Land Trusts

Why use Land Trusts for Privacy and Protection

Land trusts are employed in estate and asset protection planning for the following reasons:

• Privacy of Ownership. Owners of real property often have a legitimate need to avoid disclosure of their interest. Examples include the acquisition of parcels of land by developers, so that sellers do not collude to raise their prices. Judges need anonymity for protection from unhappy litigants. Celebrities need protection from enthusiastic fans. Persons of means prefer to avoid the attention of those prospecting for them. In a land trust, only the trustee’s name is revealed.

• Transferability of Beneficial Interests. By converting the property interest from real to personal, the beneficial interest may be transferred using a simple written assignment. This permits sale or transfer without any public record of the transaction and without the expense and delay of procuring title policies. NOTE: capital gains/income tax must be paid on gain realized upon the sale of the land trust even though there may be no public record of the transfer of trust ownership.

• Personal Residence Protection: One of the most effective and creative uses of a land trust is to utilize it in conjunction with a specially formed LLC to protect the family home. Properly configured, this type of structure allows a home owner to do the following:
  1. remove his name from public ownership records,
  2. protect the home from the homeowner’s personal liabilities or debts,
  3. preserver the homeowner’s personal capital gains exemption, and
  4. preserver the homeowner’s ability to apply his mortgage interest deduction on his personal tax return.
  NOTE: A land trust, in and of itself, does not provide any asset protection. You must combine the land trust with an entity such as an LLC to protect the property the land trust holds.

• Avoiding Probate. The decedent's property is passed on to the recipient by title (generally joint tenancy), by contract (typically life insurance, trusts, pay-on-death accounts, pre-retirement death benefits of a pension plan), or by probate administration (whatever property remains). At least two means can be used to avoid including in the probate estate a deceased beneficiary's interest in a land trust: one is to issue the certificate to the beneficiary's personal trust; the other is to state in the land-trust agreement who is to receive the beneficial interest if the beneficiary dies.

  If the personal trust is located in another state or country, a land trust avoids certain legal restrictions. The simplest way to hold title to real property in another state or country is to acquire it through the living trust established by the owner for the usual estate-planning reasons. If the trustee is an individual, this works well, because all states recognize the right of an individual trustee from another state to hold title to local real property. Few states, however, recognize a corporate trustee from another state or another country.

  The estate-planning trust of a land-trust beneficiary holds the land trust interest as personal property, and title to the real property is held by the trustee under the land trust. Thus, there is no foreign trustee of any stripe holding title to the real property and no concern about state recognition.

• Apartments. The land trust lends itself nicely to protecting the beneficiaries from apartment operations. Tenants do not know the owners’ identity, thus cannot bother them with midnight complaints.

• Agricultural Uses. In many states, the land trust is in wide use for holding title to agricultural property. It is of special interest to farming families who wish to pass the property through succeeding generations without risk of partition by dissident heirs.

  How Land Trusts Work

  A land trust is a real property title-holding mechanism, a trust agreement under which the beneficiary directs the trustee in all matters affecting title to the trust property. The following characteristics distinguish land trusts:

• Beneficiaries Not Identified. A land trust is used to hold title to real property only, identifying the trustee, but without identifying the beneficiaries to the trust. Transfer of the property is accomplished through a form of deed called a Quitclaim Deed in Trust.
  (Not a “deed of trust,” which is a security instrument.)

• Beneficiaries Hold Full Management Powers. The trust agreement is not recorded. Under it, the creator-beneficiary (you) retain full powers of management and control over the trust property, and the trustee acts only at your direction to convey, encumber, or take any other action affecting title to the property. The trustee has no duties relating to the trust estate other than those affecting title. You can utilize a corporation which you own and control as the trustee!

• Real Property Interest Converted to Personal Property. By express provision, the interest of each beneficiary is characterized as personal property, in much the same way as is stock in a corporation. Evidence of ownership may be established by a “Certificate of Beneficial Interest.” A “Certificate of Beneficial Interest" is similar in form and content to a stock certificate, or a certificate of beneficial interest in a business trust or limited liability company.

• Independent Trustee. The trustee may be a corporate entity, trusted individual, bank, lawyer or independent trust company.

• Beneficiaries Assume All Liabilities. Under the typical land trust agreement, the creator releases the trustee of any liabilities arising from the trustee’s operation of trust property.

• Relationship of Trustee and Beneficiary. In order to understand the utility of the land trust, we must clearly distinguish the roles of trustee and beneficiary. The trustee owns the property, subject to the right of the beneficiaries to instruct on all matters affecting title. The beneficiaries hold only the right to give those instructions and to enjoy the rents and profits from the property.

  The trustee is not the agent of the beneficiaries. A superficial analysis of the relationship suggests an agency relationship. Under trust law, however, the courts uniformly hold that reserving or granting a power of direction does not create an agency. Consequently, the trustee acts, even though at the direction of the beneficiaries, only as principal. This legal characterization leads to personal liability on the part of the trustee. It is for that reason that the prudent corporate fiduciary serving in this capacity carefully protects itself with release and indemnity provisions in the trust instrument. A second legal consequence is that the trustee cannot create a liability enforceable against the beneficiaries without their consent.

  The beneficiaries are not the agents of the trustee. In managing the property and giving instructions to the trustee, the beneficiaries act on their own behalf, not as the trustee’s agent. Therefore, any obligations incurred are enforceable against the beneficiaries alone, and not against the trustee or trust property.

• Tax Implications of a Land Trust. According to the Internal Revenue Code §677, a properly structured land trust should be classified for income-tax purposes as a grantor trust. If so, all income and deductions flow through to the beneficiaries in amounts proportionate to their respective interests in the trust estate. If the beneficiary is a partnership, the ultimate tax treatment is determined by the terms of the partnership agreement. The beneficiary also may be a corporation.

  If the beneficiaries are a married couple, upon the death of either, the surviving spouse would receive a step up in basis in the property.

• Securities-law implications. When forming a land trust with two or more beneficiaries, and one or more of them depends on the efforts of others to manage the property, securities laws are a consideration. In those circumstances, the creator of the trust must either register or qualify the offering of beneficial interests with the state and federal agencies involved or bring the transaction within state and federal guidelines for exempt private placements of securities.

  Historical legal basis for land trusts

  In the absence of a statute authorizing the land trust, its validity is determined by an analysis of existing case law in the target state. The principal impediment is ordinarily the Statute of Uses. This statute was enacted in 1536 by King Henry VIII of England to invalidate gifts of land in trust. That act was modified by the English courts nine years later, holding the Statute of Uses was not applicable to an active use or trust; i.e., where the trustee is given active duties to perform, the trust is valid and not impaired by the statute.

  While the Statute of Uses is the law in many states, it is not in some, including California. Even where not recognized, the courts consistently hold that a “dry” or “passive” trust (one in which the trustee has no duties to perform or the purpose of the trust is accomplished) may be terminated.

  Even if no cases can be found in your home state in which the trustee duties are limited in the manner contemplated by the land trust, the trustee clearly has duties precluding termination as a dry trust; e.g., it must, at the instruction of the beneficiaries, convey title and perform any other act that affects title, and only upon expiration of the trust term will the trustee be relieved of its duties. Under Restatement (Second) Trusts, Section 69 (1959), the majority view in the U.S. is that a duty on the part of the trustee to convey the trust estate, and nothing more, is sufficient to avoid classification as a dry trust.