A land trust, or real estate land trust, is a contractual vehicle for transferring the title of a property to an appointed trustee and is typically used for estate planning. The original property owner does not lose their claim of ownership on the property, but the trustee becomes the titleholder for legal purposes. There are many reasons why setting up a land trust can be beneficial.
First, Let’s define What a Land Trust is?
A trust in legal terms is an arrangement where a grantor or settlor gives property or an asset over to someone else to take care of and hold. The property being held is known as the principal, while the steward managing it is known as the trustee. Anyone who derives benefit from the managed asset(s) held by the trustee is called a beneficiary. In some cases, the grantor is also the beneficiary, while in others, the beneficiary (or beneficiaries) is a separate person(s).
Like any other type of trust, a land trust can be revocable or irrevocable. Irrevocable trusts require the permission of the beneficiary to make changes. These types of trusts are usually used for gifting, charitable, or inheritance purposes. By contrast, a revocable trust still permits the grantor to retain control over the asset, which means they can alter or even cancel its terms. At the same time, they are afforded many of the protections we will expand upon below.
A trust is usually a three-part relationship between the grantor and the beneficiary, connected through the stewardship of a trustee. Keep in mind that the beneficiary and the grantor can be the same person behind the legal paperwork. For example, a landowner or homeowner can appoint a trustee to handle their landed equity and appoint the landowner’s LLC or corporation as the beneficiary. However, you will need the help of an attorney to construct your beneficiary, because certain constructions (such as an LLC) can leave a paper trail that eliminates some of the benefits of setting up a land trust in the first place.
What is the History of Land Trusts?
Our modern understanding of this fiduciary relationship dates back to England at the time of the Crusades. Feudal lords making their way abroad would leave their landed property in the hands of a trustee, who would manage it in their absence. Unfortunately returning crusaders often found the trustee unwilling to return the land. Many cases were brought before the royal courts, and over time, a legal precedent around the principle of a trust was developed.
While feudalism and the crusades have come and gone, real estate land trusts have remained as a matter of particular interest to real estate investors, or anyone who wants to minimize some of the legal burdens and liabilities around owning property.
Community and Conservation Land Trusts
A community land trust usually operates as a nonprofit with an executive director as the trustee. This executive director will handle the daily concerns of the community land trust, which is often set up to protect tracts of land valued by a local community and to provide collective ownership over this cherished asset.
One of the more common reasons to set up a community land trust is to facilitate affordable housing options for members of the community, especially when the surrounding real estate climate has become prohibitively expensive in terms of maintaining a continuous and/or contiguous community. Sometimes the community land trust will rent out its properties to residents at affordable prices. Alternatively, it may allow the homes to be sold, but with resale restrictions that require the property to be resold at a particular pricing point.
Conservation Land Trust
Another similar type of land trust in this vein is the conservation land trust, which can be used to preserve a particularly cherished asset such as a natural resource, impressive landscape, or historical landmark with particular significance to the community that has formed the conservation land trust. While a conservation land trust will not usually provide financial benefit to its members or investors, it can be a legal vehicle for protecting landed assets for future generations to benefit from and enjoy.
Examples of natural land or open space that would benefit from a land preservation strategy include an outdoor recreation space with a trail leading up to scenic vistas, or perhaps an island wildlife habitat. By forming a conservation land trust, local communities can come together to create a legal land conservation strategy.
What are the Benefits of establishing a Land Trust?
Below we will discuss 8 of the major benefits that a Land Trust can bring to real estate investors or property owners.
- Reduce Your Tax Burden
- Allows You to Remain Anonymous
- Protects You from Liability
- Prevents the Due-on-Sale Clause
- Keeps the Sale Price a Secret
- Prevents Property Liens and Judgments
- Helps to Minimize the Difficulty of Probate
- Makes It Easy to Transfer Property
1. Land Trusts May Reduce Your Tax Burden
A land trust will not help you avoid paying taxes entirely. But it does open the door to certain tax benefits that can help reduce your tax burden. Remember that the beneficiary of your trust can be a person or an entity like a business. Talk with your accountant and lawyer—your property may be in an area where personal property taxes are more burdensome than business income taxes. This might be a motivating factor toward setting up a land trust and designating your business as the beneficiary.
