A land trust is a binding agreement between a property owner and a trustee that authorizes the trustee to hold the property with or without transferring the title and control of the property.
Community land trusts and conservation land trusts are designed to provide affordable housing to low-income families and conserve land for future generations, respectively.
Depending on your objectives, you may be considering one of these types of land trusts. For example, you may want to give back to your community through the establishment of a community land trust, or you are nearing retirement and want to ensure that your estate plan includes measures to keep your property out of probate.
The key to establishing a land trust is enlisting the help of an experienced estate planning attorney. Land trusts can be too complex for most people to create without a knowledgeable professional.
What Is a Land Trust?
A land trust is a legal entity that involves a grantor, a trustee and a beneficiary. The grantor is the landowner, and in many cases, also the beneficiary. The trustee is the person or firm that takes ownership — at least on paper — of the property.
A land trust can involve joint owners and multiple beneficiaries. When a land trust involves multiple owners, there is an additional benefit to the grantors: the trust can protect the other owners if one becomes the target of a lawsuit.
According to the Internal Revenue Service, a land trust “has no special distinction in the Internal Revenue Code and would be a simple, complex or grantor trust depending on the terms of the trust instrument.”
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What Is the Purpose of a Land Trust?
The main purpose of a land trust is to provide protection, but the purpose varies by type. For example, title-holding land trusts protect the identity or identities of purchasers while community land trusts protect lower-income homeowners and communities. Conservation land trusts, on the other hand, protect the site of cultural, historical or natural significance.
Types of Land Trusts
Land trusts are governed by state laws, and according to the Federal Deposit Insurance Corporation (FDIC), a real estate land trust is “a unique type of fiduciary relationship that is not allowed in every state.”
As mentioned, there are a few different types of land trusts, including Illinois land trusts, community land trusts and conservation land trusts. Each of them has a different origin and purpose.
Illinois Land Trust
Illinois land trusts, also called title-holding land trusts, were first used in Chicago in the 1800s. The FDIC states that this type of land trust is typically used for privacy, estate planning or to “facilitate borrowing arrangements.”
The grantor or beneficiary usually has control of the property for an Illinois land trust. However, the trustee has no control over how the property is used and merely holds the title. The property is transferred into the trust using a deed of trust document. This document may be recorded, depending on state law.
The trustee must file a “Notice Concerning Fiduciary Relationship” form, also known as Form 56, with the IRS each time property is transferred into or out of the trust.
Community Land Trust
Community land trusts are typically started by nonprofit organizations at a grassroots level and supported by local governments through financial resources that allow these organizations to sustain operations.
According to the Florida Community Land Trust Institute, “housing is made affordable by separating its value from the value of the land underneath it.”
In other words, the homeowner buys the house but not the land. The land is owned by the organization. The homeowner pays a monthly mortgage to a lender and a monthly payment called a “ground lease” directly to the CLT organization, which ensures the homeowner’s right to exclusive use of the land. This arrangement keeps the homeowner’s monthly payments low.
Conservation Land Trust
Conservation land trusts aim to secure land and wildlife for the health and safety of all Americans and the country’s future generations. From pure drinking water and clean air to protection from natural disasters, conservation land trusts protect the natural resources of land that have been donated through a conservation easement.
In addition to contributing to the preservation of the land’s natural resources, there is a tax incentive for creating a conservation land trust. Federal income tax deductions, estate tax benefits and state and local tax credits can amount to significant tax savings for land donors.
The Land Trust Alliance is a national land conservation organization based in Washington, D.C. that supports conservation land trusts across the United States with the goal of strengthening land conservation in rural and urban communities.
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How Land Trusts Work
A land trust can contain real estate assets including land, buildings, property notes and mortgages. The grantor establishes the trust and transfers the property. The trustee administers the trust while the beneficiary receives any benefit from it.
Sometimes in an Illinois land trust, the grantor is also the beneficiary. In most cases, the trustor retains control of the use of the property, but there are exceptions. Moreover, Illinois land trusts are legal only in certain states.
