Did you know that Walt Disney himself utilized a land trust?
It all started with Disneyland in Anaheim, California.
After the first location proved itself to be a success, Disney decided to build a second location soon after.
He knew he wanted this location to be even larger, and he eventually found the right spot while on an airplane tour of Central Florida.
Near the then-sleepy town of Orlando, Disney found 27,000 acres of unused swampland.
Because it was waterlogged, the huge stretch of land was selling for only $180 an acre in 1965.
In 2020, that’s worth roughly $1,500.
Knowing that the price would likely spike if a highly successful businessman came to call, Disney decided to hide his identity by purchasing the land through several trusts.
Today, the use of land trusts continues.
Land trusts are a private legal contract in which the owner of real estate transfers the title of the property to a trustee.
While the property owner (Disney in the above case) retained all the rights to the property itself, they ultimately remain anonymous throughout the process of building, renting, selling, or transferring the land to heirs.
In this blog, we’re talking about everything you must about creating a land trust.
Let’s get started.
1. How Does A Land Trust Work?
In legal terms, a trust is an arrangement in which one party holds property for another party’s benefit.
The trustee will hold the title to the property for the benefit of another party (or parties) known as the beneficiary (or beneficiaries).
Often, the creator of the trust is called the settlor or trustor.
The purpose of a trust is to shield the asset owner from certain legal proceedings and tax exposure.
Trusts can be both revocable or irrevocable, meaning that they may be dissolvable or undissolvable.
Trusts that are revocable can be altered or canceled by the trustor at any time.
If you’re interested in creating a land trust, you’ll need all four entities listed below.
2. Should you use a revocable or irrevocable trust?
As stated above, revocable trusts can be altered at any time by the trustor.
This means you will still retain control of the trust (and by extension, the property).
So why would you ever want to use an irrevocable trust?
Well, an irrevocable trust can provide greater protection against creditors precisely because you relinquish the ability to change the trust once it is created.
In addition, for high-wealth individuals, irrevocable trusts can protect your heirs from both federal and state estate taxes upon your passing.
Thus, revocable vs irrevocable trusts represent a trade-off between control and protection.
3. What are the two types of land trusts?
To understand land trusts, you should start by differentiating between the main two types: title-holding trust and conservation land trust.
We’ll discuss each below.
Allows the property owner to anonymously maintain all rights over the property.
This is the kind of trust that Walt Disney had.
While no one knew it, he still owned the property and was able to direct the actions of the land trust.
These types of trusts are also commonly called Illinois land trusts because they were first popularized in Chicago in the 1800s.
Businessmen in this area used land trusts to circumvent laws that stated that they were not allowed to vote on city projects in areas where they owned land.
Today, not all 50 states have a legal structure in place for title-holding land trusts.
If they do not, most will defer to the Illinois-style of land trusts so that individuals can form land trusts in their state under this guidance.
Be sure to look up the specifics in your area if you’re interested n establishing a land trust.
Conversely, a conservation land trust requires that the property owner gives up some rights over land use and development.
Often, this is to help protect wildlife, natural resources, or historical or cultural sites from development or other activities.
Although it’s for a good cause, it can be difficult for property owners to cede control over their land.
4. How does a land trust protect privacy?
A land trust is created by two legal documents.
One, the trust agreement, is between the trustor and the trustee.
With this first document, the rights, powers, duties, and obligations of the parties are established.
The second document is a deed from the trustor to the trust.
These two documents work together to help make the trust private.
First, you’ll execute the trust agreement.
Next, you’ll record the trustee deed.
Once you’ve done these two tasks, the land title records will list the trust as the owner and not the trustor.
You’ll be able to keep the trust agreement private in your own files as well, which means that no one will ever know that you retain an interest in this property.
This is advantageous because if you have a litigator who is interested in suing people, they may check to see if you have any holdings first.
Any successful real estate investor would want to protect themselves from being an unnecessary target.
A land trust allows you to keep your private business private.
5. What are the benefits of a land trust?
Owning a land trust can be incredibly beneficial.
Here’s why you may consider it.
Land trusts allow you to conceal your identity as the legal owner of real estate.
Your identity will not be disclosed to the public or any third party (unless it is subpoenaed, or court-ordered).
Land trusts make transferring land easier.
The beneficiary (“owner”) of a land trust can be changed without recording a new deed.
Lawyers often call this “ease of conveyance” because it is easy to transfer property to heirs without having to involve courts or lawyers.
You’ll also often skip the process of probate, which is convenient.
