What Is a Land Trust?

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Land trusts can sometimes be a very confusing topic for business owners, but they don’t need to be. Simply put, land trusts are legal entities that take ownership of–or authority over–a piece of property at the request of the property owner. 

July 13, 2022
Author: NCH

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Land trusts can sometimes be a very confusing topic for business owners, but they don’t need to be. Simply put, land trusts are legal entities that take ownership of–or authority over–a piece of property at the request of the property owner. 

Land trusts act as living trusts, which allow for the management of property, and can be tailored to individual needs. Let’s take a closer look at what they are and what they can do for you:

How Do Land Trusts Work?

Land trusts, which are trusts connected to real estate, are used for estate planning. These trusts are revocable and can be terminated or changed. They are often used for the land involved in conservation or wildlife purposes—or sometimes for the purpose of real estate development.

Who Purchases the Land in a Land Trust?

There are three different roles connected to land trusts. These include the following:

  • Grantor: The grantor initiates and establishes the land trust, including all its terms. In the context of a land trust, the grantor usually transfers real estate ownership into the trust for specific purposes, such as estate planning, privacy, or asset protection. 
  • Trustee: Trustees manage and administer the land trust. They hold legal title to the property on behalf of the beneficiary but exercise this authority based on the powers and limitations specified in the trust document. 
  • Beneficiary: As the name suggests, the beneficiary is the party or parties for whose benefit the land trust is established. Beneficiaries receive the benefits of property ownership, such as income, use, or eventual distribution of the property. 

What Are the Different Types of Land Trusts?

Title-Holding Land Trusts

In a title-holding trust, the property owner anonymously maintains all rights over the property and controls the actions of the land trust. These trusts are also called “Illinois land trusts” because they became popular during the 1800s in the city of Chicago. 

It was at that time that property owners were not permitted to vote on city projects in the same exact places where they owned land. To avoid this very strict law, wealthy businessmen and politicians figured out how to use land trusts to buy land in secret, which successfully protected their voting rights.

While not every state has rules designated for title-holding land trusts, most states refer to the Illinois land trust laws if they don’t have their own rules. This means that an individual can develop an Illinois-style land trust in any state with legal guidance.

Conservation Land Trusts

Property owners in conservation land trusts forfeit some of their rights over land use and development. The main purpose of a conservation land trust is to protect wildlife, historical, cultural sites, and natural resources from development or activities that could potentially lead to disruption or pollution.

Take note that donating to a conservation land trust could equal a large tax break. For example, if landowners donate their development rights to a conservation trust, they can receive a tax deduction that is equal to the difference between the value of the land and what it could be worth if it were developed. In fact, sometimes, this deduction is worth millions of dollars.

Community Land Trusts (CLTs)

This trust is designed to promote community-oriented goals by separating the ownership of land from the structures on it. In a CLT, the land is owned by a trust, while individuals or entities own the buildings and improvements. This model ensures long-term affordability, community control, and sustainable development. 

CLTs typically have a tripartite structure involving community residents, a public or nonprofit entity, and a private board. The trust often holds the land in perpetuity, leasing it to homeowners or businesses under long-term, renewable leases. Such a structure allows the community to have a say in the development and use of the land, and its perpetual nature helps maintain community-oriented objectives over the long term.

What Are the Pros and Cons of Land Trusts?

Advantages

Privacy and Asset Protection 

By placing property in a trust, the ownership details are kept private. This can benefit individuals who wish to keep their real estate holdings confidential. Additionally, land trusts can provide some level of asset protection by separating the property from the owner’s personal assets.

Probate Avoidance 

One of the advantages of land trusts is that they can help avoid probate. When a property is held in trust, the ownership can be transferred seamlessly to the successor without going through the probate process, saving time and reducing costs.

Flexibility in Duration and Purpose 

Land trusts offer flexibility in terms of management and control. The trust agreement can specify the rights and responsibilities of the trustee and beneficiaries, allowing for customization based on the specific needs and goals of the parties involved.

Disadvantages

Complexity and Cost

Establishing and maintaining a land trust can involve legal and administrative complexities. Legal fees and other costs associated with creating and managing the trust may outweigh the benefits for some individuals, especially for smaller real estate holdings.

Potential Misuse

While land trusts offer privacy, this feature can also be misused for illicit purposes such as money laundering or hiding assets in legal proceedings. This has led to increased scrutiny of land trusts in some jurisdictions, potentially creating challenges for legitimate users.

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Perceived Lack of Control 

Depending on the type of land trust, the property owner may relinquish a degree of control over the property. For example, in a community land trust, decisions about land use and development may involve community input, limiting the property owner’s autonomy.

How Long Do Land Trusts Last?

The duration of a land trust is usually determined by the terms outlined in the trust agreement. Land trusts are flexible legal arrangements that allow for the transfer of real estate ownership while providing privacy and asset protection. Unlike some other types of trusts, there is no inherent limit on the duration of a land trust.

In many cases, a land trust is established with a specific purpose or for a particular period, such as for estate planning or to facilitate a real estate transaction. The trust agreement will specify conditions under which the trust will terminate, which could include the sale of the property, the occurrence of a specific event, or the passage of a certain period.

Special Focus: Investing in Conservation Easements

A conservation easement is a legal agreement between a landowner and a qualified conservation organization or government agency that restricts the development of the land to protect its natural, scenic, or historical features. Investors can contribute to preserving ecologically sensitive areas while potentially benefiting from tax incentives.

One primary incentive for investors in conservation easements is the potential for significant tax deductions. In many jurisdictions, individuals who donate a conservation easement may be eligible for federal and state income tax deductions based on the appraised value of the donated easement. This deduction can help offset taxable income, making it an attractive option for those with a philanthropic and environmental mindset. 

The Process of Setting Up a Land Trust

Step 1: Define Objectives and Goals

Before establishing a land trust, clearly define the objectives and goals you aim to achieve. Whether it’s privacy, asset protection, or streamlined property transfer, understanding your specific needs will guide the structure of the trust.

Step 2: Select Trustee and Beneficiary

Decide who will serve as the trustee, the person or entity responsible for managing the trust. This could be the property owner or another designated individual. Identify the beneficiary—the party who will receive the benefits of the trust, such as income or use of the property.

Step 3: Consult Legal and Financial Professionals

Seek advice from legal and financial professionals experienced in trust law. They can help navigate the legal requirements, draft the trust agreement, and provide insights into the implications of establishing and managing a land trust.

Step 4: Draft the Trust Agreement

Work with legal professionals to draft a comprehensive trust agreement. This document outlines the terms, conditions, and provisions of the trust, including details about the property, the trustee’s powers, and the beneficiary’s rights. The trust agreement should also specify the duration of the trust and the conditions for termination.

Step 5: Consider Succession Planning

Plan for the future by thinking about who will take over as trustee in the event of your incapacity or passing. Clearly outline succession plans in the trust agreement to ensure a smooth transition and continuity of trust management.

Final Thoughts

Although land trusts are comparable to other types of trusts, they are typically geared toward the specific purpose of real estate. In fact, trusts are a very important part of the estate planning process—especially as they protect assets and provide property owners with complete anonymity and privacy.

For land trusts to secure assets and keep property ownership totally private successfully, they must be developed by experienced, knowledgeable, and skilled individuals. And that’s where NCH’s services come into play. Our in-house estate planning attorneys will assess your needs and work with you to ensure your most valuable assets and investments are protected. 

Call us today at 1-800-508-1729 to schedule your FREE consultation!

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.

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