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Understanding Obscure Trusts: Land Trusts

Kathryn Van Eeuwen

August 13, 2020


As the landscape of the corporate fiduciary world continues to evolve; and as the demands to increase revenue continue to mount; trust companies may be tempted to expand their offerings and venture into less well-known areas of trust administration.  Although there can be economic benefits of engaging in obscure trusts; it is wise to understand some of the pitfalls that might also occur. In this article, we examine some of the questions and concerns that may arise when administering land trusts. 

The Basics

A land trust is an agreement established between a grantor and a trustee to bifurcate legal title from the use and oversite of property. In essence, title to a property vests in the trustee while the beneficiary (usually the grantor) retains control of the use and sale of the property.  The land trust beneficiary receives all the tax benefits and property appreciation. However, the recorded deed indicates only the trustee and trust as the owner of the property, the trust beneficiaries are not disclosed. Furthermore, the trust is usually named only with a sequence of numbers and letters such as LT12345.

In addition to privacy, one of the other benefits of a land trust is the ease of conveyance in terms of both succession of ownership and disposing of part interests.  Upon the death of the original beneficiary, property held in a land trust passes to the contingent beneficiaries indicated in the trust agreement on file with the trustee.  This means that probating the property is not necessary.  The interest passes immediately enabling the new beneficiary to enjoy the property instead of having to wait a substantial amount of time for probate to close.[1]  Likewise, should the original beneficiary choose to change the person or persons to receive the share upon passing, he or she need only amend the contingent beneficiary form. And, since interests in real estate held in a land trust are deemed to be personal property interests, they may be assigned to other individuals, in whole or in part without the need for a new deed. The original beneficiary simply modifies the trust agreement.[2]

State Laws

 Although the concept of a land trust dates back many centuries in common law and was at its height during the period of European feudalism.  However, King Henry of England felt he was suffering revenue shortages among other grievances and introduced several bills to the House of Commons in the early 1500s.  In 1535 the English Parliament finally passed the Statute of Uses.[3] This statute was interpreted over the subsequent years by the courts to mean that if a trustee didn’t do anything but hold title to land, legal title vested in the beneficiary. 

However, in 1921 the Supreme Court of Illinois upheld the concept of the land trust in Jennings v. Kotz.[4]  Thus was born the Illinois Land trust. Although not formally recognized in every state (Illinois, Florida and Hawaii are a few that have statutes on the books regarding land trusts), many other states are using such trust arrangement arrangements. Colorado and California are two such states.  

Issues with Serving as Land Trust Trustee

While the land trust trustee role sounds fairly straightforward and risk free, there are several issues that can arise during administration which should be considered before entering this line of business.

Legal fee examples

Case #1

Trust company was served with summons in April 2015.Summons named plaintiff as Trustee’s name as Holder of Beneficial Interests not as trustee or in i’s corporate capacity.

Corporate counsel for the city contacted trustee to inform that the beneficiary filed the suit against the city with the beneficiary filed as attorney (pro se) for the plaintiff.The substance of the case surrounded municipal tickets received by the beneficiary concerning one of the properties in the land trust.

The land trust trustee was forced to hire an attorney to appear in proceedings throughout 2015 and 2016 to attempt to get the case dismissed as it was improperly filed.Although the judge ultimately ruled against the beneficiary, the beneficiary has appealed.The case is ongoing.

Case #2

The land trust trustee was served with a summons in April of 2019.  The plaintiff was a neighbor of one of the properties held in the land trust.  The complaint cited numerous property code violations and property neglect. 

The trustee was notified by the city’s attorney that the attorney representing the underlying beneficiary also filed an appearance as representing the trustee.  The trustee asked the attorney to clarify her representation with the court, but the attorney declined to do so due to an erroneous belief that the trust agreement and state law required otherwise. 

Trustee was forced to hire counsel to have trustee dismissed. The court did not immediately do so, and the case is ongoing.

Trustee Fees

Typically land trusts charge a higher fee in year one (acceptance and first year fee) with a nominal annual fee in subsequent years.  (the fees for commercial property is usually higher than for residential property which is typically defined as a primary residence or second/vacation home occupied by the beneficiary.)

In additional to the annual fees, additional charges are typically charged for executing a deed, accepting in additional parcels, adding or changing beneficiaries, or closing the account. 

Although the initial fee is generally received with the opening documents, the ongoing annual fees are invoiced as land trusts don’t hold cash, just title to the property.  While many clients pay their fees, it is usual to have a sizable account receivable which must be accounted for.  This also then requires the company to have a system in place to attempt to collect the fees and ultimately invoke a collection agency process at times.  This is time consuming and often fruitless, so fee write-offs are sometimes necessary. 

Incapacitation

Currently, there is no provision in the Illinois the land trust for incapacitation of the beneficiary.  Trustees can work from a power of attorney if there is a power of attorney in place and it allows for the agent to handle such matters. But, if there isn’t a valid power of attorney, there is no mechanism to govern what happens during incapacitation.  Given the fact that individuals are living longer but not necessarily living out their days with their full faculties intact, this can be an issue for trustees.   

Refinancing the Property

Many lenders won’t refinance a property within a land trust.  In those instances, the property must be deeded out of the land trust back to the beneficiary, refinanced, and then deeded back again to the land trust.  Generally, this happens at the last minute before the refinancing occurs because the beneficiary has forgotten the property is in the land trust. 

Trustee Resignation

When resigning as trustee, if no new trustee is appointed, the trustee deeds out the property directly to the beneficiary.  However, in some municipalities and counties, in order to transfer title to any real property, certain certifications may be required by the recorder’s office.  As an example, in Chicago, in order to record a deed, a water certification (water cert) must be obtained from the City of Chicago Department of Finance indicating that all fees and penalties associates with any water or sewer charges are paid in full.  Without the water cert, no deed can be recorded.  And the cost incurred is not just to bring the delinquent charges current and/or pay any penalties outstanding, the city also charges a $50 fee to provide the water cert.  Therefore, the trustee may have to pay, out of its own funds, to obtain the necessary documentation to deed out the property and have it recorded.

[1] Michael Brennan, “Illinois Land Trust Explained,” The Virtual Attorney, Dec. 18, 2017, www.thevirtualattorney.com/blog/illinois-land-trusts-explained.

[2] Ibid.

[3] David T. Smith, “The Statute of Uses: A Look at Its Historical Evolution and Demise,” Case Western Reserve Law Review, Volume 18, Issue 1, 1966, scholarlycommons.law.case.edu/cgi/viewcontent.cgi?article=4446&context=caselrev.

[4] Jennings v. Kotz 132 N.E. 625 ILL Oct. 22, 1921.