What Is a Land Trust?

Trusts are useful financial vehicles that can be used for estate planning, asset protection, privacy, and tax optimisation. There are numerous types of trusts, each with their own unique characteristics which serve different purposes. 

A land trust is a special type of living trust (i.e. a trust which comes into effect during the grantor’s lifetime) that is specifically used to hold real estate and/or related assets. 

Table of Contents:

• How Does a Land Trust Work?
• The Benefits of a Land Trust
• Setting up a Land Trust
• Conclusion

A land trust is a legal entity that takes ownership and control over property, which is transferred to the trust by the landowner, to the ultimate benefit of the trust’s beneficiaries. Each land trust has its own unique terms tailored to suit the individual grantor’s needs. Land trusts are a type of revocable trust, meaning they can be altered or terminated by the grantor at any time.  

The types of assets which a land trust is allowed to own include:

• Physical property, e.g., houses, commercial buildings, real estate, etc.
• Mortgages/bonds
• Property notes

How Does a Land Trust Work?

Land trusts work in much the same way as ordinary revocable trusts. There are three parties involved in the trust agreement:

1. The grantor/settlor: The one who establishes the trust and transfers ownership of property into it. The grantor is usually the owner of the property before it is transferred into the trust.
2. The trustee: The trustee is appointed by the grantor to oversee and manage the assets in the trust for the benefit of the beneficiaries, in accordance with the instructions of the grantor.
3. The beneficiary/ies: The beneficiary is the party that will ultimately benefit from the assets held by the trust. In the case of a land trust, the grantor is usually also the sole beneficiary of the trust during their lifetime. It is also possible to name a separate legal entity such as a Limited Liability Company (LLC) or even another trust as the beneficiary and/or the grantor. 

The grantor transfers their chosen real estate assets to the land trust and appoints a trustee to manage it. The grantor also dictates the terms of the trust and the responsibilities of the trustee, such as collecting and distributing rental income, maintaining the property, organising the sale of the property, etc. 

The beneficiary benefits from the assets in the trust in accordance with the specific terms. They may receive immediate and ongoing benefits in the form of rental income, or permission to utilise the property during the grantor’s lifetime.

They may also receive delayed benefits in the form of proceeds from the sale of the house, either whilst the grantor is still alive or after their passing. This all depends on how the trust terms are laid out by the grantor. Land trusts are revocable, meaning that the grantor has the power to change or terminate the trust terms at any time. 

One of the main features of a land trust is that the grantor can also be the sole beneficiary of the trust while they are alive. This effectively allows them to retain full control and benefits of the trust’s assets, while legally separating ownership of the trust. This can have significant advantages. 

See: Land Trusts vs Living Trusts

The Benefits of a Land Trust

The main benefits of a land trust are:

1. Privacy of ownership

While you retain full control and use of the property you transfer to a land trust, the assets are legally listed in the trust’s name, and therefore are not linked to your personal identity in public records. This effectively provides a legal means for anonymous real estate ownership. 

2. Asset Separation

A land trust allows you to keep your real estate investments separate from your other assets, which can provide greater asset protection, tax benefits, and privacy of ownership. 

3. Avoids Probate

Land trusts, like most other trusts, allow beneficiaries to inherit the assets held in the trust without having to go through costly and time-consuming probate procedures which are associated with a Will and Testimony. 

4. Limited Liability

The assets held in a land trust are legally separated from the grantor to a certain extent, which provides an additional layer of protection in the case of unfavourable lawsuits, bankruptcy, or creditor claims. However, the extent of asset protection is limited, and so in order to provide comprehensive protection from lawsuits, an LLC or other separate legal entity should be the designated beneficiary.

5. Ease and Privacy of Transfer

Land trusts allow for the convenient transfer of real estate by designating another party as the beneficiary of the assets. The sales price also need not be disclosed publicly when the assets are transferred to a named beneficiary. 

6. Tax Benefits

Land trusts provide a way to optimise taxes. The assets held in the trust are removed from the grantor’s personal estate, which can lead to overall greater tax efficiency. It also helps to reduce/avoid estate taxes when the beneficiary inherits the assets held within the trust.

See more: Land Trust vs Living Trust

How to Set up One?

The process of setting up a land trust is not much different to other types of trusts. The grantor must designate one or more trustees to manage the trust, decide which assets they wish to transfer to the trust, and name the beneficiary/ies of the trust.

Once this has been established, the next step is to draft the trust agreement, along with its specific terms which the grantor decides upon. Trust documents are complex, and so it is recommended to enlist the services of an estate attorney to help draft the document and ensure it is valid, as well as to recommend specific terms of the trust to suit your needs.

The choice of beneficiary is obviously of utmost importance. The beneficiary can either be the grantor themselves, a separate individual, or a separate legal entity such as an LLC, a corporation, or even another living trust if you already have one.

Establishing an LLC or limited partnership as a ‘beneficiary vehicle’ is the best way to ensure maximum asset protection, because a land trust does not provide liability protection to individual beneficiaries. 

See: offshore companies for real estate

Conclusion

A land trust is a useful trust vehicle specifically designed to safeguard real estate assets for the benefit of the trust’s beneficiaries. It provides a good alternative to conventional living trusts, as it comes with some unique features which are perfectly tailored for real estate assets.

While it does not provide the highest level of asset protection (for example, irrevocable asset protection trusts are much better suited as asset protection vehicles), it does provide an additional layer of security, whilst giving complete flexibility and control to the grantor of the trust. 

Land trusts are most well-suited for providing privacy of ownership, ease of transfer, avoidance of probate, and tax optimisation. They are highly effective tools when used in conjunction with other estate planning and asset protection structures.