What is a Land Trust?
A land trust is a legal entity that holds the title for a property in lieu of the property owner. The trustee (which can be a LLC or an individual) is the named manager of the property, while the grantor (original property owner) still has authority and ownership of the property.
How does a Land Trust work?
A trust is basically a formal agreement between two parties - a trustee and a grantor (who is often also the beneficiary, but the beneficiary can be another person bringing the total to three parties involved) to hold a piece of property. The trustee agrees to hold the deed of the property and execute the grantor’s directives.
First you have to sign a trust agreement between the two parties, then the grantor will give the deed of property over to the trustee. However, just because the trustee is now on the deed, it doesn’t mean they are the owner of the property - the grantor remains in control.
This can be a beneficial relationship because it allows the grantor to remain anonymous on public records. Only the trustee will be listed on the record and they are legally obligated to keep the grantor’s (and beneficiary if it’s a different party) name confidential except by court order.
Most trusts are revocable, meaning the grantor can revoke the trust anytime they choose. Some trusts are irrevocable, meaning the trust follows the property through its sale or inheritance. In these cases, only the beneficiary may revoke it. No registered agent is required.
How does a Land Trust protect you?
First, it allows the grantor privacy with their property holdings. Since the trustee will be the only party listed on public records for the property, there is no access to the grantor’s name. This can be especially useful if family, community members, or creditors try to find out financial information about your investments.
The second way a land trust can protect you is by shifting your personal property over to a trust of an LLC. By doing this, you will be limiting your liability and potentially gaining a tax advantage. For example if you own multiple properties and are concerned about your increased liability, you can put the properties in a land trust and have the beneficiary be an LLC.
Much like an LLC protects the members of a business from undue liability of their personal assets, an LLC as beneficiary works the same for property owners. If a tenant injures themselves on one of your properties, any litigation will be directed at the beneficiary. If the beneficiary is an LLC, the grantor will be protected.
Advantages & Disadvantages of Land Trusts
Land trusts are certainly not for everyone, though many people - including those with multiple properties - may not fully understand what they can be used for. Below is a run down of the pros and cons of obtaining a land trust.
Advantages of Forming a Land Trust
One big draw of land trusts, especially for individuals who own multiple properties, is the anonymity it offers. When your land is held in a trust, your name is no longer attached to the property on public record.
Avoid Due-on-Sale Clause
The due-on-sale clause is triggered when a property is sold and the lender can insist on payment of the entire remaining debt balance to be “due on sale.” For property investors it can be beneficial to hold off paying back the full loan amount right away if they plan on using that profit to invest in another property.
You will only receive liability protection if the beneficiary is an LLC. This will help you if there’s any litigation against your property, but it can also help you if there are multiple owners of the same property and one owner is being sued. Typically when you sue someone you can put a lien on any assets they might have, but having an LLC land trust, this common property will be protected as well as the other investors.
Helps Minimize Probate
Probate is the process of allocating assets after someone dies. This process can often be lengthy and costly, especially if the deceased has not set up clear guidelines in a will. Even with a will it is not always smooth. If the deceased’s property is in a land trust, however, the transfer of ownership can skip probate completely and the transfer can happen quickly.
Disadvantages of Forming a Land Trust
Although there are more advantages of forming a land trust in New Mexico, there are a couple of disadvantages to forming land trusts.
Setting up and maintaining a land trust can be quite expensive, and only gets more expensive with the number of properties you have and the structure you need to set them up under. At minimum this will cost you a few hundred dollars, but it’s not uncommon for the price tag to go into the thousands.
False Sense of Security
Though there are privacy protections in place and LLC options to limit your liability, it does not mean that you are fully immune to lawsuits or liability. Most of the privacy restrictions are lifted with a court order and with that you may be vulnerable.
Different Types of Land Trusts
There are two different types of land trusts in New Mexico.
Title Holding Trust
A title holding trust is commonly referred to as an “Illinois Trust,” though you do not have to be in the state of Illinois to be part of one, it’s just where it originated.
This is one of the most common types of private land trusts and allows property owners to remain anonymous while their land is held by a trustee. The original owner still maintains all rights and authority over the property.
Conservation Land Trust
A conservation land trust is designated for land or property that may protect certain historical or cultural areas, wildlife sanctuaries, or natural resources.
By putting these properties in a trust you are shielding them from development or land use that is not in keeping with the conservationist goals. These types of trusts do require the owner to give up some rights over their land.
Why would you put Land in a Land Trust?
While there are different reasons someone might choose to put land in a trust, the main ones are the privacy protection and the potential for limited liability. Many individuals who own multiple properties (or famous people or celebrities), do not wish for their name to be made public on their properties.
Additionally, if you are a multi-property owner you are taking on a lot of risk when you don’t protect yourself through an LLC-as-beneficiary. There are also environmental and philanthropic reasons people use land trust as well.