The Land Trust - ABA YLD 101 Practice Series

By Hugh Drake

The land trust, often referred to as an "Illinois land trust&" because of its origins, is truly a unique legal entity. And, as described by Henry W. Kenoe, the Illinois land trust scholar, it is, perhaps, unfortunate that it is bears the trust moniker because the designation is almost too confining. The land trust is very versatile and differs from a conventional trust in many ways.

The land trust is a legal arrangement in which a trustee holds legal and equitable title to property, but all managerial powers over the trust assets remain with the beneficiaries of the trust. The trustee takes action when called upon and directed by the beneficiaries. A classic definition of the land trust appeared in Robinson v Chicago Natl. Bank, 32 Ill.App.2d 55 (1961),

"The land trust is a device by which the real estate is conveyed to a trustee under an arrangement reserving to the beneficiaries the full management and control of the property. The trustee executes deeds, mortgages or otherwise deals with the property at the written direction of the beneficiaries. The beneficiaries collect rents, improve and operate the property and exercise all rights of ownership other than holding or dealing with the legal title.&"

Oftentimes, trustee action is limited to the conveyance of the property when the trust terminates. Land trusts are unique because the duties and powers of the trustee are so limited, but it is still considered a trust and generally governed by the principles that are otherwise applicable to all other trusts.

The land trust is created through two documents – a deed into land trust and the trust agreement. The deed into land trust typically establishes the rights and responsibilities of the trustee. It usually states that the beneficiary's interest is a personal property interest and that the beneficiary does not hold title of any kind to the real property. The trust agreement usually provides that the beneficial interest holders are able to direct the trustee in all matters of title and management of the real estate.

The land trust has attained its popularity and wide usage due to the practical elements that the beneficial interest provides:

  • The interests of the beneficiaries will not be disclosed without order of court;
  • The interests are not subject to partition;
  • The beneficial interest is personal property and, therefore, avoids ancillary probate requirements;
  • Transferability of beneficial interest is simple;
  • The beneficial interest can be used as collateral;
  • Testamentary dispositions can be set out within the trust agreement, thereby avoiding probate.

Although, many suggest that the land trust may have first been used among real estate transactions in Cook County, Illinois, as early as 1891, it is now sanctioned in many states by common law or statute.

The RPTE Property Preservation Task Force has identified the land trust as one potential answer to the difficulties existing with tenancy in common ownership of real property. The root problem in tenancy in common property is that a co-tenant can sue for partition and cause a forced sale. Developers often will force this issue by acquiring a small fractional interest in the real property, and ultimately buying it at fire sale prices through the partition action. Title to family farm property often becomes highly fractionalized through generations of intestacy. The land trust could address these root problems in that partition is not available, and the beneficial interests of the land trust can be made to transfer upon the death of the beneficial interest holder, outside of probate.

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