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Horses on a farmTrusts 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 means of manage property ownership. The terms of a land trust can be unique to your needs and the type of real estate it owns. Understanding how this type of trust works and what it’s meant to be used for can help you decide if one belongs in your estate plan.

Land Trust, Definition

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:

  • Physical property, such as homes, commercial buildings or plots of land
  • Property notes
  • Mortgages

A land trust can be used for any of those asset types but they’re typically more often used for real estate that’s being used for either property development or land conservation. For 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 you want to preserve for wildlife or conservation efforts.

How a Land Trust Works

Aerial view of farmlandStructurally, land trusts are similar to other types of revocable living trusts. There are three parties involved:

  • The grantor or settlor, who creates the trust and transfers property ownership to it.
  • The trustee, who manages the trust according to the specific wishes of the grantor or settler.
  • The beneficiary, who stands to 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:

  • You want to keep real estate investment property separate from your other assets.
  • You want privacy and anonymity, as assets held in a land trust are owned by the trust and listed in the trust’s name in public records, rather than your own.
  • You want assets held in the land trust to avoid the probate process once you pass away.
  • You want enhanced liability protection or protection from creditors – specifically, liens or judgments – as a property owner.
  • You want to be able to purchase or sell real estate assets without the sales price being disclosed publicly.

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

Couple signs a land trustSetting 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.

The Bottom Line

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.

Tips for Handling Real Estate Assets

  • Consider talking to a financial advisor about your specific estate-planning needs. If you don’t have an advisor yet, finding one doesn’t have to be complicated. SmartAsset’s matching tool can help you connect with professional advisors in your local area. If you’re ready to get connected with an advisor near you, get started now.
  • Real estate can add diversification to a portfolio but it doesn’t necessarily mean you have to own rental properties. There are other ways to invest in real estate, including real estate investment trusts, purchasing mortgage notes and real estate mutual funds.

Photo credit: ©iStock.com/alexeys, ©iStock.com/Nicholas Smith, ©iStock.com/laughingmango

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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