What Is a Land Trust?
A land trust is a legal entity that takes ownership of, or authority over, a piece of property at the behest of the property owner. Land trusts are living trusts that allow for the management of property while alive. However, like other types of trusts, each land trust's terms are unique and can be tailored to individual needs.
- Land trusts are organizations that take legal ownership, stewardship, or partial control over property at the behest of the landowner.
- Title-holding land trusts, also known as Illinois land trusts, protect landowner anonymity and keep property out of probate.
- Conservation land trusts are tasked with the management of undeveloped land to maintain natural resources, historical sites, and public recreational areas for future generations.
- Landowners who use conservation easements to transfer development rights to a conservation land trust can receive a tax deduction for their charitable donations.
- Due to some instances of fraud, some conservation easement donations and the land trusts that accept them have come under increased scrutiny.
How a Land Trust Works
Land trusts, which are trusts tied to real estate, are often used for estate planning. It’s meant to be used during your lifetime for managing properties. They are revocable trusts, meaning they can be terminated or changed. Land trusts can include real estate (e.g. buildings or homes) or property notes and mortgages. They are typically used for the land involved in conservation or wildlife purposes, or for real estate development purposes.
Land trusts have three key parts—the grantor, trustee, and beneficiary. The grantor is who creates the trust and transfers the property. The trustee manages the trust and the beneficiary is the one that benefits from the land trust.
Grantors handle how the transferring of assets into the trust and sets the terms of the trust. Trustees handle the intimate details of the property. For example, if a rental property is held in a land trust, a trustee might be responsible for overseeing maintenance and collecting rent payments.
Types of Land Trusts
There are two key types of land trusts—title-holding and conservation land trusts. Title-holding trusts allow individuals or entities to hold land anonymously. The big difference with a conservation land trust is that the owner must give up some land use and development rights.
Title-Holding Land Trust
A title-holding trust allows the property owner to anonymously maintain all rights over the property and direct the actions of the land trust. These trusts are also commonly called 'Illinois land trusts' because they were first popularized in Chicago during the 1800s. At that time, property owners were not allowed to vote on city projects in the same places they owned land. To circumvent this law, wealthy businessmen and politicians would use land trusts to purchase land anonymously, thereby protecting their voting rights.
Not all 50 states have a legal structure in place for a title-holding land trust. However, most states defer to the Illinois land trust laws if they don't have their own, meaning that any individual can form an 'Illinois-style' land trust in any state with proper legal guidance.
Conservation Land Trust
Conservation land trusts require that the property owner give up some rights over land use and development. The goal of a conservation land trust is to protect wildlife, historical or cultural sites, and natural resources from commercial development or other activities that may lead to disruption or pollution.
Requirements for a Title-Holding Land Trust
In a title-holding land trust, the landowner signs a document called a Deed in Trust, which transfers legal ownership of the property. When setting up the trust, the landowner (who is both the trust grantor and the beneficiary) can specify how the land is to be managed, who has control over it, and how any income it produces is distributed. This means that while the trust is the title-holder on paper, the landowner maintains complete control over the property.
Title-holding trusts are used as a way for property owners to maintain anonymity and keep valuable assets out of probate. They can also provide a number of other estate planning benefits and protect assets from judgments or liens. This can be especially useful for the very wealthy, celebrities, and large companies who may want to keep development plans under wraps.
Requirements for a Conservation Land Trust
In a conservation land trust, the trust doesn't necessarily take over the land title unless the property is donated in its entirety. Instead, a landowner can enter into a legally binding agreement, called a conservation easement, thereby "donating" their development rights to the trust. The trust is tasked with ensuring the easement is enforced and, in some cases, managing the property.
Conservation easements can be tailored so that the landowner retains ownership and usage rights—such as the right to continue farming or raising livestock—while still ensuring that the land remains undeveloped in perpetuity. Conservation easements "follow the land," which means that the terms of the easement remain in force even if the land is sold or passed to heirs.
The total number of acres of undeveloped land managed by 1,300-plus private conservation land trusts throughout the U.S.