What states use land trusts?
Only six states have a land trust statute on the books:
- Indiana
- South Dakota
- Florida
- Hawaii
- Virginia
- Illinois
Community land trusts and conservation land trusts, on the other hand, are legal in all 50 states. Although these types of land trusts are legitimate, the IRS has warned that people use abusive tactics toward community and conservation land trusts to avoid paying taxes.
In fact, the Charitable Conservation Easement Program Integrity Act was reintroduced in Congress in 2019 to address the use of conservation land trusts as tax shelters. However, as of 2022, the bill had not been passed into law.
Land trusts are usually created for a specific period of time. They can be revocable — meaning, they can be dissolved or altered — or irrevocable — meaning, they can’t.
Land Trust Examples
- Illinois Land Trust
- Probably the most famous and recognizable use of an Illinois land trust is Disney World. When Walt Disney decided to purchase Florida swampland, he knew the price would rise dramatically if the sellers knew he was involved. So, he used several trusts to protect his identity and buy the land at the listed price.
- Community Land Trust
- New Communities Inc., formed in 1969, is often considered the first community land trust in the United States. New Communities is a Black-owned farming cooperative that used home ownership as a tool to work toward economic and political freedom. Today, there are more than 275 community land trusts in the U.S.
- Conservation Land Trust
- There are thousands of conservation land trusts across the country striving to protect and preserve land, water and wildlife. The Land Trust Alliance, a national non-profit group providing support for community land trusts, says more than 61 million acres are under conservation.
There are some notable examples of land trusts throughout the years:
Pros and Cons of Land Trusts
A land trust comes with pros and cons, and might not be the right choice in every situation. You should carefully consider whether to create a land trust before making any decisions.
Pros and Cons of Land Trusts
Pros
- Privacy: Land trusts provide buyers with anonymity.
- Liability protection: Land trusts reduce liability, especially when there are multiple grantors.
- Separation from personal finances: Land trusts divide personal financial assets from real estate assets.
- Ease of transfer: Land trusts make it easier to transfer real estate assets.
- Probate simplification: Oftentimes, land trusts do not require probate.
Cons
- Privacy is not inviolable: Anonymity is not guaranteed against a court order or subpoena.
- Liability is not limitless: In specific cases, property owners can be held liable for direct management of the property.
- Loss of redemption rights: Parties in a land trust lose all redemption rights, which allow people to reclaim property that has been seized for nonpayment by paying all outstanding amounts, fees and penalties.
- Loan disqualification: Land trusts are generally automatically disqualified from acquiring secondary market loans.
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Should I Create a Land Trust?
Land trusts exist for several reasons and can help you work towards your retirement goals. You might create a title-holding land trust to acquire property that provides a counterbalance to the longevity of retirement funds or to simplify the probate process for your beneficiaries. On the other hand, you might want to protect land or wildlife from overdevelopment, and enjoy the tax break a conservation land trust offers.
If you’re trying to prepare for expenses and health care costs in retirement, there are several alternatives to land trusts and real estate investments.
Purchasing an annuity is one example. While land trusts require real estate assets, buying the right annuity can help you prepare for the costs of retirement and reach your financial goals.
How to Create a Land Trust
Creating a land trust is similar to setting up other kinds of trusts. The process starts with choosing a trustee for the property. You will want to be diligent about selecting competent, creditable trustees, considering the fiduciary relationship of a land trust, as well as the legal and financial ramifications that do not adhere to state statutes.
Once you have chosen your trustee or trustees, you will create your land trust through the execution of a deed of trust and a land trust agreement. These two documents constitute the land trust and set its terms.
The details of the execution of these documents, as well as the terms of the documents themselves, will be specific to the state in which the land trust is established. For example, in Illinois, the deed of trust is recorded in the county where the property is located.
Because the details vary by state, consider hiring a trusted attorney who is experienced with land trusts in your state. Fees will apply.
