What Is A “Land Trust”?

Before becoming an estate planning attorney, I used to hear the term “land trust” and wonder about it. The public often misunderstands the nature of this type of trust and its purposes, attributing different benefits to such a trust than those actually conferred.

A land trust, which is a trust owning real estate, really has two primary purpose: ease of transfer of the property and anonymity of land ownership. The trust instrument itself is not recorded and is not a public document. The deed to the property is recorded in the public records, but it does not identify the beneficial owners of the trust property. Consequently, anyone looking for property owned by the beneficiaries of the trust will not find the property by searching the names of the beneficial owners in the public records. Although land trusts make it more difficult for anyone searching the public records to locate property of potential and existing debtors, land trusts, in and of themselves, do not offer additional protection from creditors. Creditors can enforce judgments against a beneficiary’s interest in a land trust.

A land trust may be titled any way the trust creator (the grantor of the trust) chooses. The grantor may elect to name her trust “Star Wars II Trust.” When property is transferred into the trust, the deed of title to the property will read: “John Doe, as Trustee of the Star Wars II Trust dated [date trust created], as amended or restated.” Because the names of the beneficial owners are not disclosed in the public records, creditors cannot easily identify the beneficial owners of the trust property.

The law relating to land trusts varies from state to state. In Minnesota, land trusts are illegal, and are not recognized. In Illinois, by contrast, land trusts are recognized.

Florida has a statute that governs land trusts, the “Florida Land Trust Act,” Section 689.071, which allows for creation of this specific, non-traditional trust.[1] Once property is transferred into a Florida land trust, the beneficial ownership interest becomes a personal property[2] right, rather than a real property right, which changes how the law treats the property right. For example, for a lender to secure an interest in the property, it will have to proceed in accordance with the laws governing personal property rather than real property, where the lender would use a traditional mortgage.[3] Because the right is considered personal property, the real estate is not subject to partition.[4] Moreover, the trustee of a land trust in Florida can convey title to the land without a spouse’s or beneficiaries’ agreement.

Why would someone want a land trust?

• Anonymity: A grantor in a high-risk profession, or a person with significant real estate holdings, might want to add a layer of difficulty to the work of a potential creditor who is seeking to identify assets of the grantor.
• Family Business Succession: Family business owners might wish to place the business’s real property in trust so that the trust instrument clearly establishes how the property will be managed and/or transferred to the next generation after the death of the business owners.
• Development: An investor might want to acquire parcels of land for development without disclosing her identity, for fear it will interfere with her ability to negotiate the best price for the purchase.
• Avoidance of Ancillary Probate Proceedings: Probate administration occurs where the person lived when he or she died. Both real and personal property held in that state is probated. If the decedent owns real property in another state, an ancillary probate proceeding must be opened in the state where that property is located. Because the interest in a land trust is deemed a personal property interest, non-residents of the state in which the property is held in trust can, by placing title to their real estate in a land trust, avoid having to open an ancillary probate administration in the event of their deaths.
• Avoidance of Partition: Real property held in a land trust is not subject to being ordered by a court to be partitioned, meaning forcibly divided among the beneficiaries.
• Business Dispute Resolution: Provisions in a well-crafted trust instrument can avoid deadlocks among multiple owners in a general or limited partnership, or other forms of multiple ownership of property, by providing rights and obligations of owners and a methodology for resolving disagreements.
• Marital Property: Use of a land trust may assist in keeping property separate from marital property.
• Legal incapacity: Legal incapacity of a beneficiary will not interfere with the trustee’s management of real estate development projects.
• Ease of Assignment: As personal property, the beneficial interest in the land trust may be assigned to a third party without the need for executing and recording a deed to the property, with its corresponding formalities and costs of recording.

Some important notes concerning land trusts:

• A corporation or other institution may be the trustee of a land trust in Florida. For practical reasons, a corporation is a good choice for trustee, because corporations do not die or abandon the role.
• The trustee must not also be the beneficial owner, or a legal doctrine will apply to merge the roles and deem the ownership an outright interest, free of trust.
• Insurers and lenders will typically have specific requirements relating to land held in a land trust.
• Consult a tax attorney regarding the tax consequences of land trust ownership.
• Consult a securities lawyer regarding possible securities regulation issues arising from the creation and offering of interests in a land trust from which profits are generated by the efforts of others.

[1] In a traditional trust, the trustee of the trust holds legal title to the trust property, and holds the property “for the benefit of” the trust beneficiaries. The beneficiaries hold “equitable title,” which gives them “beneficial ownership of”—the right to enjoy– the property in the trust. In a Florida land trust, however, the trustee holds both the legal and the equitable title to the trust property. The beneficiaries nevertheless enjoy beneficial interests in the property, as delineated in the trust instrument. The Florida Act requires that the trust instrument confer on the trustee the “power and authority either to protect, conserve and to sell, or to lease, or to encumber, or otherwise manage and dispose of the real property.” (Section 678.071(3)) Otherwise, the title is not successfully transferred in trust.

[2] Real property essentially means land and buildings. Personal property means every other kind of property.

[3] However, if the real purpose of the arrangement was to secure the payment of money with real property as the security, the interest will be deemed a mortgage and the mortgage must be foreclosed. Kirkland v. Miller, 702 So.2d. 620 (Fla. 4^th DCA 1997).

[4] Partition is a legal proceeding in which land under dispute can be forced into a sale and the proceeds divided between or among the opposing owners.