FAQ Understanding Land Trusts: Benefits, Risks, and Structure

A land trust is a legal arrangement where legal and equitable title to real property is held by a trustee for the benefit of beneficiaries. Unlike traditional ownership where an individual or entity directly holds title, in a land trust, the trustee holds the title while the beneficiaries retain the rights to the earnings, avails, and proceeds from the property. This separation of legal and beneficial ownership is a key characteristic of a land trust.

Land trusts offer several benefits, primarily focused on privacy and flexibility. By holding title in the name of the trustee, the identities of the beneficiaries can be kept private from public records, offering a layer of anonymity. Additionally, the beneficial interest in a land trust is considered personal property, which can simplify transfers, avoid probate, and potentially offer some asset protection benefits, although it’s crucial to note it does not shield assets from creditors in bankruptcy. Land trusts can also be creatively used by real estate investors for various purposes, such as navigating lending guidelines, circumventing due-on-sale clauses, and structuring joint venture projects.

While there are various types of trusts, such as living trusts, personal property trusts, and irrevocable trusts, a land trust is specifically designed to hold title to real property. It is typically a revocable, inter vivos (living) trust, meaning it is created during the settlor’s lifetime and can be amended or terminated by the settlor. Unlike some trusts used for estate planning where the grantor, trustee, and beneficiary may be different individuals for asset protection purposes, in a land trust, the beneficiaries usually retain significant control and the right to direct the trustee. The beneficial interest in a land trust is treated as personal property, which is a key distinction from direct real estate ownership.

The validity and specific requirements for land trusts vary by state. Some states, like Illinois (where land trusts originated), Alabama, Florida, and Virginia, have specific statutes authorizing land trusts. In states without explicit statutes, land trusts are generally supported by court rulings (“precedent”) and general common law trust principles. The enforceability often hinges on whether the trustee has sufficient “active duties” to satisfy the Statute of Uses, which historically voids “passive” trusts where the trustee merely holds title without significant responsibilities. While no state currently makes using a land trust illegal, the legal landscape and judicial interpretation can differ.

While beneficial, land trusts are not without potential drawbacks. These can include issues with lenders who may be unfamiliar with land trusts or object to the transfer of title, potential loss of homestead protection (depending on state law), and general ignorance of land trusts by other parties involved in real estate transactions (attorneys, Realtors, etc.). Relying on the reliability of the chosen trustee is also crucial, as they hold legal title to the property. There is also the potential for a land trust to be challenged in court as a passive trust that violates the Statute of Uses, which would cause title to revert to the beneficiaries. It is also critical to understand that a land trust will not protect assets from creditors in a bankruptcy proceeding.

The selection of a trustee for a land trust is an important decision as they hold legal and equitable title and have the power to deal with the property. The trustee should be someone trustworthy, ideally knowledgeable in financial and real estate matters. Options include friends, associates, relatives (other than a spouse), or potentially a trust department at a bank. However, using a bank may present challenges due to their conservatism and potential reluctance to maintain privacy. Using a trustee who resides out of state can enhance privacy. It is generally advisable to use different trustees for multiple properties to avoid a creditor easily discovering all beneficial interests.

Transferring property into an inter vivos trust where the borrower remains a beneficiary and the transfer does not involve a transfer of occupancy rights is generally an exception to the enforcement of a due-on-sale clause under the Garn-St. Germain Depositary Institutions Act of 1982 for residential properties with less than five dwelling units.
However, other types of transfers of beneficial interest or changes in occupancy could potentially trigger the clause.
It is important to understand that transferring title in violation of a due-on-sale clause is not illegal, but it gives the lender the option to call the loan due and payable.

The beneficial interest in a land trust is considered personal property, not real property. It si also called “personalty”. This is a fundamental aspect of the land trust structure.
This personal property interest gives the beneficiaries the right to direct the trustee and receive the proceeds from the property, but it does not give them direct ownership of the real estate itself.
This characteristic can be leveraged for privacy and ease of transfer through the assignment of the beneficial interest rather than a deed transfer of the property itself.