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Trust and Estate Planning News

Land Trusts

The Illinois Land Trust is Dead...Long Live the Land Trust!

There are not many trust institutions in Illinois that can say this: Our land trust business is growing and thriving! Yet this is definitely the case at ATG Trust Company. Why is that surprising?

With the advent of the self-trusteed grantor trust as the vehicle of choice for many clients, property is simply deeded in to the grantor trust. And often, that is the best idea. So why are we taking on new land trusts regularly? First, a bit of history is needed to set the stage for more discussion.

There is no statute in Illinois that specifically creates the nationally recognized "Illinois-type land trust." Instead, we have miles of case law dating back to the late 1800s and rooted in England's Statute of Uses.

The function or purpose of a land trust is to turn real property into personal property for limited purposes. This is not always as clear as we would like. Here is an illustration: The real estate title is deeded to a trustee (often a corporate trustee, but not necessarily) and the beneficiary owns the trust but not the real estate. So, in theory, the beneficial interest is not real estate but personal property. That gives the flexibility of ownership of personal property to the beneficiary, thus making it easier to assign, sell, or otherwise dispose of their interest-as opposed to navigating the more cumbersome rules that sometimes accompany a real estate transaction.

In fact, it was quite common a couple of decades ago to place property in a land trust at the local bank and obtain a loan against it by simply executing an "assignment of beneficial interest." No mortgage, very clean and effective. But a raft of issues arose and now it might even be more involved to get a loan with property in a land trust than without one. That has much to do with the way real estate lending changed, and the fact that many mortgage lenders are (oops, were) based outside Illinois and had no idea of the definition or purpose of a land trust.

So if ease of conveyance and assignment really are non-issues now, why do some practitioners use land trusts regularly? There are a few reasons that we hear as common themes.

The use of a land trust is still a great way for people with modest estates to avoid the need to probate their house. For many families, a simple will, land trust, and effective powers of attorney for health care and property are all that are needed to have a solid estate plan in place.

Even if the concern over personal liability for one of the spouses arises, it is possible to craft a land trust that takes advantage of the protections offered in a tenancy by the entirety titling. (765 ILCS 1005/1c) But in estates deserving a more sophisticated approach, such as the use of self-trusteed grantor trusts, what advantage could there be to a land trust? The big one is liability.

Consider this: These ostensibly larger estates are in theory more at risk for someone wanting to sue them than the folks with lesser assets. A land trust can help.

What we are seeing is a land trust where the beneficial interest is owned by the grantors individually, or tenants by the entirety where appropriate, and then a triggering event lets the umbrella trust take over. The usual triggering event is death but it does not have to be. Use language similar to the following:

"In the event of the death or disability of John Doe, (disability defined exactly as in the John Doe Self Declaration of Trust, dated April 1, 2009), then his entire beneficial interest in this trust shall vest in the John Doe Self Declaration of Trust April 1, 2009."

By tying the language in the umbrella trust to the land trust beneficial interest, the estate planner has maintained the separation of the personal residence from other trust assets until death or disability. As a practical planning matter, some land trustees might not accept that language unless they are also the successor trustee in the grantor trust.

Some will balk at this saying that the premium (your time and a land trust fee) to protect this potential but small risk is too high. The best response to this concern was from a lawyer who explained it like homeowners insurance: You pay a premium for it. Are you really sad that you never had to make a claim because your house burned down?

Another use is in fractionalizing interests such as making gifts of real estate over time. It is possible to assign bits of a land trust beneficial interest. We have seen it done where a client has a taxable estate but all the value is in real estate. It requires getting a solid valuation for the property at the time of the gift and then assigning a portion of the owner's interest to the donee. The limitations and potential problems with this are fairly obvious, but it can be and has been done effectively. It is also wise to assign the power of direction for the portion being gifted. It ties the bow on the package so that the IRS cannot claim the donor retained some ownership rights.

You know your clients' needs better than they do in most cases. That is the lawyer's role and duty. So, if liability is an issue, consider the lowly land trust in conjunction with their self-trusteed trust.

And please remember that ATG Trust Company provides land trust services in Illinois at very low rates for clients of member attorneys. It is a little insurance policy we think is often a good idea. Access the forms at our website