2. Land Trusts Allow You to Remain Anonymous
Real estate that is managed as a land trust will be associated with the trustee’s name in public records—not yours. If you are concerned about solicitations from salespeople or annoyed by the prospect of fielding solicitations from other real estate investors, placing your landed property in someone else’s hands for management is the best way to keep your name out of the public.
For example, if you own a large suburban subdivision, anonymity will prevent you from unwanted solicitations from companies or real estate agents. This could include sales calls about the latest property management software, or from a marketing team that wants to help you fill your vacancies. The trustee cannot give your name out to anyone unless there is a court order. This anonymity can avoid disruptions to your day and unwanted solicitations. Additionally, it can protect you from less well-intentioned people, such as opportunists.
3. Land Trusts Protect You from Liability
When you buy a piece of land, the purchase goes on public record, along with the amount you paid. Unfortunately, in today’s world, there are plenty of opportunists and unscrupulous competitors. All it takes is for someone to scroll through the records of the County Recorder, calculate your net worth, and make a move to sue you. The lis pendens of their hokey lawsuit can freeze up your property and prevent you from moving forward with your goals.
Putting your landed assets into a land trust will prevent opportunists from learning your net worth. It is important to keep in mind that genuine lawsuits can still find their way to you, so don’t assume that a land trust is a blanket form of protection. It is important for private landowners to pursue best practices around ownership, such as hiring licensed contractors to perform work, securing their property, and hiring competent property managers.
4. Land Trusts Prevent the Due-on-Sale Clause
The due-on-sale clause can be invoked by lenders who want to collect the full balance of a property holder’s outstanding debt if they choose to sell the property. As a real estate investor, this clause can prevent you from investing with the flexibility you need.
For example, you might be taking a loss on a property, and not have the full amount. Or, you might need that money to immediately bankroll another investment or be attempting to work out some other arrangement without needing to pay off that asset immediately.
Whatever the case may be, the Garn-St. Germain Act of 1982 prevents mortgagors from invoking this clause. However, it is important to note that this is not a blanket rule, and there are limitations to this clause—such as commercial property and properties that contain more than four units of housing.
5. Land Trusts Keep the Sale Price a Secret
A land trust can keep certain financial information out of the public record. In many cases, this anonymity can help give you leverage. If you are negotiating a deal, obscuring your net worth or the prices you have paid for other pieces of property can come in handy. This is especially applicable to real estate investors working in high profile commercial real estate, where negotiations can be extremely difficult and public knowledge of your financial profile can be a liability.
6. Land Trusts Prevent Property Liens and Judgments
A property can be owned by several different investors. Placing the property into a land trust can protect the investors in the event of a justified lawsuit. Creditors or litigants will not be able to go after the assets of individual investors just because they are partial owners.
Keep in mind that even lawsuits that have nothing to do with the property can be an issue. The plaintiff may attempt to sue one of the investors and obtain a property shared with others as part of a settlement, or to fund the amount of their demanded compensation. A land trust can prevent these kinds of misfortunes from impacting any other investor in the group and it can make it easier to deflect these issues away from the property.
7. Land Trusts Help Minimize the Difficulty of Probate
Probate is the process whereby the assets of a deceased person are parceled out to the legal next of kin, especially in the absence of a will. The probate process can be long, drawn-out, costly, and emotionally draining on a family that has suffered a loss. If creditors or family members who feel entitled to the property want to lay claim to the landed assets, they can weigh down the whole procedure in painful arguments and court litigations.
If you’re wondering how to avoid probate, a land trust might be your best solution. You will still be able to control your assets without locking you into an irrevocable trust. Putting land into a land trust creates a vehicle for the smooth transfer of this land to an intended beneficiary if a death does occur.
