Using A Land Trust In Estate Planning: How To Avoid Probate

When you work hard and save money to pass on to your heirs, you don’t want them to have to pay legal fees to obtain it after your death. You also don’t want your family members to experience stress while they wait to find out who gets what from your estate.

One way to avoid the expenses and delays of these legal proceedings (called probate) is to create a type of living trust called a Land Trust.

What is a Living Trust?

A living trust— also known as an “inter vivos” trust, which translates from the Latin to mean a trust that is created “between the living”—places your assets in a fund that is managed by a trustee of your choosing for the best interests of your beneficiaries.

As an alternative to a Last Will and Testament, which distributes your assets after your death, a living trust bypasses the time and expense of probate because your assets already are dispersed in the trust. In addition, living trusts offer other advantages, including privacy in situations where the state requires the filing of an asset inventory and immediate access to income and principal by your beneficiaries.

While a living trust can hold any type of asset, a Land Trust is a type of living trust designed specifically for real estate-related assets. A Land Trust can hold physical properties, mortgages, air rights, notes, and other types of property assets.

The property owner is the beneficiary of most of these anonymous trusts, meaning the owner controls how the property is managed and retains all of the property rights, including developing, renting, and selling it. Land Trusts are generally considered to be revocable trusts, meaning that the owner can amend or even terminate them at any time.

What Are the Benefits of a Land Trust?

In addition to avoiding probate, there are other possible benefits of making a Land Trust part of your estate plan. A land trust offers:

• privacy of ownership and non-resident ownership
• limited exposure to liens and judgments
• insulation from potential hazards of individual ownership
• transfer and use of beneficial interest as collateral
• prevention of separation of the land
• protection in the acquisition, development, and operation of residential development
• agricultural land-use protection

What Are the Disadvantages of a Land Trust?

A Land Trust does not protect property owners from all potential liability, and it does not offer privacy in all cases. Also, the IRS requires that all trusts, including Land Trusts, file Form 1041.

Here are three potential pitfalls of setting up a Land Trust.

1. Redemption rights allow homeowners to reclaim their property before and, in some cases, after foreclosure. This right is lost if the property is purchased under a land trust and you are the beneficiary.
2. Homestead exemptions, which protect your property from taxes and creditors in 48 states, are forfeited with a land trust.
3. A land trust disqualifies you from secondary market loans. In the secondary mortgage market, lenders and investors buy and sell home loans and servicing rights.

When is Best Time To Set Up A Land Trust?

If you have decided that the benefits of a land trust outweigh any potential disadvantages, your first step is to choose your trustee. The trustee can be a friend, family member, or institution, but make sure it is someone you trust. 

Next, setting up a land trust requires two primary documents—a deed to trustee and a land trust agreement. After you have chosen your trustee, you will need to draw up an agreement that satisfies all parties and complete and sign the documents.

You can keep your ownership private by forming a land trust with either a private trustee or an institutional trustee just before closing on the property. By keeping your name off the permanent property records, you will protect your property from creditors who might use the Uniform Fraudulent Conveyance Act to gain your assets.

A land trust trustee should be exempt from personal liabilities related to the land trust’s debts and obligations. However, not every state views land trusts in the same way. Your trustee should research their state laws so that they are clear on their liability before they sign a land trust agreement.

Royal Legal Solutions will work with you to construct a trust agreement and file the right paperwork on behalf of your land trust. If you choose us your “nominee trustee,” our name will appear on all public records to protect your anonymity. After filing the paperwork, we will then transfer the trustee title back to you.

The professionals at Royal Legal Solutions are experienced in assisting with land trusts throughout the U.S. and Canada.

Image by un-perfekt from Pixabay

Author: Scott Royal Smith

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.