Probate is the official proving of a will, and this process is typically required when the owner of an asset passes.
However, with a land trust agreement, you’re able to designate a succession of ownership.
Thus, you’ll avoid the costly and time-coming process of probate.
Do you have multiple owners of a parcel?
If so, your land trust can be structured intentionally to provide a clear and easy legal division.
This is a simple way to facilitate multiple ownership.
A land trust allows you to remain eligible for both homeowner’s and senior citizen’s real estate tax exemption.
No need to throw away your tax advantages!
6. What are the drawbacks of a trust?
The drawbacks of land trusts are hidden in their benefits.
One potential disadvantage is the fact that it gives owners a false sense of security.
Property owners are not entirely protected from liability when they create a trust.
Courts have ruled that real property owners (not trustees) are liable in direct management of the property.
In other cases, you may not have the complete privacy that you want.
Courts can still subpoena information, and the legalities of land trusts are highly complex and vary from state to state.
Finally, while you may maintain some of your tax advantages, you will still be required to file Form 1041 as a land trust.
Don’t think that you’re exempt from taxes altogether just because you’re a land trust!
7. What are conservation and community land trusts?
A conservation land trust is an organization that acquires properties, either through purchase or donation, in order to protect them for future generations.
Conservation easements are a popular way to protect land as the property owner can sell or donate their land for conservation while also collaborating on the restrictions about how the land can be used.
In these cases, the land can sometimes be used for recreation, but not for development.
Conservation land trusts are advantageous because it allows the property owner to retain the property rights to the land.
It also helps the environment because the land is no longer at risk of being exploited or developed.
Community land trusts are nonprofit organizations that provide affordable housing for lower-income communities.
They incorporate a dual-ownership concept.
Typically, when buying a house, you pay for the structure and the land it occupies.
In a community land trust, the organization buys the land and you (as the homeowner) would only pay for the house.
This is a great benefit for community members looking for affordable housing because their mortgage payments will not change.
Community land trusts will keep their homes at affordable prices that are independent of market fluctuations.
In order to buy a house in this area, you must be able to show that you can cover the mortgage and upkeep costs.
Additionally, you must also agree to sell the home for the same price that you paid for it when you’re ready to move.
This helps keep housing affordable for everyone.
Both community land trusts and conservation trusts are legal in all 50 states.
If you’re interested in finding out more about them, look for specific details in your area!
8. What is the difference between a land trust and an LLC?
Above, we talked about the uses of a land trust as a privacy device.
Land trusts help you conceal your holdings so that no one else needs to know.
That said, land trusts are not corporate entities, and they do not enjoy the liability protections that corporations or limited liability companies (LLC) may enjoy.
If someone were to become injured on your land, you (as the beneficiary) could be held liable.
If you don’t want this to happen, then you’ll want to establish a corporation, LLC, or limited partnership.
This way, it stands in as the beneficiary, and you’re safe from any liability.
9. How do taxes work for a land trust?
The transfer of property into a land trust can often be accomplished tax-free.
For reference, you can look at the internal revenue code.
The federal government will treat the property as if it is owned outright by the beneficiary.
Further, in many states, the transfer of property to a trust does not trigger any transfer or recording taxes.
You may find that accountants or attorneys in your area are unfamiliar with land trusts in your area.
While this can be frustrating, it may also reassure you that land trusts ensure privacy.
Anyone who does not already know about land trusts won’t often seek to find out more about your holdings.
10. How do you set up a trust for multiple investment properties?
Land trusts are created using the two legal documents described above: a contract or agreement that states the right of both parties and the trustee deed.
However, before you can create the trust itself, you must decide on a name for your trust.
This is what the owner will be listed as in public records when the properties are placed in the trust.
Then, you should find a land trust attorney who can draw up a contract stating the rights of the parties and your land trusts.
Both parties will sign it, and you’ll record your trustee deed.
Once this step has occurred, you’ll be protected under all the privacy benefits that land trusts provide.
Are you ready to create your own land trust?
Land trusts are ideal for lawsuit prevention and privacy.
If you’re looking for anonymity like Walt Disney, they can be an easy way to achieve that as you pursue your real estate dreams.
Just remember that, for as many benefits as they provide (including privacy of ownership), land trusts do not give you true asset protection.
For that, you’ll need to investigate asset and liability protection.
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Disclaimer: we are not lawyers, accountants or financial advisors and the information in this article is for informational purposes only. This article is based on our own research and experience and we do our best to keep it accurate and up-to-date, but it may contain errors. Please be sure to consult a legal or financial professional before making any investment decisions.