8. Land Trusts Make It Easy to Transfer Property
Placing landed assets into a land trust can make them much easier to transfer, as long as both the grantor and the beneficiary are still alive. In some states, such a vehicle will help avoid paying out transfer taxes that could greatly burden the whole exchange. Real estate investing for beginners can seem intimidating, and one of the more difficult parts are all the legal and tax-related pieces of a sale that can chip away at profits. But creating the right legal instruments around your property can minimize your losses and maximize your profits.
There may also be times when you need to restructure your business or break it into smaller components for tax, legal, or management purposes. Placing your property into the vehicle of a land trust can make the process easier.
How to Set Up a Land Trust
Technically, you can set up a land trust on your own. However, a mistake can be costly or even irreversible, so it is always best to hire an attorney. Land trust laws vary from state to state. Some states use a common law going back to the land trusts of English Law. Others use a more state-specific code. The process becomes even more complicated if you have investment properties across state lines. Other issues can arise depending on what type of property you have and whether there are any conservation easements or environmental rules in that location.
One of the main reasons to set up a land trust is to have the security and anonymity required for successful real estate investing. Once you have found a trustee, you can eliminate the huge headache stemming from the risks around public association with your landed assets. Make sure that your trustee has a high degree of financial integrity, knowledge of real estate, real estate law, and tax codes.
The attorneys at Anderson Advisors specialize in real estate and asset protection and have extensive experience helping investors set up land trusts.
How to Fund a Land Trust
To fund a trust, you must transfer a deed to the trust. A land trust inherently contains assets in the form of land or property.
Financing Options: Can Land Trusts Obtain a Mortgage?
If you don’t plan on using cash to purchase your desired property, then obtaining a mortgage from a lender is a possibility. Traditionally, banks have avoided lending money to people planning to keep their name off the title. Now, that’s beginning to change. Some banks, and in particular, community and regional banks, are willing to close on a loan in the name of a Grantor Trust.
Funding Community Land Trusts
Some types of land trust arrangements are community-centric, geared toward maintaining affordable housing or preserving a piece of land that is important for natural, historic, or cultural reasons. These types of land trusts are usually arranged along the lines of a non-profit. As such, they can receive financial benefits from Federal Conservation Programs, the most common of which are the Farm Bill, the Land and Water Conservation Fund, the North American Wetlands Conservation Act, the Forest Legacy Program, and the Endangered Species Act.
For example, if you own a farm and are engaged in sustainable farming practices, you can apply for grants from the Farm Bill. If you own property that is home to endangered species, you can apply for grants from the Endangered Species Act. If you own a large tract of land that is wooded, you could apply to the Forest Legacy Program. Note that there are other programs, and the ones mentioned here are just some of the largest. If you’re an investor, these programs can facilitate the process of wrapping up your landed assets in the construct of a protective land trust—but keep in mind that this path to land trust formation may carry certain rules and rights around land usage.
Other types of grants revolve around a particular community. Popular examples of this type of land grant include community gardens in a park, houses of worship, or historical urban enclaves. In these cases, funding to manage the land trust can be achieved by grassroots fundraising within the community and applying for private and government grants. In these cases, it is also important to work with a trustee who can be trusted and shares in your community vision or at least appreciates your goals and wants to facilitate them—whether these goals are about protecting the integrity of a special place or making homeownership more affordable for your local communities.
Tips on How to Name Your Trust Property
The primary consideration when naming land trusts is privacy. For this reason, your name and personal address shouldn’t appear on the property deed or the land trust agreement. Many land trust agreements require the title to be recorded in both the trust and the trustees’ names. Therefore, it’s important to establish a unique name that won’t provide clues that you’re the property owner. As a recommendation, you can use the address of the property as the trust name.
How to Choose the Right Trustee
Selecting a trustee is a very important part of the overall land trust creation process. Taking time to choose the right person is necessary because they’ll have fiduciary duties, as well as management responsibilities, over your trust assets. It’s crucial to find someone you can rely on to fulfill this role and act in the best interest of the beneficiary. Some characteristics to look for in a potential trustee include their financial integrity, knowledge, trustworthiness, honesty, shared philosophies, and conservation values.
