The process of buying, selling and managing real estate can be a complicated affair. For real estate investors who work full-time jobs or need to manage other investments in addition to their landholdings, these complexities can sap profits and create tremendous legal headaches. They can also waste tremendous amounts of time that might be better spent on other activities.
In most states, landowners and real estate investors who can't be bothered with these problems are afforded a relatively simple solution: a legal arrangement known as a land trust. A land trust is a common and convenient way to transfer the rights and benefits of land ownership between interested parties. As a well-established form of ownership, the parameters within which the parties to land trusts must operate have been well-established.
Two Types of Land Trusts
Although there's only one form of land trust that concerns most real estate investors, it's worth mentioning that there's a second iteration that might be useful to certain types of landowners. Known as a "conservation" or "historic" land trust, this type of trust is typically established to protect certain classes of property within a given jurisdiction. Whereas conservation trusts typically protect unimproved natural environments for the enjoyment of the public, historical trusts may protect unique old buildings like farmsteads, antique pieces of fixed equipment like waterwheels, and historically significant pieces of property.
However, most real estate investors concern themselves with regular or "Illinois" land trusts. These instruments are relatively easy for the layperson to grasp.
Why Illinois?
The origins of the modern land trust were not particularly auspicious. Since they were first established in the late 1800s to administer the real estate investments of corrupt Chicago-area politicians, they've come to be called "Illinois trusts." However, original "Illinois" trusts had one key attribute that distinguishes them from modern land trusts: In order to preserve some semblance of fairness, they were structured as "blind" trusts over which beneficiaries lacked any executive power. Although every state maintains slightly different laws pertaining to land trusts, most modern trusts closely follow the original "Illinois" structure.
How a Trust Operates
There are three parties to the vast majority of land trusts: grantors, trustees and beneficiaries. These are defined as follows:
- Grantor: The original owner of the property that belongs to the trust. A trust may be comprised of a single grantor's holdings or grow by accumulating multiple grantors' holdings over time. Obviously, grantors must sell or deed their holdings to the trust.
- Trustee: The entity that administrates the trust and executes the beneficiary's orders.
- Beneficiary: The individual, partnership or corporation with a beneficial interest in the trust. Land trust beneficiaries enjoy all of the privileges associated with land ownership and few of the headaches associated with land management.
Once a grantor sells or deeds his or her holdings to the trust, the trust's beneficiary or beneficiaries receive complete ownership rights over the property. The beneficiaries are free to sell, rent, subdivide and improve the property in accordance with local ordinances. Meanwhile, the trustee must follow their instructions and handle all legal issues that might arise from the property's use and ownership.
Some Key Benefits
Land trusts confer several key benefits. For starters, they ensure that land can be passed easily between beneficiaries in the event of death, divorce, or the dissolution of a legal partnership. While they don't confer complete legal immunity, trusts do offer some basic legal protections for their beneficiaries as well.
Trusts also guarantee the privacy of their beneficiaries by "shielding" their interests behind the "facade" of the trustee. Beneficiaries' identities can only be disclosed in certain extraordinary circumstances. Finally, trusts simplify the transfer of interests or ownership stakes by eliminating the need for formal deed transfers between beneficiaries. A beneficiary who wishes to "cash out" and sell his or her stake to his or her partners in the trust can do so through a simple, semi-private transaction.
Trust and Verify
It's important to note that trusts aren't cure-alls for the complex nature of real estate ownership. However, they're useful tools that can enrich and protect their beneficiaries while dramatically simplifying the legalities of long-term land ownership. Since the laws that govern land trusts vary between jurisdictions, you'll need to study the laws in your area before entering into one of these agreements.
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