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Trust Law/Level VII · Property and business/7.1 Land/Lesson 1

Land trusts

What a US land trust is, which states have statutes on it, how the beneficiary keeps control while a trustee holds title, and why it is neither a tax shelter nor strong asset protection.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Often the leanest route is no land trust at all: where state law allows, a transfer-on-death deed or a revocable living trust avoids probate, and a land trust saves no tax because Rev. Rul. 92-105 taxes the owner directly.
  2. Where a statute exists, as in Florida under §689.071, a land trust needs only a deed recorded with the county and a private trust agreement; county recording fees and any transfer tax still apply.
  3. Because the IRS treats the beneficiary as owning the land directly, no separate trust tax return arises and a §1031 like-kind exchange stays available; rents and gains still go on the owner’s own return.
  4. Assigning the beneficial interest instead of recording a new deed does not avoid transfer tax: Illinois taxes transfers of beneficial interests at 50 cents per $500 of value, recorded or not (35 ILCS 200/31-10).
  5. A land trust adds little liability protection; insurance or an LLC does that job. Moving land into one to hinder existing creditors can be undone as a voidable transfer.

MaterialsFlorida Statutes §689.071, the Florida Land Trust Act, free on the Florida Senate websiteCode of Virginia §55.1-117, on land trusts, free on the Virginia Legislative Information System websiteRev. Rul. 2004-86 on the IRS website, which summarises Rev. Rul. 92-105 on Illinois land trusts

Wonder

  1. Why would a trustee hold title to land while someone else makes the decisions about it?
  2. Which states have statutes on land trusts, and what do those statutes say?
  3. Why does US federal tax law usually look straight through a land trust?

Explore

  1. In the US, a land trust, often called an ‘Illinois-type’ land trust, is an arrangement in which a trustee holds title to real estate, usually under a recorded deed in trust, while the beneficiary keeps the power to direct the trustee, manages the property and receives its income and sale proceeds. The trustee’s duties are mostly limited to holding title and signing deeds or mortgages when directed. The detailed terms are in a separate trust agreement that is usually not recorded. This lesson describes the device and does not recommend it.
  2. The device grew up in Illinois, especially in Chicago. In Duncanson v. Lill (1926), the Illinois Supreme Court dealt with a Chicago apartment building conveyed in 1917 to the Chicago Title and Trust Company as trustee, under a deed declaring the beneficiaries’ interest to be personal property. In Conley v. Petersen (1962), it called the validity of such land trusts ‘clearly settled in Illinois’. Illinois land trusts rest mainly on case law and conveyancing practice; Illinois statutes, such as the Land Trust Beneficial Interest Disclosure Act (765 ILCS 405), regulate them rather than create them (lesson 7.1.2).
  3. Some other states have statutes on land trusts. Florida’s Land Trust Act (Fla. Stat. §689.071) defines a land trust and provides that if the recorded deed or the trust agreement declares the beneficiaries’ interests to be personal property only, that provision controls; otherwise the interests are real property. Code of Virginia §55.1-117 provides that a land trust does not fail because no beneficiaries are named and no duties are laid on the trustee, and deals with when beneficiaries’ interests are personal property. Hawaii’s Land Trust Act (Hawaii Revised Statutes chapter 558) authorises trusts that incorporate it and provides for disclosure of beneficiaries.
  4. In states without such a statute, a similar arrangement is judged under general trust and property law, and courts may treat it differently, for example as an agency; results vary by state. Lists of ‘land trust states’ published online differ from one another, so each claimed statute is worth checking in the state’s own code before relying on it. The term should also not be confused with conservation land trusts, which are nonprofit organisations that protect land from development and share only the name.
  5. A land trust is not a tax shelter. In Rev. Rul. 92-105, the IRS considered an Illinois land trust in which the taxpayer kept exclusive control of the management, operation, renting and selling of the property, with an exclusive right to its earnings and proceeds, and had to file all tax returns and pay all taxes on it. Because the trustee’s only responsibility was to hold and transfer title at the taxpayer’s direction, the IRS concluded that no trust existed for federal tax purposes: the trustee was a mere agent, and the taxpayer was treated as owning the real property directly.
  6. A land trust is not strong asset protection either. Because the beneficiary keeps control and the benefit, a court can generally reach the beneficial interest to pay the beneficiary’s debts, and the beneficiary’s identity can be obtained through discovery and other legal process (lesson 7.1.4). What a land trust mainly offers is a public deed showing the trustee’s name rather than the beneficiary’s, and the ability to transfer the beneficial interest by assignment instead of a new deed. How those features work, and how transfers are taxed and recorded, depends on the state.

Key facts

  • In a US land trust, a trustee holds title to real estate while the beneficiary directs the trustee, manages the property and receives its income and proceeds.
  • In Conley v. Petersen (1962), the Illinois Supreme Court called the validity of Illinois land trusts ‘clearly settled’.
  • Florida (Fla. Stat. §689.071), Virginia (Va. Code §55.1-117) and Hawaii (HRS chapter 558) have statutes on land trusts.
  • Under Florida’s Land Trust Act, a provision declaring the beneficiaries’ interests to be personal property controls; without one, the interests are real property.
  • In Rev. Rul. 92-105, the IRS treated the trustee of an Illinois land trust as a mere agent, so the taxpayer was treated as owning the property directly.
  • A land trust is not strong asset protection: a beneficiary’s interest and identity can be reached through legal process.

Exercise nine, six, three, one

9CollectList up to 9 features of land trusts described in this lesson or in a state statute you are reading (some sources give fewer), such as who holds title, who directs the trustee, how the beneficial interest is classified and how the arrangement is taxed.
6ClusterSort them into 6 categories: who holds title, who controls the property, how the beneficial interest is classified, state statutes, federal tax treatment, and facts you are unsure about.
3DistillReduce the 6 categories to 3 groups: what a land trust changes on the public record, what it leaves with the beneficiary, and what it does not change for tax or creditors.
1CrystallizeWrite 1 sentence explaining, in your own words, why the IRS in Rev. Rul. 92-105 treated the trustee of a land trust as a mere agent.

Fact check

Dates, figures and claims checked against the published sources listed below.

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