Hey Moguls, Mr. Land Trust himself is back with you again today to continue is awesome series all about Land Trusts. In case you’ve missed ‘em, you can find them all here.
From his last uber-informational lesson, you learned some of the benefits of owning your property in a Land Trust and being the “Property Manager,” NOT the owner of real estate.
So in today’s lesson, Randy’s gonna teach us about which states have the best Land Trust Statute Law and why. You’ll also learn that you do not have to form a Land Trust in YOUR state or the state where the PROPERTY is located to hold title to the property. Just blew your mind there, didn’t I?
So, let’s let this genius REIer take it away…
From Randy Hughes…
It is important to understand that there is no Federal Land Trust Law. (Shocking, right? It’s like the one thing the federal government doesn’t have its sticky fingers in.)
Each state has its own laws regarding trusts, and most states do not have a specific Land Trust Statute. Because states are required (under the Full Faith and Credit Act Article IV Section 1 of the United States Constitution) to respect the "public acts, records, and judicial proceedings of every other state” you can create a Land Trust in one state (I suggest using a state that has an actual Land Trust Statute) to hold title to property in another state.
Illinois – which is considered the “granddaddy of land trust laws” – has more than 100 years of case law (which means thousands of decisions by Illinois courts over the past 100+ years regarding Land Trusts and issues related to them). Illinois land trust law and Massachusetts business trust law set the foundation for all other states to follow.
This is the reason why most Land Trusts today are referred to as, “Illinois TYPE Land Trusts.”
The States that Reign Supreme
Rather than drafting their own statutes, most states just model their laws after Illinois and Massachusetts.
However, with the exception of Florida, Virginia, Texas, North Dakota, Indiana, Hawaii, Arizona, Ohio, and California, there is little statute law in any of the other states on which land trusts can be based.
Consequently, trusts are valid in most all states except Louisiana. (Louisiana’s laws are based on French Civil law so check with local legal counsel to determine usage potential. I have talked with attorneys in Louisiana that say they created Land Trusts in their state…but I have not personally seen a Louisiana Land Trust.)
The differences from state-to-state hinge primarily on the issue of Trustee’s Duties. Some states (i.e. Wisconsin) require active duties of the Land Trust Trustee to validate the Trust and prevent it from being considered a “dry trust.” I don’t like Wisconsin trust law because I don’t want my Trustee to do ANYTHING other than hold title to my property! I don’t want my Trustee to insure the property, collect rents, provide management duties, cash checks, etc.
In fact, by Wisconsin requiring active duties of a Land Trust Trustee, it is preventing the Land Trust from being beneficiary driven. Most Trusts are Trustee driven – meaning that the Trustee makes decisions for the Trust and its assets.
The Land Trust is significantly different in that the beneficiary makes all the decisions for the Trust and its asset. And that’s the way, uh huh uh huh, I like it!
And the Best State Is…
So, getting back to the best state Land Trust Law (in my opinion)…here is the big reveal…drum roll, please…
Virginia!
Why? Well, before we dive into that, let’s go over why other states are NOT the best.
Some states (i.e. Illinois, Wisconsin, Michigan, Maryland, Texas, & West Virginia) require their Land Trusts to bestow some “management duties” upon the Trustee to create a valid Trust. I do not want my Trustee to have any “duties” other than to hold title to the property and convey that title when instructed to do so.
Other states (i.e. Illinois, Florida, Arizona, Hawaii & Pennsylvania) have been chipping away at the confidentiality, ability to avoid transfer taxes and property reassessments that are benefits of using a Land Trust.
States like Arizona, Hawaii and Pennsylvania have tried to circumvent the privacy element of a Land Trust by requiring the disclosure of the Beneficiary upon formation of the Trust. While this is an easy problem to circumvent (by making the Beneficiary of your Land Trust a Personal Property Trust), it requires a little extra paperwork and hassle.
So, say so long to those states and give a hearty welcome to Virginia.
Virginia does not require management or operational duties of their Trustees. And, even better, under Virginia Code Sec. 55-17.1 (Cum. Supp.1993), a land trustee may take title to real estate without specifying the identities of any trust beneficiaries and this does not invalidate or defeat the trust. Thus, the Virginia land trust statute makes the trustee of a land trust the full title owner of the real estate and allow the beneficiaries to protect their privacy.
That’s what I call a major win/win!
One More Thing…
Before leaving this subject of individual state land trust laws, it’s important to understand that you cannot circumvent what State Statue says.
For example, you as the grantor could put into a Land Trust Agreement language that says that the Trustee is not to disclose certain information about the Trust. But, if the state law where the trust is being administered (the situs of the Trust), states that the trustee must inform others (under certain circumstances), then the Trustee is obligated to do so.
For Chicago-area institutional Trustees this is THE most common summons and complaint received. Therefore, if you were constructing an Illinois Land Trust to hold title to Illinois property, you could not prevent this law from applying by drafting a restriction in the Trust Agreement.
Whew, We Made It
So, what did we learn today? A LOT!
We learned that you don’t have to create a Land Trust in the state where the property is located (or where you, the Beneficiary, is located). We also learned that while Illinois and Massachusetts have the most legal history on Land Trusts, they are not necessarily the best states to form our Land Trusts in.
And I revealed that not all states’ Trust laws are created equal and some states have better (my opinion) laws than others. My favorite state to form a Land Trust in is Virginia. And finally, we learned that there can be specific advantages to using certain states to form our Land Trusts in.
Wowzers! This makes me think of the good ole U.S. of A. in a whole different way.
Stay tuned as we continue this great series with more helpful Land Trust info soon. Next up, we’ll talk about using an LLC as the beneficiary of a Land Trust. It’s a great idea to do this because linking the Land Trust with the LLC is a good structure when it comes to the privacy, benefits and asset protection. I’ll explain, so check back soon!
In the meantime if you want to continue your Land Trust education, please feel free to enjoy a webcast training I’ve prepared on how to create your first Land Trust.
Randy Hughes, aka, Mr. Land Trust
Talk to Me
Got any Land Trust questions or thoughts? Talk to me in the comments section below.
Research your state’s Trust laws and see if they have a Land Trust Statute.
Ask other real estate investors if they use Land Trusts and which state they recommend.
Learn all you can about the Trust laws in YOUR state and how they might affect your real estate holdings.
Experiment with different state laws and their advantages/disadvantages