Land Trusts Can Protect Property and Privacy
Land trusts are a very useful way to guarantee asset protection and privacy, but very few people other than real estate lawyers know what they are. A land trust is basically a contract that splits the ownership and control of property between a trustee and a beneficiary. How does a land trust work? The actual owner of the property is the land trust itself. The trustee of the land trust is the person or entity that holds the legal title to the property that the land trust owns. The trustee can execute deeds and mortgages, and otherwise deal with the property, basically functioning as the land trust itself (if the land trust were a person). The beneficiary of the land trust can live in the property, rent it out and collect the rents on it, improve and operate the property, and basically control it in the way a normal owner of property would. Every action the trustee makes that involves the property must be at the direction of the beneficiary. The land trust changes your interest in your property: you as an individual no longer own it, but you control it as a beneficiary.
Property owners form land trusts for three main purposes: 1) to make simple estate planning, or gifts of real estate, easier; 2) to shield the beneficiary from liability; 3) to increase the beneficiary’s privacy; and 4) to simplify many of the issues involved with real estate investing.
- Estate planning/ Gifts: For most people, the home they own is their most valuable asset. For example, let's say Mrs. Jones owns a home, but has no other substantial assets. If Mrs. Jones doesn't have a trust when she dies, her estate will enter probate, a court proceeding that divides her assets. Probate is a long and expensive process, and a totally unnecessary one for Mrs. Jones, because she already knows who should inherit her house. With a land trust, Mrs. Jones can designate a herself as a beneficiary, and her daughter Jane as a "contingent beneficiary" of her property. This means that Jane will automatically become the beneficiary when Mrs. Jones dies, without any probate or other interference by the court system. Similarly, if a land trust owns your property and you wish to give it to someone else, you can simply make them the beneficiary of the land trust instead of you by assigning your beneficiary interest to them.
- Land Trust Asset Protection/Liability Shield: Let's say Mrs. Jones loses a lawsuit, and owes money to satisfy the judgment. In order to get money to satisfy the judgment, the court enters a judgment lien against Mrs. Jones, which prevents her from transferring any of her assets. But, a court only entered a judgment lien against Mrs. Jones personally, because she (and not her land trust) was a party to the lawsuit. Mrs. Jones is a beneficiary of the land trust that holds her property, which means she doesn’t have title in the property, the land trust does. So, if someone to whom she owes a judgment called her "judgment creditor", wants her assets, they need to go through extra steps to get at her property.
- Land Trust Asset Protection/Privacy: Land trusts also put extra steps in the process of finding out who owns your property, and how much it is worth. Did you know that you can find out almost everything about someone’s assets by looking up their property address with the local county assessor? It’s easy to see when they took out their mortgage, how much they owe, and who is on the deed. If anybody ever wants to sue you, they can see if you have deep pockets just by looking up your home. However, if your property is owned by a land trust, it is significantly more complicated for casual observers to find out what you are worth.
- Real Estate Investing: Many real estate investors want to protect their privacy and protect themselves from liability, so creating a land trust can help them in the same way it can help non-investors. Beyond these benefits, land trusts can also serve as partnership agreements for simple deals. If your lawyer structures the parts of the trust agreement called the Beneficial Ownership and Power of Direction properly, it can keep partners from going off and making decisions on their own, can put in writing what percentage of the deal each partner owns, and can otherwise serve as a perfectly appropriate and enforceable partnership agreement. Why pay your lawyer twice for both agreements, when one offers you all the protection you need?
Be advised: land trusts are not available in all states. Asset protection trusts and real estate trusts have been recognized in one form or another in Arizona, California, Florida, Hawaii, Indiana, North Dakota, and Virginia. However, land trusts are used most extensively in Illinois, where they date back over 100 years. In fact, these instruments are often called "Illinois Land Trusts", or even "Chicago Title Land Trusts", even when they are used outside the state of Illinois, or by different title companies. Although these trusts are less well-known than other asset protection and estate planning documents, they can be extremely beneficial for a variety of users.
The information in this post is provided as a general educational resource only. It should not be considered or relied upon as legal advice.