The Facts About Land Trusts*

A land trust is a simple, inexpensive method for handling the ownership of real estate. It is an arrangement by which the recorded title to the real estate is held by a trustee, but all the rights and conveniences of ownership are exercised by the beneficial owner (beneficiary) whose interest is not disclosed. This method of owning real estate eliminates many of the difficulties that otherwise may be encountered in acquiring, owning, or selling real estate.

The beneficiary of a land trust changes his or her interest in the property from real estate (title to the property) to personal property (ownership of the beneficial interest). Even though the beneficiary retains complete management and control over the property itself, he or she is not burdened with the legal characteristics of real estate when he or she deals with the property.

Since the beneficial interest is considered to be personal property, it is treated in much the same manner as a car, a savings account, or other tangible property. Consequently, the beneficial interest can be sold, pledged, or assigned in a simpler fashion than a conveyance of realty.

How Does a Land Trust Operate?

A land trust may be created by anyone capable of entering into a contract--an individual; a group of persons such as a partnership, syndicate, or business association; or two or more private individuals who desire to purchase and own the real estate as a joint venture.

Under a land trust agreement, the beneficiary retains complete control of the real estate in the same manner as if the recorded title were in his or her name. He or she may end the trust whenever desired and may add additional property to the trust at any time. At all times the beneficiary deals with the property as though he or she were the record title owner, for, as a matter of fact, he or she is the owner. The trustee executes deeds and mortgages and deals with the property only if directed in writing by the beneficiary.

When title to real estate is held in a land trust, the interest of the beneficiary, under terms of the trust agreement, is personal property. Since the beneficiary's interest is personal property, he or she may transfer it by assigning that interest without the formality of executing and acknowledging a deed; the wife or husband need not join in such assignment for the purpose of releasing the spouse's homestead rights.

What Are The Benefits of a Land Trust?

There are many benefits derived from the use of a land trust.

1. Privacy of Ownership.

Under a land trust, the identity of the real owner is never disclosed to the public. This feature can be important for many reasons. For example, a number of persons may be purchasing several parcels of real estate for some special purpose, and it may be that the desired result can be best accomplished if the objective is not made public; co-owners may desire that the interest of each member must be kept confidential; or an individual owner may not want to be burdened with inquiries.

Whatever the reason may be for not disclosing the identity of the real owner, a land trust provides the answer. Of course, certain governmental agencies and others, following valid and authorized legal processes, can ask about the beneficial ownership.

2. Protection for the Owner.

A land trust offers particular benefits in those cases where the real estate is held by two or more persons. If the property is owned by two or more persons, the title to the property might become faulty and unmerchantable because of death, legal disability, divorce, judgements, and many other types of litigation affecting one of the co-owners. When the property is held in a land trust, a judgment against one of the beneficiaries does not constitute a lien upon the real estate held in trust; neither do the ordinary legal proceedings against any of the beneficiaries muddle the title.

Although the real estate itself is not encumbered by a judgment lien, the interest of the beneficiary in a land trust can be subject to the claims of creditors. If the title to the real estate is in the name of a trustee, the creditors must take additional steps to assert claims against the property.

3. Succession and Ownership.

It has been a common practice to create joint tenancy in real estate holdings solely for the purpose of providing a succession of ownership upon death without the expense and delay of probate proceedings. Under joint ownership, however, either of the joint tenants is given an immediate interest in the ownership and management of that property, and in many cases, it handicaps the real owner as he or she cannot deal with the property without the written consent of the joint owner and the other spouse.

Under a land trust agreement, the party creating the trust can retain sole control over the property during his or her lifetime, with the desired succession in ownership becoming effective upon death without, under certain conditions, the expense of going through probate proceedings. This can be especially helpful to those who live out of state but own real estate in this state. They will not need to institute separate probate proceedings here but can have the land trust property administered in their home states.

4. Ease of Conveyance.

A land trust affords a convenient means of mortgaging and selling a trust property without having to obtain deeds from all the beneficiaries and their spouses. It dispenses with the necessity of obtaining the release and waiver of homestead from the spouses of the parties interested in the trust real estate. These are noteworthy features if many individuals are interested in the property and are scattered throughout the United States.

Also since the beneficial interest is considered to have the legal characteristics of personal property, it can be pledged for a loan according to the same standards as stocks, bonds, automobiles, or other personal property without the restrictions and formalities of mortgages, title reports, and policies. Such assignments, although substantially easier than conveyances of realty, can produce a gift and transfer tax consequences.

5. Disposing of Part Interest.

A land trust simplifies the practical problem of disposing of a part interest in a property since the beneficial interest under a land trust can be transferred by assignment; no deed is needed. This avoids a deed's formal requirements concerning acknowledgment, recording, and joinder by the grantor's spouse, although it may trigger a transfer tax. This aspect of the adaptability of a land trust becomes important when real estate is held by a number of persons, such as a group of heirs, or if the owners have disproportionate shares of the property.

How Do You Create a Land Trust?

You create a land trust by signing a short trust agreement at the time the real estate is purchased or after it has been acquired. Under the agreement, you, the owner (called the beneficiary), direct a corporate fiduciary to hold title to the real estate for you, and you direct and instruct the corporate fiduciary as to the persons who will have the authority to manage and control, whether and when it should be sold and to whom, and who will become the owner upon your death.

You, too, can protect your real property by creating a land trust and thereby assure an orderly distribution to your beneficiaries and heirs.

* Courtesy of Megna Trust Company.  The information in this brochure is not intended as legal advice.  For legal advice please consult an attorney.