A land trust is a legally enforceable trust arrangement between a property owner and a trustee that allows the trustee to keep the property either with or without surrendering the property’s title and control.
A land trust’s purpose is determined by the kind of land trust. Real estate trusts, sometimes known as “Illinois land trusts” after the state where they were created, exist to safeguard the privacy of landowners and avoid probate. They may also keep creditors away from the property.
Conservation land trusts and community land trusts are intended to assist low-income households with affordable homes while also conserving land for future generations.
You could be contemplating one of these kinds of land trusts, depending on your goals. For instance, you could wish to give back to your community by establishing a community land trust, or you might be approaching retirement and want to make sure your estate plan contains provisions to keep your property out of probate.
Enlisting the assistance of an expert trust lawyer is essential when it comes to establishing a legal land trust. Land trusts are much too complicated for most individuals to set up without the help of an expert.
What Is a Land Trust and How Does It Work?
A land trust has no unique distinction in the IRC (Internal Revenue Code). It would be a simple, complex, or grantor trust depending on the terms of the trust instrument, according to the Internal Revenue Service.
A land trust is a legal entity comprising three parties: the grantor, the trustee, and the beneficiary. These are the same people that are involved in any other trust. The landowner is the grantor, and in most situations, the landowner is also the beneficiary of a land trust. The trustee is the company or person who, at least on paper, assumes ownership of the property.
A land trust might have several beneficiaries and co-owners. There is an extra advantage to the grantors when a land trust comprises numerous owners. If one of the owners is sued, the trust may protect the other owners.
Types of Land Trusts
Land trusts are controlled by state regulations, and a real estate land trust is “a unique type of fiduciary relationship. This is not allowed in every state, according to the Federal Deposit Insurance Corporation.
The Illinois Land Trust
In the 1800s, Illinois land trusts were first employed in Chicago. This form of a land trust is often utilized for privacy, inheritance planning, or to “facilitate borrowing arrangements,” according to the FDIC.
An Illinois land trust’s donor or beneficiary often keeps ownership of the property. The trustee only owns the title and has no authority over how the property is used. A deed of trust is a binding document that puts property into a trust and may be registered, depending on state legislation.
Each time a property is transferred out of or into the trust, the trustee must submit Form 56, i.e., the “Notice Concerning Fiduciary Relationship” form, with the IRS.
Community Land Trust
Community land trusts are often founded at the grassroots level by non-profit groups and backed by local governments via financial resources that enable these organizations to operate.
Housing is made affordable in the Community Land Trust (CLT) model by separating its value from the value of the land beneath it, according to the Florida Community Land Trust Institute.
To put it another way, the homeowner purchases the residence but not the land. The organization owns the land. The homeowner deposits a monthly mortgage payment to a lender, as well as a monthly “ground lease” payment to the CLT organization, which guarantees the homeowner’s right to exclusive use of the land. The homeowner’s monthly payments are kept low as a result of this arrangement. CLT homeowners pay property taxes and create equity in the same way that homeowners with other kinds of loans do.
The Conservation Land Trust
Conservation land trusts work to ensure that land is preserved for the health and safety of all Americans and future generations. Conservation land trusts maintain the natural resources of land that has been granted via a conservation easement, from clean drinking water to protection from natural catastrophes.
There is a tax benefit for establishing a conservation land trust, in addition to contributing to the preservation of the property’s natural resources. For land donors, federal income tax deductions, inheritance tax advantages, and state and local tax credits may result in considerable tax savings.
Land Trusts and How They Work
The conditions of the agreement determine how a land trust operates.
In an Illinois land trust, for example, the property owner may be both the trustor and the beneficiary, although this is not usually the case. The trustor, in most situations, maintains authority over the property’s usage, although there are exceptions. In addition, Illinois land trusts are only authorized in a few states.
On the other hand, community land trusts and conservation land trusts are lawful in all 50 states. Although these forms of land trusts are legal, the IRS has cautioned that those who use conservation and community land trusts to avoid paying taxes are abusing the system.
In fact, in 2019, Congress revived the Charitable Conservation Easement Program Integrity Act to combat the exploitation of conservation land trusts as tax shelters.
When forming any sort of land trust, such schemes emphasize the need to seek legal advice from an experienced attorney.
How Do I Form One?
Choosing a trustee for the property is the first step in creating a land trust. Landowners must be vigilant in choosing qualified, reputable trustees, given the fiduciary relationship of a land trust and the legal and financial repercussions of a land trust that does not follow state regulations.
After you have decided on a trustee, you will need to set up your land trust by signing a deed in trust and a land trust agreement. These two legal documents establish the terms of the land trust.
The manner in which these contracts are executed, as well as the wording of the documents themselves, are unique to the state in which the land trust is formed. The deed in trust is registered in the county where the property is situated.
You will require the guidance and assistance of an attorney who is familiar with land trusts in your state since the nuances differ by state. Please note that there will be charges, and these charges may differ from State to State.