There has been a lot written about land trusts. Mostly by people who have very little knowledge and certainly little experience using a land trust. Therefore, there is a lot of “misinformation” out there in cyberspace regarding the truth about what a land trust will do and will not do for real estate investors. I will try to clear up some of the problem areas but let's first start with some basics about land trusts in general.
Illinois was the first state to create land trusts and is the reason other states sometimes refer to such trusts as “Illinois land trusts.” Florida, Indiana, South Dakota, Virginia, and Hawaii are among the other states that recognize land trusts by statute. Many other states recognize the validity of a Land Trust but do not have specific statutes authorizing their use.
Ultimately the property itself can be reached in a lawsuit (even with an out-of-state trustee), but your plan should be to stay as far away from the eye of the storm as possible so they do not reach any of your other assets. A judgment lien levied against your individual 10 unit building is one problem. But, a judgment rendered against you–in your personal name, is a much worse situation.
The next important piece to the land trust puzzle is the DIRECTOR of the trust. When a deed is prepared conveying a property into a land trust, the deed must state that the trustee is merely holding title to the property without any rights to mortgage, lease, convey, exchange, option, barter, etc. Without written direction from the beneficiary or someone he has appointed, the trustee cannot act and nothing can happen. However, if the beneficiary designates a director to act on his/her behalf, then the fun begins.
The length of tenure and limits of authority can be restricted for the director in the land trust agreement, thus insuring no abuses would occur. After the term of the director has expired, the power of direction can automatically pass to the SUCCESSOR DIRECTOR or revert back to the original beneficiary. It is important to maintain a director for your trust if you want “control” of your trust out of your hands and in the hands of someone you can trust.
It is possible for one person to be all of these people: trustee, beneficiary, and director. Hopefully by now you can see the disadvantage in such a structure.
Land Trusts Made Simple 101 will continue in Part 2 of this 3 part series.