Land Trust Taxes & Record Keeping

Occasionally I am challenged on whether a Land Trust has to file a tax return or not. Some “professionals” insist that I am wrong when I say that a Land Trust does not file a tax return and does not obtain an FEIN number with the Internal Revenue Service (IRS).

Does a Land Trust Have to File a Tax Return?

A Land Trust is a pass-thru entitiy in the eyes of the IRS, In fact, the IRS does not even consider a Land Trust to be a Trust at all…for tax purposes (see Revenue Ruling 92-105). According to IRS Code Section 677, a properly structured Land Trust should be classified for income tax purposes as a Grantor Trust. Therefore, all income and deductions flow through the trust to the Beneficiaries in amounts proportionate to their respective interests in the trust corpus.

It is interesting to note that if the beneficiary of the Land Trust is a partnership, corporation or Limited Liability Company the ultimate tax treatment is determined by the terms of the partnership aggreement, stock of the corporation or terms of the operating agreement for an LLC. This could result in the advantages of disproportionate tax treatment for multiple investors.

Attorneys, accountants and other professionals try to tell me (and their clients) that if you put your property into a Land Trust the Trust will have to file a return with the IRS. The problem is that most professionals are use to other kinds of trusts (that do have to file a tax return) and not the Illinois “Type” Land Trust.

This is not to say that all Land Trusts ARE Illinois Land Trusts, just that they are “like” an Illinois Land Trust. Nonetheless, no matter what state you form your Land Trust in, a federal tax return is NOT required. And for you skeptics out there, here is the section of the IRS code that deals with this subject (See Revenue Ruling 92-105 and IRS Code Section 677).

Misplacing Land Trust Documents

All you need to create a Land Trust is two documents. A Deed to Trustee and a Trust Agreement. The heart of a Land Trust is the Trust Agreement (TA). So, what do you do when you can’t find your TA?

Your first phone call should be to your Trustee. She/He/It should have a copy. But, sometimes things happen and even your Trustee can’t find a copy of your TA. Your frustration mounts when you can’t locate your TA because generally you went looking for it for a reason and you need it now!

Why do you need your TA? Probably because you are getting ready to sell the property out of the Trust and you need to prove to a closing agent, title company or attorney that the Trust exists. Or, you need to make a change (amendment) to the TA (i.e. change of Beneficiary or change of Trustee).

First, I would suggest that you learn your lesson so this never happens again. Make sure that you keep two copies of each TA in addition to the copy retained by the Trustee. Keep a “hard copy” in your property files filing cabinet and keep an electronic copy on a Memory Stick in your safe at home or in your safe deposit box at your bank. Now, back to the problem.

A Trust Agreement is not like a Will. By statute, Wills can be revoked by destroying it. Therefore, if no one can produce a valid Will upon the death of the testator, there is a presumption that the will was revoked.

Not the case with a Land Trust Agreement. If a TA cannot be found there is no presumption that the agreement was revoked. And if a photo copy cannot be found of the original TA, the Beneficiary can “Restate” the TA by typing up a new one!

All the Beneficiary needs to do to recreate the TA is the put at the top of page one of the newly formed TA, “Amended and Restated Trust Agreement.” Then in the body of the TA attest to the fact that the original TA could not be found and that the Beneficiary is certifying that the is a true and accurate restatement of the original TA.

So, remember. Keep multiple copies of your TA (and any amendments) in different locations. But, if all else fails you know that you can always recreate the TA, if necessary.