Land Trusts (LT) have been used in the United States for over 100 years, primarily for property privacy. Many people, for various reasons, want to own real estate without public knowledge. Maybe he’s a celebrity, a politician (President Obama owns his suburban Chicago home on an LT), or an individual who just doesn’t want the general public to know about his private affairs. These people may also fear the wrath of disgruntled tenants, vendors, or building inspectors. Also, if it were public knowledge that the richest man/woman in the city owned a local rental property, perhaps rent increases and maintenance requests would be perceived differently.
Since title to property is public information, many real estate owners and real estate investors choose to take title to their LT real estate investments. Land trusts are titled in the name of a Trustee and the trust itself. The LT Beneficiaries are not disclosed to the public and are only named in the Trust Deed (an unregistered contract between the Trustee and the Beneficiary). The Beneficial Owners may be an individual, a corporation, a Limited Liability Company, or another trust. Consequently, the true beneficial owners can be buried deep for reasons of privacy and asset protection (without any documents in the public records indicating true ownership and control).
The beneficiary of an LT share is responsible for what happens to the property held within the trust. Therefore, most real estate investors will own the beneficial interest through another entity (ie, a corporation or limited liability company). Unfortunately, some LT recipients are unscrupulous and attempt to hide ownership to avoid conflicts of interest and/or building code violations. Consider, for example, Chicago Councilman Thomas Keane, who owned a stake, through a land trust, in a corporation that obtained a lucrative parking lot at the city-owned O’Hare International Airport. The Councilman did not disclose his interest in the property when he voted to award the contract (see Land Trust Secrecy-Perhaps No Longer a Secret, 23 DePaul L. Rev. 509,511 n.10 (1973)).
The technique of using an LT to hide property has become an art form in Cook County, Illinois. It is estimated that over 90% of the property in Cook County is held by a land trust!
So why is it important to register the title in the name of a person or the Receiver of an LT? Everyone who owns a property places in the public records some type of document that records his interest. Otherwise, there is a risk that subsequent buyers or creditors of a previous owner may deprive the current claimant of title to it. But it is also true that the registered title does not need to reveal the person’s name or identify them in any way! Instead, an agent, corporation, trustee, or other entity may act as the legal owner. Your relationship to the beneficial owner of the beneficial interest may be (as mentioned above) represented by an unregistered private document that is not disclosed to anyone without a court order or instituted discovery process.
Is it immoral not to reveal the true identity of the controlling party of real estate? Some would say yes, but once you own real estate in your personal name and experience some of the inherent legal risks, you might be more understanding of those who don’t want to own title in your individual name. Real estate ownership carries risk, and sometimes excessive oppressive risk. While it is true that owning real estate must come with some responsibilities (i.e., upkeep, complying with building codes, meeting minimum housing standards, etc.), it should not be a target source for lawyers of contingency fees and other frivolous legal attacks.
Additionally, some real estate investors are concerned about federal and state government intrusion into their lives (read: Patriot Act). Since there is no requirement to itemize specific property ownership details on your IRS 1040, holding real estate in an LT keeps the investor’s name out of all city, county, state, and federal databases.
Since land trusts are not registered at the state or federal level (unlike limited liability companies, LLCs, and corporations), they are the last useful entity that is not an entity available to owners of real estate (land, improved properties, commercial buildings, residential buildings, real estate options, real estate contracts, etc.). Yes, LLCs and corporations offer more direct asset protection benefits, but Land Trusts provide more privacy of ownership and indirect asset protection benefits. Therefore, it is best to link Land Trusts, LLC and Corporations to get the best of both worlds.
By structuring the Land Trust with an LLC or Corporation as the beneficiary, the real estate investor creates a unique structure with symbiotic benefits. For example, changing ownership of the beneficial interest (which is held by an LLC) would effectively change LT’s ownership/control of the title without public notice or knowledge. Not only would this be a deeply private transfer of ownership and control, but the tax authorities would be left out of the loop, resulting in substantial tax savings!
Some theorists hold that property should be owned only by individual names so that the “public good” can be served by holding owners accountable for what occurs on the property (responsibility for persons and condition). At the federal level, some even refer to two important statutes: the Freedom of Information Act (1976) and the Privacy Act of 1974 as reasons to compel ownership in the names of individuals and not trusts (or at least limit the privacy of the Land Trust through legislation).
In Arizona, for example, fear of organized crime prompted action by its legislature (see New York Times, March 30, 1976 at 20, col 4). The AZ legislature enacted, as an amendment to the registration statute, a provision requiring that each transfer to or from a Trustee include the names and addresses of the beneficiary or persons representing the beneficiary. However, under this law, it is not clear whether the Trustee of another Trust (ie, a personal property trust), a corporation, or a nominee can be listed as a beneficiary and still comply with the law.
In Illinois, land trust statutes seemed to have evolved out of legislative apprehension over slum housing problems and corruption among public officials (as in the Thomas Keane case mentioned above). A 1963 law enacted in Illinois requires full disclosure of a Land Trust beneficiary “within 10 days after receipt of a notice or complaint of violation of any ordinance relating to the condition or operations of real property affecting health or safety.” The apparent intent was to force disclosure of the “true owners” of buildings with housing code violations. While there is a $100.00 per day penalty for violation of the law, nowhere are specific procedures detailed for compelling disclosure.
Iowa’s number one concern when it comes to property privacy is the possibility of hiding property ownership by non-resident aliens. Under Iowa law (see Alien Property Rights Under Iowa and Federal Law, 47 Iowa L. Rev. 105), a nonresident alien may not own more than 640 acres located outside the corporate limits of a town or city (see Iowa Code Ann. 567.1). However, Iowa’s nonresident alien property prohibition speaks of “taking title to or owning” real property. It is not clear if indirect ownership (ie through Land Trust or nominee) is prohibited. It is also interesting that the Iowa law does not mention penalties for non-compliance!
The interesting thing about some states’ attempt to control LT information (and force disclosure) is that their statutes are event-based. The event that triggers the disclosure is the transfer of title into or out of the trust. Events subsequent to the transfer to the trust, such as beneficiary changes or amendments to the trust deed, are not required to be disclosed.
There is an inherent conflict between those who want to own private property and the interests of the general public (and some government agencies). While it is true that some nefarious characters will attempt to use a land trust to avoid code requirements, tax reassessments, or the sunset clause at the time of sale, the vast majority will not. Most people who use a land trust do so with good intentions in mind. (ie estate planning, privacy concerns, asset protection, etc.).
Certainly, public officials should not be allowed to use land trusts to defraud the public (and building code violators must be held accountable), but in the typical residential real estate sale transaction, the buyer is protected through seller disclosure laws, title companies, and attorneys involved in the transaction (regardless of whether or not a land trust is used). Additionally, responsibility for property held within a land trust passes to the beneficiary. While an LLC or other entity may be the beneficiary of a land trust, ultimate liability is not avoided through the use of a land trust.
Because our American legal system has gone haywire and contingency fee attorneys abound, I am not in favor of the free flow of information when it comes to property. Since there is no federal land trust law (only state by state), the likelihood of legally compelling LT recipients to voluntarily disclose information about the title or condition of their property is unlikely, if at all, in most states.
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