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Trust Law/Level VII · Property and business/7.1 Land/Lesson 2

The Illinois land trust

How the Illinois land trust works: a deed in trust to a bank or trust company, a beneficial interest treated as personal property, why Illinois courts held it is an active trust, and the limits of its privacy.

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. If the only goal is avoiding probate, a revocable living trust or, where the state allows, a transfer-on-death deed does it without paying a bank or trust company to act as trustee.
  2. Deeding your own land into an Illinois land trust for no price is exempt from state transfer tax where consideration is under $100 (35 ILCS 200/31-45(e)); later sales of the beneficial interest are taxed at 50 cents per $500.
  3. Name successor beneficiaries in the trust agreement, as the agreement in Conley v. Petersen did, so the interest passes at death without probate; without such a clause it may pass to the executor.
  4. Privacy covers only the public deed: 765 ILCS 405 requires beneficiaries to be named on applications to government for permits, licences or other benefits relating to the land, and courts can compel disclosure.
  5. No separate trust tax return is needed, because Rev. Rul. 92-105 treats the beneficiary as the direct owner; rents and gains go on the beneficiary’s own return, and property tax still falls due.

MaterialsChicago Title & Trust Co. v. Mercantile Trust & Savings Bank, 300 Ill. App. 329 (1939), free on the Caselaw Access Project websiteConley v. Petersen, 25 Ill. 2d 271 (1962), free on the Caselaw Access Project websiteThe Land Trust Beneficial Interest Disclosure Act, 765 ILCS 405, free on the Illinois General Assembly website

Wonder

  1. Why did Illinois courts treat a trustee who signs deeds only when asked as an ‘active’ trustee?
  2. What does it mean for an interest connected with land to be treated as personal property?
  3. When must the beneficiaries of an Illinois land trust be named?

Explore

  1. An Illinois land trust is created by two documents. A deed in trust conveys the real estate to a trustee, often a bank or trust company, and is recorded. A separate trust agreement, usually not recorded, names the beneficiaries and gives them the power to direct the trustee, to manage and control the property and to receive its rents and sale proceeds. The deed gives the trustee broad powers so that buyers and lenders can deal with it without examining the agreement. This lesson describes the device and does not recommend it.
  2. The form developed in Chicago practice. In Duncanson v. Lill (1926), the Illinois Supreme Court considered a Chicago apartment building conveyed in 1917 to the Chicago Title and Trust Company as trustee. The deed vested the entire legal and equitable title in the trustee and declared the beneficiaries’ interest to be personal property, consisting of the earnings, avails and proceeds of the land. The court treated the beneficiaries as holding no freehold in the land itself. In Conley v. Petersen (1962), it called the validity of such land trusts ‘clearly settled in Illinois’.
  3. In Chicago Title & Trust Co. v. Mercantile Trust & Savings Bank (1939), the Illinois Appellate Court held that the English Statute of Uses, which turned a passive use into legal ownership by the beneficiary (lesson 1.2.4), did not vest title in a land trust’s beneficiary, because the trustee had active duties and the beneficiary’s interest was personal property. The duties were to make deeds when directed and to sell any property left in the trust at the end of its twenty-year term. Earlier Illinois decisions had held that duties count as active even when merely formal. So a judgment against the beneficiary was not a lien on the land.
  4. Treating the beneficial interest as personal property has practical effects. It can be transferred by assignment rather than by a new deed: in Duncanson v. Lill, the beneficiaries assigned their interest to buyers, who signed the trust agreement and became the beneficiaries while title stayed with the trustee. Under the forms in these cases, a beneficiary’s interest passed on death to the executor or administrator, not directly to heirs, although an agreement can name successor beneficiaries, as the one in Conley v. Petersen did. The trust agreement’s terms therefore decide what happens.
  5. The privacy is limited. In Sanelli v. Glenview State Bank (1985), the Illinois Supreme Court quoted a statute reciting that the legislature had for years required disclosure of land trust beneficiaries in certain situations, because direction and control of the real estate lay with them. The Land Trust Beneficial Interest Disclosure Act (765 ILCS 405) requires an application to the state or a local government for a permit, licence or other benefit relating to land held in a land trust to name each beneficiary and their interest. Discovery and other legal process can also reveal beneficiaries (lesson 7.1.4).
  6. For federal income tax, Rev. Rul. 92-105 considered an Illinois land trust whose trustee’s only responsibility was to hold and transfer title at the taxpayer’s direction. The IRS concluded that no trust existed for tax purposes: the trustee was a mere agent, and the taxpayer was treated as owning the real property directly, which mattered for a like-kind exchange under §1031. An Illinois land trust is therefore not a tax shelter, and because the beneficiary keeps control it is not strong asset protection either (lesson 7.1.1). Lesson 7.1.3 compares the Massachusetts nominee trust.

Key facts

  • An Illinois land trust uses a recorded deed in trust to a trustee, often a bank or trust company, and a usually unrecorded trust agreement naming the beneficiaries.
  • In Duncanson v. Lill (1926), a Chicago land trust deed vested the entire legal and equitable title in the trustee and declared the beneficiaries’ interest personal property.
  • In 1939 the Illinois Appellate Court held that the Statute of Uses did not vest title in a land trust’s beneficiary, because the trustee had active duties and the interest was personal property.
  • In Conley v. Petersen (1962), the Illinois Supreme Court called the validity of Illinois land trusts ‘clearly settled’.
  • 765 ILCS 405 requires applications to government for a permit, licence or other benefit relating to land in a land trust to identify the beneficiaries.
  • 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.

Exercise nine, six, three, one

9CollectList up to 9 features of the Illinois land trust described in this lesson or in a court decision you are reading (some sources give fewer), such as what the deed in trust says, what the trustee must do, how the beneficial interest is classified and when beneficiaries must be named.
6ClusterSort them into 6 categories: the deed in trust, the trust agreement, the trustee’s duties, the beneficiary’s rights, disclosure rules, and federal tax treatment.
3DistillReduce the 6 categories to 3 groups: what appears on the public record, what stays in private documents, and what the law can require to be disclosed or taxed.
1CrystallizeWrite 1 sentence explaining, in your own words, why an Illinois court held that the Statute of Uses did not make a land trust’s beneficiary the legal owner.

Fact check

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

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