Land Trust Agreement 101
Investors use land trusts in real estate to protect their privacy, conceal the identity of landowners, and reduce legal information that the public can obtain through the property’s titles, records, and tax databases. Lenders may instead pursue legal actions against the land as collateral that secures the property.
A land trust agreement is a legal document that separates the ownership of a piece of property from the responsibilities of managing it. With a land trust agreement, one person holds legal title to a piece of property while a trustee manages the asset for the shareholder’s benefit. Land trust agreements can be set up using an offshore entity for confidentiality purposes and to avoid taxes by taking advantage of international laws that prevent U.S. courts from accessing the land .
The "trustor" or "settlor" creates the agreement in which they name the "trustee" or bank that receives the legal title of the asset. The "beneficiary" of the trust receives beneficial interest or equitable rights for profit from the property. With an express trust, the agreement specifies the rights and legal duties of each of the three parties. However, if the agreement doesn’t exist, then the law designates the rights and responsibilities.
An express land trust agreement can last for many years. To create the trust, a written agreement is needed that includes signatures from the settlor, trustee, and beneficiary. The beneficiaries or the settlor can terminate the agreement early. To terminate the land trust, the land returns to the settlor as the original owner.
Essential Elements of a Land Trust Agreement
A land trust agreement should contain a number of key components that are essential for its function and enforcement. The parties involved must already be determined before the drafting process begins. For those who are considering setting up a land trust, they must be sure of the inclusion of the settlor, beneficiary and trustee as parties to the trust.
The names and addresses of the parties must be clearly listed in the document. The full description of the subject property must also be complete, including any other accompanying legal documents like deeds to the property.
In a typical land trust agreement, the beneficiary of a property is the land owner. Benefits may also extend to tenant shareholders, who own stock in the entity that owns the land. But often, the owner of the land will even transfer rights to the property to a beneficiary with the drafted trust agreement template. Many states require that the duties of the trustee of the property be detailed in the document. The trustee is expected to fulfill the role of the decision-maker and financial agent of the land, making the most appropriate decisions on behalf of the settler. Trustees have a legal duty to act in the best interest of the trust beneficiary at all times. A provision or clause within the land trust agreement should make clear the powers of the trustee, including whether the trustee can make deals involving the land. Some agreements allow a trustee the power to sign deeds or mortgages and to buy or sell property on behalf of the entity. Others give the trustee the authority to transfer property under different types of conditions.
There must be provisions for successor trustees in the land trust agreement. A settlor usually lists the trustee who will assume control in the event that the current trustee can no longer perform their duties. It may be a family member or other trusted friend, who can then take over and manage the trust. The land trust agreement may name an alternate trustee to take control in the event a resigning trustee recommends his or her replacement.
Advantages of a Land Trust
One of the big reasons to use a land trust is for asset protection. Often, the land trust holds the property so that the beneficiary can avoid the costs of probate. A land trust almost always shields the beneficiary from income tax (unlike most revocable trusts). A land trust with multiple beneficiaries might help protect property from creditors when one of the beneficiaries runs into financial trouble (although this can be complicated and may vary by state).
Another very important reason to create and use a land trust is for privacy. The real estate property deed that is recorded in the land records will be listed under the land trust’s name, and the beneficiary’s name will not be public information.
The concept of a property trust is also use as an onramp to other estate planning tools. For instance, living trusts require too many administrative changes if the owner moves into a different county. The private nature of a land trust can allow for a semi-permanent trust that allows several purchases in different counties.
Lastly, a land trust is a relatively easy way to transfer ownership, provided you have a good land trust agreement template. In the event of a divorce, or when one of the beneficiaries is deceased, most states will treat the land trust as if it were still the original owner, even with a change in discretion. Conversely, if one of the beneficiaries wishes to divest, the point of distraction can be minimized by specifying the price and proceeds to be divided between the beneficiaries.
In real life, the most common use for a property trust is for inheritance purposes. Let’s say one set of grandparents wants to buy a farm for their grandchild to grow up on. They can easily amend their own land trust agreement template to name the grandchild as their beneficiary. In this way, the farm will not be subject to probate, it will not be publicly noted under the beneficiary’s name, and once the property is transferred to the beneficiary, the grandparents can stop paying mortgage on the property.
Drafting a Land Trust Agreement Template
The following is an exemplary guide for how to make a land trust agreement template:
Preparations Land trust agreement templates will vary in many ways from jurisdiction-to-jurisdiction, but generally the first thing you will want to do before drafting a template is perform research into the requirements for a land trust in the state or country in which the land trust is to be formed. Typically, these rules will be enacted upon by statute and, if officially registered, the statute will be the ultimate source of authority for the land trust, its trustee, and its beneficiary. Some states may have very specific methods that must be used for creating a land trust, while others, such as Nevada, are more flexible.
