here's a breakdown of the advantages of land trust, especially in estate planning¹:

• Privacy: The beneficial owner's (the person who benefits from the trust) name can be kept off public records, ensuring more privacy in property ownership.
• Probate Avoidance: Land held in a land trust bypasses probate, the often lengthy and expensive court process of verifying a will and distributing assets, saving time and money for beneficiaries.
• Ease of Transfer: Transferring ownership interests in a land trust can be simpler than traditional property transfers, particularly with multiple beneficiaries.
• Protection from Lawsuits and Creditors: Depending on the type of trust and state laws, a land trust might shield assets from lawsuits or creditor claims against the beneficial owner.
• Centralized Management: A land trust allows for easier property management, especially if several beneficiaries are involved.

What Are the Drawbacks of a Land Trust?

Here's a breakdown of the potential drawbacks of using a land trust:

• Potential Loss of Control: Transferring the property title to a trustee reduces your direct control over the asset. The terms of the trust agreement will dictate what actions you can take without the trustee's consent.
• Limited Mortgage Options: With property in a land trust, obtaining traditional mortgages can be more difficult as lenders may be less familiar with the process.
• Potential for Increased Costs: Creating and administering a land trust involves legal and trustee fees. These costs could outweigh the benefits in some situations.²
• Limited Liability Protection: While land trusts can offer some protection from lawsuits and creditors, they are not foolproof. Legal rulings and state laws can expose the beneficial owner to liability.
• Loss of Tax Breaks: Some property tax exemptions, such as homestead exemptions, may be unavailable when the property is held in a land trust.
• Complexity: Land trusts introduce an additional layer of complexity into property ownership. Understanding the trust agreement and seeking legal advice before proceeding is crucial.

Important Note: These drawbacks depend significantly on the state of the property, the terms of the specific trust, and your circumstances.

How Much Does a Land Trust Cost?

Setting up a land trust requires legal expertise, so you must pay attorney fees. Depending on the complexity of the land trust you want to create, you may incur a spectrum of costs. In general, you may want to consider the following expenses:

• Attorney's Fees: The more complicated the land trust, the higher the attorney's fees could be.
• Trustee Fees: You must also consider trustee fees, especially if your trustee is responsible for property maintenance, rent collection, and tenant management.
• Administrative Costs: Administrative costs can include fees associated with filing real estate documents, transferring property notes, preparing and filing annual tax returns, and accounting fees for managing property in the land trust.

It's helpful to investigate detailed cost estimates from your attorneys, trustees, and other professionals involved in creating and managing your land trust so you know what kinds of short-term and long-term fees are involved.

Legal Considerations for a Land Trust

When considering the establishment of a land trust, there are several legal considerations to keep in mind to ensure compliance and effectiveness in achieving your estate planning or property management goals:

1. State Laws and Regulations: Land trust laws vary significantly from state to state. Some states have specific statutes that govern the creation and operation of land trusts (like Illinois), while in others, the concept might be less familiar and not explicitly regulated. Understanding the relevant state laws is crucial.
2. Drafting the Trust Agreement: The actual trust document must be meticulously drafted to specify the rights and obligations of the trustee and the beneficiaries. It should clearly define how the property will be managed, the conditions under which it can be sold or transferred, and how disputes will be resolved.
3. Choosing a Trustee: The trustee of a land trust holds significant responsibilities and powers. Choosing a reliable and competent trustee—whether an individual or a corporate entity—is essential as they will manage the property and must act in the best interests of the beneficiaries.
4. Beneficiary Rights and Privacy: While a land trust offers privacy by keeping the identity of the real owners out of the public records, beneficiaries should understand their rights and any limitations. This includes their rights to information about the property, any profits derived from it, and input into decisions made by the trustee.
5. Transfer Taxes and Other Tax Implications: Transferring property into a trust can trigger transfer taxes, and there might be other ongoing tax implications to consider, such as property taxes and federal income taxes. Understanding how holding property in a land trust affects tax liabilities is essential.
6. Funding the Trust: Properly transferring assets into the trust—known as funding the trust—is essential to manage the assets effectively. This often involves re-titling property to the trust, which must be done correctly to avoid legal pitfalls.
7. Compliance with Other Legal Obligations: Owning property in a land trust does not absolve the trustee or the beneficiaries from complying with other legal obligations, such as zoning laws, environmental regulations, and mortgage terms.
8. Succession Planning: The trust agreement should also clearly outline the provisions for succession in case of the trustee's death or incapacity, ensuring there is always someone legally able to manage the trust's affairs.
9. Potential Challenges: Beneficiaries and trustees should be aware that the anonymity provided by land trusts can sometimes lead to scrutiny and even challenges from third parties, including government bodies or creditors, questioning the trust's legitimacy or purpose.

Due to these considerations' complexity and legal significance, it's advisable to consult with an attorney specializing in real estate or trust law to navigate the establishment and management of a land trust. This ensures all legal requirements are met and the trust's structure aligns with the owner's estate planning objectives.

Is a Land Trust Right for You?

A basic understanding of trusts may help you decide whether or not creating a land trust is an effective estate planning asset protection vehicle for you and your family or business. However, if you are a real estate investor, commercial property developer, or individual contractor who buys and sells houses for a living, there are many benefits of having a land trust for you to consider.

Consulting with an estate planning attorney specializing in land trusts, your financial advisor and a tax professional can help you determine your best course of action.

Sources

1. The Advantages and Benefits of Using a Title Holding Trust or Land Trust – Exeter 1031 Exchange Services, LLC. https://www.exeterco.com/benefits_of_a_title_holding_trust
2. The National Agricultural Law Center – Legal Issues with Land Trusts: What is a Land Trust? https://nationalaglawcenter.org/legal-issues-with-land-trusts-what-is-a-land-trust/
3. How Walt Disney Used Land Trusts to Purchase and Build Disney World – The Presser Law Firm, P.A. https://www.assetprotectionattorneys.com/blog/2019/december/how-walt-disney-used-land-trusts-to-purchase-and/
4. Middlebury Land Trust – About Us. http://www.middleburylandtrust.org/about/index.shtml
5. Local Housing Solutions – Community Land Trusts. https://localhousingsolutions.org/housing-policy-library/community-land-trusts/
6. Champlain Housing Trust. https://www.getahome.org/
7. Land Trust for Asset Protection and Privacy – Asset Protection Planners^®. https://www.assetprotectionplanners.com/asset-protection-trust/land-trust-privacy/