LAND TRUSTS: How they work and when to use one.

Land Trusts fall into a class of Trust called "Special Purpose Trusts".  An SPT is any trust which has a specific and limited purpose.  This would include a Land Trust, which are designed only to hold land.  Other examples would be a "Gun Trust" which is designed to hold just guns, or even a Personal Residence Trust, which, you guessed it, is designed only to hold your personal residence.  

As with any trust, at a minimum, a land trust will have a Settlor, Trustee and Beneficiary, and may be either Revocable or Irrevocable.  Most land trusts are Revocable.  This provides simplicity for tax reporting as well as continued flexibility to buy, sell and transfer the property. 

The primary reasons people use land trusts are:

1. PRIVACY.  The land trust itself is not a public document and therefore the terms and even the settlor and beneficiary information is not available publicly. The Trustees name; however, will be seen on the deed transfer.
2. ESTATE PLANNING. A land trust acts very much like a revocable living trust for specific real estate asset and can pass those assets outside of probate to a designated beneficiary.
3. AVOID TRANSFER TAXES.  Land trusts are often exempt from state transfer taxes or reassessment of a property and are commonly used to avoid this.
4. AVOID THE DUE-ON-SALE CLAUSE.  Most mortgage documents will specify that any transfer of a property will trigger a Due-On-Sale clause and accelerate the mortgage.  While this rarely happens in practice (primarily because most mortgages are sold and no one is looking at future transfers), it is a concern for some and using a land trust would avoid that if the trust qualifies under the Garn St. Germain Act.
5. ASSET PROTECTION. Finally, land trusts have been touted as asset protection vehicles; however, a standard land trust does not provide any asset protection.  To accomplish asset protection using a land trust a very particular setup must be used.

Using a Land Trust for Asset Protection

In order for a land trust to be effective in protecting assets several modification must be made from the standard land trust setup:

1. The Beneficiary of the Trust cannot be the persons who are creating the Trust ("Settlors") directly.  Rather the Beneficiary must be an asset protection entity.  Most often this will be an LLC.   NOTE: If the Settlor is not also the Beneficiary, this may affect some of the above benefits.
2. The Trust should NOT be a simple revocable land trust.  All revocable trusts are inherently poor asset protection vehicles.  If a land trust is revocable by the Settlor, then no matter who the Beneficiary is, a court can simply order the Settlor (who is the debtor) to revoke the trust.  This undoes any attempt at protection.
3. The Trust must include specific asset protection features such as Duress Provisions and a Spendthrift Clause and the use of a Protector, just to name a few.

In my experience, I have not once reviewed a land trust which was appropriately set up as an asset protection vehicle.  There is a narrative out there that a simple revocable land trust with an LLC as a Beneficiary is an asset protection vehicle.  It is my opinion that this is not true.  It is true that this would create a level or privacy, but in an actual attack on a client's assets I would not rely on a revocable trust which holds land to be 100% effective.

The Better Approach

The better approach is to actually deed the property into an LLC. This actually changes the ownership of the property and changes the governing rule set to that of the LLC (away from a revocable trust).  If the LLC in turn is properly set up and connected to further asset protection tools such as a holding company and even The Bridge Trust, you have far more protection.