A land trust is a binding trust agreement between a property owner and a trustee that authorizes the trustee to hold the property with or without transferring the title and control of the property.

The purpose of a land trust depends on the type of land trust. Real estate trusts — also referred to as “Illinois land trusts” for the state in which they originated — exist to protect a landowner’s privacy and avoid probate. They can also protect the property from creditors.

Community land trusts and conservation land trusts are designed to provide affordable housing to low-income families and to conserve land for future generations, respectively.

Depending on your objectives, you may be considering one of these types of land trusts. For example, you may want to give back to your community through the establishment of a community land trust, or perhaps you are nearing retirement and want to ensure that your estate plan includes measures for keeping your property out of probate.

The key to setting up a legitimate land trust is enlisting the help of an experienced trust lawyer. Land trusts are too complex for most people to create without a knowledgeable professional.

What Is a Land Trust?

According to the Internal Revenue Service, a land trust “has no special distinction in the Internal Revenue Code and would be a simple, complex, or grantor trust depending on the terms of the trust instrument.”

A land trust is a legal entity that involves a grantor, a trustee, and a beneficiary. These parties are the same as those in any other trust. The grantor is the landowner, and, in most cases, the beneficiary of a land trust is also the landowner. The trustee is the person or firm that takes ownership — at least on paper — of the property.

A land trust can involve joint owners and multiple beneficiaries. When a land trust involves multiple owners, there is an additional benefit to the grantors. The trust can shield the other owners if one becomes the target of a lawsuit.

Types of Land Trusts

Land trusts are governed by state laws, and according to the Federal Deposit Insurance Corporation, a real estate land trust is “a unique type of fiduciary relationship that is not allowed in every state.”

Illinois Land Trust

Illinois land trusts were first used in Chicago in the 1800s. The FDIC states that this type of land trust is typically used for privacy, estate planning or to “facilitate borrowing arrangements.”

Typically, the grantor or beneficiary of an Illinois land trust retains control of the property. The trustee simply holds the title and has no responsibility to direct the use of the property. A document called a deed of trust transfers the property into the trust and, depending on state law, may be recorded.

The trustee must file a “Notice Concerning Fiduciary Relationship” form (Form 56) with the IRS each time property is transferred into or out of the trust.

Community Land Trust

Community land trusts are typically started by nonprofit organizations at a grassroots level and supported by local governments through financial resources that allow these organizations to sustain operations.

According to the Florida Community Land Trust Institute, “In the Community Land Trust (CLT) model, housing is made affordable by separating its value from the value of the land underneath it.”

In other words, the homeowner buys the house, but not the land. The land is owned by the organization. The homeowner pays a monthly mortgage to a lender and a monthly payment called a “ground lease,” which goes directly to the CLT organization and ensures the homeowner’s right to exclusive use of the land. This arrangement keeps the homeowner’s monthly payments low.

Just the same as homeowners with other types of loans, CLT homeowners pay property taxes and build equity.

Conservation Land Trust

The Land Trust Alliance is a national land conservation organization based in Washington, D.C., that supports conservation land trusts across the United States with the goal of strengthening land conservation in rural and urban communities.

Conservation land trusts aim to secure land for the health and safety of all Americans and the country’s future generations. From pure drinking water and clean air to protection from natural disasters, conservation land trusts protect the natural resources of land that has been donated through a conservation easement.

In addition to contributing to the preservation of the land’s natural resources, there is a tax incentive for creating a conservation land trust. Federal income tax deductions, estate tax benefits and state and local tax credits can amount to a significant tax savings for land donors.