What is the Purpose of a Land Trust?
Trusts are not just for the extremely wealthy, they are a useful tool to protect anyone’s assets. A trust can simplify the process of passing real estate assets on to heirs, as well as serve other useful functions.
What is a Land Trust?
A real estate land trust is one of many types of trusts.
A trust is an arrangement in which one party holds property for another party’s benefit.
The owner of the trust becomes the trustee for all legal purposes. However, the property owner does not give up control of their assets such as real estate, stocks, bonds, or cash.
What is the purpose of a trust?
There are several reasons people use trusts. A trust is protection for the owner from certain legal issues and tax exposure, or a trust might be used to shield real estate assets from some estate taxes. A trust can also simplify the process of passing real estate assets on to heirs, and a living trust can help heirs to avoid dealing with probate.
When you place your assets in a trust, technically you no longer “own” them. Instead, the trustee of the trust is the owner.
After a person dies, only the property they technically owned will go through probate. So, since the person no longer “owns” the property int he trust, the property will not have to go through probate.
What’s the big deal about probate?
Probate is a time consuming process that’s supervised by a court. The court validates your will and distributes your property.
Probate can take between six months and two years, and can add stress and responsibilities at a difficult time.
Steps involved in probate:
- The will is filed with your local probate court and at that point becomes public records.
- A complete inventory of your property must be conducted by your executor.
- Your inventoried property must then be evaluated and appraised.
- Next, all remaining debts, which include death taxes, will be paid.
- After this, the court will validate your will.
- All attorney’s fees, executors’ fees, and court costs are then paid from your estate.
- Finally, what’s left of your estate’s assets are distributed to your heirs.
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What if you don’t have a will?
If your estate is over a certain threshold, your estate must go through the probate system. In this case, the court will decide how to distribute your estate among your heirs.
Although a living trust can help you avoid probate, a trust in itself may not be enough.
A simple will may also be required to cover any of your property that is not included in the trust.
Types of Trusts
Irrevocable
A trust that cannot be canceled.
Revocable
A trust that can be dissolved at any time.
A revocable trust controlled by you can be altered or canceled. Income from the trust flows to you personally for income tax purposes.
There are variations of these as well, so always consult with a qualified attorney to select the best option for you.
If disbursement of the assets in your estate and avoidance of probate is your primary reason for creating a trust, a revocable or an irrevocable trust could be appropriate.
NOTE: Revocable trusts do not provide protection from lawsuits and creditors in most states.
Revocable trusts controlled by you are generally considered to be part of your personal assets and may be seized by lawsuits and claims by creditors.
If protection from liability is your main goal, then an irrevocable trust may be a better option. Since this type of trust is created while you are alive, it’s still considered a living trust or “inter vivos” trust.
An irrevocable trust can be a tool used as protection from creditors and lawsuits.
An irrevocable trust has three requirements:
- You cannot cancel or “revoke” it.
- You cannot control it – it must have a separate trustee other than you.
- The trust is required to file its own income tax return.
Essentially, by creating an irrevocable trust, you’re creating a separate legal entity and giving it ownership and control over any assets in the trust.
Any assets placed in this type of trust would have protection from creditors and courts, while your personally owned assets would not have this protection.
Testamentary Trusts
A testamentary trust is another option. This is a trust to be created upon your death. It could be funded by the state’s assets or any life insurance proceeds.
A testamentary trust does not require maintaining the trust during your lifetime. Since trusts can involve some time and monetary costs, this option may be best for some people.
A trust can ensure that our wishes are carried out with more certainty than a will, and this is because the trust has direct control over your assets upon your death.
Back to our original question:
What is the Purpose of a Land Trust?
Land Trusts
These are trusts that can be formed for the purpose of purchasing properties. Land trusts may also be referred to as a “Title Holding Trust.”
A land trust is a title-holding vehicle for real property under which a beneficiary directs the trustee in all regards that would affect the title to the trust property, including management.
With a land trust, the property owner retains the right to rent, redevelop, or sell the property. These terms would be outlined in detail in the trust agreement or deed.
Land trusts can provide anonymity.
One important use for this type of trust is for the actual property owner to be able to remain anonymous. The name of the trust is the holder of the property, and this would be the name shown in public records for the property.
If the property owner is a well-known figure and known to be wealthy, this anonymity can help with price negotiations.
Uses for a Land Trust:
- Privacy of ownership.
- Non-resident ownership.
- In some particular cases, limit exposure to judgements and liens.
- Avoid probate.
- Avoid a marital interest in the title.
- Transfer a beneficial interest or use a beneficial interest as collateral.
- Prevent partition, acquisition, or development of the land.
- Facilitate family estate planning.
- Provide corporate or agricultural land-use protection.
The three parties that are involved in a land trust:
- Creator of the trust (grantor/settlor)
- Trustee
- Beneficiary (often same as the grantor)
The trustee has particular duties assigned by the beneficiary that may include collecting rent, paying bills for the property, and the property management related tasks.
The beneficiary has the ownership of the property and equitable title.
Benefits of the assets go to the beneficiary, and the beneficiary can fire the trustee and appoint a successor trustee as desired.
Trusts are not just for the extremely wealthy, they are a useful tool to protect anyone’s assets. Be sure to consult with a qualified attorney who can advise you as to the best way to hold our properties and set up a trust if appropriate.