Setting Up Your Trust with an LLC as the Beneficiary
The owner of the property determines who the beneficiary is when the trust gets created. As mentioned previously, the beneficiary is usually the property owner. However, it should be noted the trust alone doesn’t completely protect the beneficiary because there is no asset protection. Along with the control the beneficiary has over the management of the trust, there is the exposure to liability. Let’s use an example to explain this point more clearly.
If a beneficiary’s investment property is occupied by a resident who slips and falls, or files an environmental wildlife habitat claim, the tenant may want to seek monetary damages. Although privacy exists in land trusts, there’s still a chance a diligent lawyer will find out the landlord’s true identity.
How Can Beneficiaries Ensure their Assets are Protected if a Claim or Lawsuit is Filed Against Them?
To ensure the protection of your properties inside of the land trust, you should place them in an LLC. The LLC acts as the beneficiary and in the case of an accident, such as a slip and fall of a tenant, you are personally protected. If a lawsuit is filed against you because the accident took place on your property, they will not be able to come after the equity in your home. Since the beneficiary is an LLC, the exposure it faces is limited to what’s inside the LLC.
What are the Other Benefits of an LLC Besides Asset Protection?
An LLC, also known as a Limited Liability Corporation, is not formally recognized as a taxable entity, meaning there is no tax designation. Rather than an LLC paying tax, the profits get passed through to the owners, whether they are individuals, a partnership, S corporation, or a corporation. Other benefits of setting up land trusts in an LLC include the isolation of liability, the protection of owners, and the level of privacy provided.
Are There Any Disadvantages to Setting Up Land Trusts with the LLC as the Beneficiary?
Some of the few downsides of an LLC becoming the beneficiary include the need for formalization, filing documents with the state, and incurring state fees. The process can be expensive. Although utilizing this option can be more costly, it’s an effective asset protection tool that can be extremely invaluable.
How do I assign an LLC as my Beneficiary?
The first step to take is forming a land trust. Then you should transfer your assets or properties into the trust. Next, you will need to set up an LLC. Finally, you will assign your beneficial interest to the LLC. Once this has been done, the deed is the only document kept in the public records. The assignment will be kept private, and the land trust agreement is kept private. You can even file without the trustee’s name in certain states, depending on the rules of the recorder’s office
Consulting and Hiring Legal Counsel to Achieve Maximum Benefits
Investors know that real estate asset management is far from passive, even if it generates what is called passive income. A real estate investor must be a savvy negotiator, knowledgeable about the market, and good with numbers. But the good news is that you can outsource many of the more nuanced concerns to professionals like accountants, lawyers, and property managers so that you can focus on expanding your portfolio.
Protecting your personal assets through a vehicle like an LLC or corporation is of the utmost importance, as is using legal strategies to minimize your tax burden. As it turns out, there is also a great way to protect business assets as well—through a land trust. A land trust has many benefits in terms of anonymity, legal protection, and ease of transfer.
There is much to know and understand about the formation of land trusts. Laws vary from state to state, and those laws can change. The nuances involved are numerous and can be difficult to understand. Many people aren’t very knowledgeable when it comes to land trusts. They get confused about single-family homes, non-profit organizations, community land trusts, conservation easements (and other laws that conserve land), Some will even tell you they cannot be done in certain states. But the reality is, only eight states in the U.S. have statutes on land trusts. The remaining states follow common law, which is currently recognized in all 50 jurisdictions.
If you are considering the use of land trusts for your investment properties, it’s recommended to consult with a legal firm that has the foresight and relevant experience when it comes to these contracts. Anderson Advisors has thousands of clients spread out around the country who have benefited immensely from the formation of land trusts. You’ll receive complete guidance and assistance, from initial trust property setup to more complicated strategies such as conservation easement for private landowners.
We hope you’ve learned from this article and feel more confident about placing your investment properties inside land trusts. You’ve worked hard to grow your assets. By keeping your properties safe and reducing your liability, you can enjoy the long-term benefits of successful real estate investing for your family and future generations.
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