FAQs

Land Trusts: An FAQ

1. What is a land trust?

A land trust is a legal agreement where a trustee holds the title of a property for the benefit of a beneficiary. The beneficiary retains control over the property and directs the trustee’s actions.

2. How does a land trust differ from a living trust?

While both are revocable trusts created during one’s lifetime, they serve different purposes:

• Land trusts: Designed specifically for real estate, used primarily for asset protection, and offer anonymity as the beneficiary’s name doesn’t appear on public records.
• Living trusts: Encompass both real and personal property, mainly used for estate planning to avoid probate and estate taxes.

3. What are the main advantages of using a land trust?

Land trusts offer numerous benefits, including:

• Asset protection: Shields property from judgments and liens against the beneficiary.
• Privacy: Keeps the beneficiary’s name off public records, maintaining anonymity.
• Ease of transfer: Beneficial interest can be transferred easily with a simple signature.
• Circumventing due-on-sale clauses: Allows transfer of property without triggering a due-on-sale clause.
• Avoiding probate and estate taxes: Facilitates seamless transfer of property upon death, minimizing taxes.
• Limiting liability: Protects beneficiaries from personal liability for debts associated with the property.

4. Are there any tax implications when using a land trust?

The IRS considers a land trust a “disregarded entity” meaning there are no direct tax consequences. Beneficiaries report income and expenses from the property on their personal tax returns as if they owned the property directly.

5. How does a land trust help with property management, especially for rental properties?

Land trusts can simplify property management by allowing the beneficiary to act as the property manager while the trustee’s name appears on leases and other agreements. This separation can help de-personalize interactions with tenants, particularly in sensitive situations like rent increases or evictions.

6. Can a land trust be used to avoid probate and estate taxes?

Yes, when structured properly, a land trust can help avoid probate because the property isn’t part of the beneficiary’s estate. It can also minimize estate taxes as the beneficial interest can be transferred to heirs without triggering estate tax liabilities.

7. Are there any disadvantages to using a land trust?

While disadvantages are few, some potential challenges include:

• Lender reluctance: Some lenders may hesitate to finance properties held within land trusts.
• Title company unfamiliarity: Occasionally, title companies may be unfamiliar with land trust procedures.

8. How is a property sold when held in a land trust?

There are two primary methods for selling property held in a land trust:

• Assigning beneficial interest: A simple and private method involving signing over the beneficial interest to the buyer.
• Deeding the property out of the trust: A traditional sale process where the trustee deeds the property directly to the buyer.

Video Land Trust – Anderson Advisors CPAs and Lawyers