How Land Trusts Work

To understand the legal benefits of a real estate land trust, let's continue to use the example of John Smith and his business partners, who created a land trust to hold the title to an apartment building they own in Chicago.

The first benefit of real estate land trusts is privacy. Once the title to the apartment building is transferred into a trust, the names of John and his business partners cannot be disclosed without a court order [source: Murray]. One advantage of remaining anonymous is to avoid litigation. If people think that John is fabulously wealthy, they might dream up frivolous lawsuits against him [source: Asset Protection Planners]. But if John's name is not on any public real estate records, he's less of a potential target.

Another benefit of land trusts is that multiple owners of a property aren't punished by legal judgments against only one of them. If John didn't have a land trust, and one of his business partners was sued by his creditors, then the creditor could place a lien on the title to the apartment building. That would be damaging to John and the rest of the property owners. With a trust, however, the apartment building is shielded from legal actions against one of the other owners [source: Chicago Title].

Another major advantage of a real estate land trust is what lawyers call "ease of conveyance." In other words, it's easy to transfer ownership of the property to heirs without involving lawyers or courts. Usually when someone dies, their will has to be approved and their assets appraised through a costly legal process called probate. Probate can also involve payment of back taxes and debts [source: Nolo]. With a trust, the property owners create a succession plan that names new beneficiaries upon death. Since the trust itself never "dies," no probate is required.

A potential disadvantage of land trusts is the false belief that the trust protects property owners from all liability. Even in Illinois, where the modern real estate land trust was born, courts have ruled that the real property owner, not the trustee, is liable in cases dealing with the direct management of the property [source: Murray]. It's also dangerous to think that a land trust offers bulletproof privacy. A court can order full disclosure of property ownership for any number of civil and criminal complaints. The legalities of land trusts are highly complex and differ state by state, so it's critical to obtain the counsel of a reputable trust lawyer.

Lastly, it's wrong to think that trusts don't pay taxes. The IRS requires all trusts, including land trusts to file Form 1041 [source: IRS]

Real estate land trusts are not the only kind of land trusts. On the next page we'll explain how nonprofit organizations use land trusts to promote environmental conservation and affordable housing.