Identify the Parties Involved in the Land Trust Agreement – Before you begin drafting the land trust agreement, you’ll need to identify the names of the parties involved with the land trust. This means naming the person or corporate entity that is creating the trust (the "grantor"), along with the name of the trustee who will manage the trust, and the beneficiary (or beneficiaries) of the trust. Outlining the Terms of the Land Trust Agreement – A land trust agreement will typically include a great deal of information outlining the objectives of the land trust , such as why it was created and how it is going to be maintained. A land trust agreement should also outline any restrictions that are placed on the land, including what must be done to maintain the land and what can be done to the land by the beneficiary. How the land can be utilized should also be expressed. If applicable, the land trust agreement may also outline what happens if the beneficiary wishes to sell his or her interest in the property and how that transaction will be processed. In some instances, the land trust agreement will also refer to other agreements, such as a purchase contract for property, to help clarify exchanges involving real estate. Ask for Professional Assistance – If the details involving your land trust agreement are becoming difficult to manage on your own, or if you have questions about how to create a legally sound land trust agreement that will be recognized and enforced in the court of law, it would certainly be wise to consult with an attorney who has experience with handling land trust agreements and transfers. A professional will be able to ensure that the document complies with your state’s laws, while also making sure that the agreement is properly executed and that the interests of all parties in the land trust are clearly expressed so that future disputes can be avoided.
Legality and State-Specific Factors
The legality of land trust agreements and the specifics around their formation are largely dictated by state laws. While the concept of land trusts are recognized in all 50 States, the types of trusts and relevant statutes regulating them can differ significantly from state to state. Further, some states may have laws that conflict with the decades-old principles that have formed the basis of land ownership rights.
For instance, California has a specific statute for "community property." Under this statute, any increases of property value from a marriage are considered as "community property," regardless of whether that property is held in a land trust. Therefore, the creator of a trust could unintentionally weaken his or her claim to the trust if certain procedural requirements are not met.
Conversely, some states grant enhanced powers to trustees. For example, under Montana law, a Trustee may be insured through the Land Title Associations of that state. This is a remarkable feature designed to protect the Trustee as well as the beneficiaries. In many other states, Trustees are not covered by such insurance or may even be strictly forbidden from charging fees for their services, which could leave someone acting without compensation exposed to risks on behalf of the beneficiaries.
Finally, in other states, such as Maine, a trust’s duration is restricted to 21 years from the death of the last living beneficiary. Since land trusts are intended to be long-term relationships between the Trustee and beneficiaries, this can become a significant issue when drafting the trust agreement.
Land Trust Common Pitfalls
Common pitfalls in creating a land trust agreement template include common mistakes in the drafting, lack of consideration for circumstances that make it invalid or not enforceable, and failing to keep records that prove the trust was fund. Here are some common examples of mistakes that can render your land trust unenforceable:
Pre- or post-date signature Often, an individual will pre-date the trust. Beware! This is a way of hiding liability and attempting to break a contract. Further, if you do not actually sign the trust agreement, it is invalid. An individual will often attempt to post-date the trust by signing the document before funds are deposited with the trust company or bank. This is inadvisable because the individual really desires the separation of assets at the time of signing, not later. For this reason, you should not use a typewriter to prepare the land trust agreement template. Use a computer to prepare the document so that you can add the term ‘undated’ into the clause containing the date of the agreement. The computer may also allow you to add the signers’ initials before the date in case there are any discrepancies over the date.
Signers only sign one page When you finally have your land trust agreement template in front of you, make sure you have your parties signed and that they did not sign on the last page when there were several pages. Image the document as a single file with no page missing. This is very important because if a party signed the last page only, but did not sign a previous page or pages on purpose or by mistake, the parties may claim that the trust was never formed because it did not have the approval of all the signees . An example is the Renold v. Bank of America case in which only the trustee not the grantor signed the last page. The trustee and lender were still bound by the mortgage, but the deed of trust had no power to modify the mortgage because the parties had not signed the first page. (See Renold v. Bank of America (1985) 174 CA3d 1102 [220 CR 103].)
Signature without witnesses Some states require that the deed of trust be signed by two witnesses in order for the deed to be effective. By merely signing without witnesses, the deed or instrument is invalid.
Missing signature or words In some cases, the signer will sign but omit words, such as "wisdom, counsel, and direction" in the clause that begins the Declaration of Trust. That renders the deed invalid.
Blank terms Here you can fill in any blanks that may have been left in the land trust agreement, such as the name of the trustee, beneficiaries, and/or the real property. You may even have left a space for the amount of the loan.$
Missing recording information A land trust agreement template should contain the recording number and/or the date of recording of any deed. Also, the name of the lender and lender’s phone number should be included.
Not creating an irrevocable trust Some states allow types of trusts to be revoked by the settlor without the consent of the trustee. A settlor may attempt to revoke or terminate the land trust agreement due to a lack of solvency. But in most cases, it is best to have an irrevocable land trust to avoid future problems.