Examples of Land Trusts
An example of a title-holding land trust is Disney's resort in Florida. The Walt Disney World Resort in Orlando, FL, was initially purchased in 1965 using a title-holding land trust. The original owners of the Florida swamplands, where the resort was built, had no idea that Disney (already a household name at the time) was behind the purchase. Had they been aware of the buyer's identity, they likely would have increased their asking price.
Meanwhile, there are plenty of examples of conservation land trusts across the U.S. Three's the Ozark Land Trust which covers dozens of projects across 28,000 acres through the Ozark region. The trust is a non-profit organization that helps landowners preserve land in the Ozark area and protect it from urban development. The Ozark Land Trust helps accomplish this with nature preserves and conservation easements.
Advantages and Disadvantages of Land Trusts
The key advantage of land trusts is that it provides liability and privacy protections. It allows real estate investors to keep property separate from personal finances. Using a land trust helps keep the details of net worth private. Real estate investors often use land trusts to keep property separate from other assets.
However, there are downsides to a property trust. Firstly, if you purchase the property under a land trust, any redemption rights are lost. That is, the right to reclaim the property just before (or after) foreclosure. Second, most land trusts are automatically disqualified from secondary market loans.
Now, the other issue with land trusts is that they give the illusion that there is no liability. Land trusts still have liability, even in Illinois. The real property owner, and not just the trust or trustee, can be found liable for things. As well, privacy isn’t guaranteed, and court orders can pierce the privacy veil.
- Separate personal finances from real estate
- Privacy—anonymous property ownership
- Certain liability protections
- Ease of probate process
- Lose redemption rights
- May not qualify for secondary market loans
- No full-proof liability protections
- Privacy veil can be pierced
There is one other important distinction between title-holding and conservation land trusts: a donation to the latter could earn you a big tax break.
If a landowner donates their development rights to a conservation trust, they can receive a tax deduction equal to the difference between the value of the land as encumbered (with the easement in place) and what it could be worth if it were developed for its "highest and best use." In some cases, this deduction can be worth millions of dollars.
Typically, landowners are either farmers and ranchers who have owned the property for generations or very wealthy individuals, families, or businesses that can afford to buy tracts outright. Recently, however, a new investment niche has developed designed to open up the tax benefits of conservation to a larger portion of the population.
Investing in Conservation Easements
Using a multi-member partnership (or 'syndicate'), these investment companies allow multiple accredited investors to pool their money to purchase land for conservation. After donating the property development rights to a land trust via a conservation easement, the members of the partnership split the tax deduction pro-rata. Thanks, in part, to these conservation partnerships, it is estimated that land conservation increased by 175% between 2005 and 2015.
Conservation Easement Controversy
Of course, any time there's the potential for profit, someone will abuse the system. There have been some high-profile cases of people taking very large deductions for donating easements on golf courses, housing developments, and other properties that don't actually have much ecological or cultural value.
In response, there has been an aggressive backlash against syndicated investments, specifically, and the land trusts that accept their easement donations. However, this singular focus may not paint a complete picture of the issues at play. Whether donated by farmers, billionaires, or syndicated investors, it is clear that conservation easement donation laws require a closer look to ensure that the risk of abuse is minimized without removing the incentive to conserve.
Land Trust Definition FAQs
How Does a Land Trust Work?
Land trusts work like other trusts, allowing the grantor to set unique terms and conditions that fit their needs. Land trusts have three key parts—the grantor, trustee, and beneficiary. Grantors create the trust and transfer the property into it, trustees manage the trust, and the beneficiary benefits from the trust.
What Is the Purpose of a Land Trust?
Land trusts are meant to create liability and privacy protections for landowners. Real estate investors, individuals, and entities use land trusts to help create separation for personal finances and property.
Who Purchases the Land in a Land Trust?
The land is generally purchased by an individual or business that will then transfer the property into a land trust. The grantor of the land trust is the individual or entity that creates the trust and transfers the property.
How Long Does a Land Trust Last?
Land trusts generally last for a set period of time, such as 20 years. It's up to the beneficiary to extend the trust term when it expires, if they do not the property is sold.
The Bottom Line
Land trusts are similar to other trusts but are meant exclusively for real estate. Note they can also hold other property-related assets, such as mortgages and notes. Any land can be used for a land trust, however, it’s mostly used for land conservation or developmental property.