Trusts can be used as an estate planning tool if you need more than just a will to manage your assets. A land trust is a specific type of trust related to real estate. This is a type of living trust, meaning it can take effect during your lifetime as a tool to manage property ownership. The terms of a land trust can be unique to your needs and the type of real estate it owns. Many people work with a financial advisor to create an estate plan for their financial needs and goals.
What Is a Land Trust?
A land trust is a legal entity that assumes control over property and other real estate assets at the behest of the property’s owner. It’s a living trust, which is generally revocable, meaning the terms of the trust can be changed or terminated at any time.
Unlike other living trusts, land trusts are associated exclusively with real estate. The types of assets a land trust can own include:
A land trust can be used for any of those asset types. However, they are more typically used for real estate assets in property development or land conservation.
As an example, real estate developers can use land trusts to hold large pieces of property for commercial or residential development. Or you may use a land trust to hold ownership of a piece of land that you want to preserve for wildlife or conservation efforts.
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, also known as Illinois land trusts, are used for privacy, estate planning or to facilitate borrowing arrangements, according to the FDIC. The landowner, as both the grantor and beneficiary, signs a deed of trust and a trustee simply holds the title with no responsibility to manage the property’s use. This kind of a land trust keeps the assets out of probate court and lets the owner preserve anonymity.
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. Donors benefit from federal income tax deductions and state as well as local credits.
Community land trusts are nonprofit, community-based organizations that typically aim to ensure long-term housing affordability. They do this by separating ownership of land on which a building (such as housing) is constructed and the building. The trust acquires permanent ownership of a parcel of land and enters into a long-term, renewable lease, typically 99 years, with homeowners instead of a sale. When homeowners sell their particular residence, the sellers earn only part of any increase in property value. The remainder is kept by the trust, which maintains the affordability of the residential units for future low- to moderate-income families.
How a Land Trust Works
Structurally, land trusts are similar to other types of revocable living trusts. The table below breaks down the three parties involved:
|Land Trust Parties|
|Grantor or Settlor||Creates the trust and transfers property ownership to it|
|Trustee||Manages the trust according to the specific wishes of the grantor or settler|
|Beneficiary||Benefit in some way from the terms of the land trust|
As the grantor or settlor, you would decide which real estate assets should be transferred to a land trust and what terms the trustee must follow in managing those assets. For example, if the trust includes a rental property then the trustee’s duties may include collecting rent payments, overseeing upkeep and maintenance and finding new tenants when the property is vacated.
The beneficiary is the person who benefits from the assets in the trust. So going back to the example of a rental property held in a land trust, the beneficiary may receive some or all of the rental income, depending on the terms laid out by the grantor.
As the grantor of a land trust, you can change its terms at any time. For instance, you can remove real estate assets from the trust or add them as you acquire new property; designate a new trustee or successor trustee if you’re unhappy with the current one; or give new instructions for how assets in the trust are to be managed on behalf of your named beneficiaries. If you end up selling all of the assets held in a land trust, you can terminate the trust altogether.
Benefits of a Land Trust
There are several benefits associated with using a land trust to hold real estate assets. While typically you might use a living trust to protect assets from creditors or minimize estate taxes, you might consider a land trust if:
Land trusts can be useful if you don’t want people to be able to estimate the true extent of your net worth or if you’re investing in real estate on a larger scale and want to keep those dealings separate from the rest of your personal finances.
How to Set Up a Land Trust
Setting up a land trust is similar to creating any other type of trust. It starts with identifying one or more trustees to oversee it, determining which assets will be held in the trust and choosing a beneficiary.
With a land trust, the beneficiary can be an individual, but you can also set up a limited liability company (LLC), corporation or limited partnership for the sole purpose of acting as beneficiary. Doing so can offer increased protection against liability claims or creditor lawsuits. If you already have a living trust, you could also name that trust as the beneficiary of your land trust.
The next step is creating the actual trust document. This is something that an estate planning attorney can help with. An estate planning attorney can make sure that the trust document is valid and they can also help with issues you may overlook, such as updating property insurance beneficiaries for assets you transfer to the trust.
An estate planning attorney can also guide you through whether it’s necessary to have multiple land trusts for multiple real estate assets. Whether it makes sense to group them together into a single trust or have individual trusts may depend on what you intend to do with the property. For example, if you have both investment properties and conservation land, you may want to keep those separate from one another.
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.
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