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Is The Secrecy of a Land Trust Lawful?
A land trust (LT) has been used in the United States for over 100 years, primarily for ownership privacy. Many people, for various reasons, want to own real estate without public knowledge. Maybe it’s a celebrity, a politician (President Obama has a house in LT in the Chicago suburbs), or someone who doesn’t want the general public to know their private business. Such individuals may also fear the wrath of disgruntled tenants, vendors, or building inspectors. Further, if it is public knowledge that the wealthiest man/woman in town owns a local rental property, rents may increase and maintenance requests may be perceived differently.
Many real estate owners and real estate investors choose to obtain title for their real estate investments in LT’s since the title of property ownership is public information. Land trusts hold title in the name of the trustee and the trust itself. Beneficiaries of LTs are not disclosed to the public and are only named in the trust agreement (a non-recorded agreement between the trustee and the beneficiary). Beneficial owners can be individuals, corporations, limited liability companies or other trusts. As a result, the true beneficiaries may be buried deep for privacy and asset protection reasons (no documentation on public record showing true ownership and control).
The beneficial interest holder of the LT is responsible for what happens to the property 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 beneficiaries are unscrupulous and try to hide ownership to avoid conflicts of interest and/or building code violations. Consider, for example, Chicago Alderman Thomas Keen, who has an ownership interest, through a land trust, in a corporation that acquired a lucrative parking lot with the city-owned O’Hare International Airport. The alderman did not disclose his ownership interest when he voted to approve the contract (see Land Trust Secrecy—Maybe A Secret No More, 23 DePaul L. Rev. 509,511 n.10 (1973)).
The technique of using LT to hide ownership has been developed into an art form in Cook County, Illinois. It is estimated that over 90% of the property in Cook County is held in land trusts!
So, why is it important to register the title in the name of an individual or a trustee of an LT? Every person who owns a piece of property in a public place has recorded some form of document recording their interest. Failure to do so increases the risk that subsequent purchasers or creditors of the previous owner may deprive the current claimant of his title. But it is also true that a recorded title need not reveal an individual’s name or identify him/her in any way! Instead, nominees, corporations, trustees or other entities may intervene as legal title holders. His relationship with the beneficial interest holder (as previously mentioned) may be represented by a private unrecorded document that is not disclosed to anyone except by court order or the establishment of a discovery process.
Is it unethical not to disclose the true identity of the party controlling a piece of real estate? Some would say yes, but once you’ve owned real estate in your own name and experienced some of the inherent legal risks, you may be more understanding of those who don’t want title in their personal name. Real estate ownership involves risk, and sometimes more pressing risk. While it is true that real estate ownership carries with it certain responsibilities (ie maintenance, compliance with building codes, meeting minimum housing standards, etc.), it should not be a target source for contingency fee lawyers and other petty legal attacks.
Furthermore, some real estate investors are concerned about federal and state government intrusion into their lives (read: the Patriot Act). Because there is no need to provide specific property ownership details on your IRS 1040, placing real estate in an LT keeps the investor’s name out of all city, county, state and federal databases.
Because land trusts are not registered at the state or federal level (unlike limited liability companies -LLCs and corporations), they hold real assets (land, improved property, commercial buildings, residential buildings, real estate options, real estate contracts, etc.). Yes, LLCs and corporations offer more direct asset protection benefits, but a land trust provides more privacy of ownership and indirect asset protection benefits. Therefore, it is best to combine land trusts, LLCs and corporations for the best of both worlds.
By structuring a land trust with an LLC or corporation as the beneficiary, a real estate investor creates a unique structure with symbiotic benefits. For example, changing ownership of a beneficial interest (held by an LLC), would effectively change ownership/control of the title held by the LT without public notice or information. Not only will this be a deep private transfer of ownership and control, but the taxing authorities will be kept out of the loop resulting in huge tax savings!
Some theorists argue that property should be owned solely in individual names so that the “public good” can be served by holding owners accountable for what happens on the property (responsibility for people and circumstances). At the federal level, some also cite two important laws: the Freedom of Information Act (1976) and the Privacy Act of 1974 as reasons to force land trusts to be owned in the names of individuals and in trusts (or at least limit the privacy of land trusts by law).
In Arizona, for example, fears of organized crime prompted its legislature to act (see New York Times, March 30, 1976 at 20, col. 4). The AZ Legislature, as an amendment to the recording statute, enacted a provision requiring each trustee to include the names and addresses of the beneficiary or persons representing the beneficiary for each conveyance to or from him. However, the Act is unclear as to whether a 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 Act.
In Illinois, land trust regulations seem to have developed out of legislative fear of slum housing problems and corruption among public officials (as in the Thomas Cain case, mentioned earlier). A 1963 law enacted in Illinois “requires full disclosure by the beneficiary of a land trust within 10 days of receiving a notice or complaint of a violation of any ordinance relating to the condition or operation of real property affecting health or safety.” The apparent intent was to compel the disclosure of the “true owners” of buildings in violation of the housing code. While the law imposes a fine of $100.00 per day for non-compliance, no specific procedure is specified anywhere to compel disclosure.
Iowa’s primary concern when it comes to privacy of ownership is the potential for concealment of property ownership by a nonresident alien. Under Iowa law (see Property Rights of Aliens Under Iowa and Federal Law, 47 Iowa L. Rev. 105) a nonresident alien cannot own more than 640 acres of land outside the corporate limits of a city or town (see Iowa Code n. 567.1. ). However, Iowa’s ban on nonresident alien ownership speaks to “acquiring or holding title” to real estate. It is unclear whether indirect ownership (ie through a land trust or nominee) is prohibited. It is also interesting that the Iowa law does not mention any penalties for non-compliance!
What is interesting about how some states attempt to regulate LT information (and compel disclosure) is that their laws are statute-based. The event that triggers the disclosure is the transfer of title into or out of the trust. Events subsequent to entering into the trust, such as beneficiary changes or amendments to the trust agreement, need not be disclosed.
There is an inherent conflict between those who want to take private property and the interests of the general public (and some government agencies). While it is true that some unscrupulous characters will try to use land trusts to avoid code requirements, tax reassessments or due-on-sale clauses, the majority will not. Most people who use land trusts do so with good intentions. (ie estate planning, privacy concerns, asset protection, etc.).
Public officials certainly shouldn’t be allowed to use land trusts to defraud the public (and hold building code violators accountable), but in a typical residential real estate sale transaction the buyer is protected by seller disclosure laws, title companies and the attorneys involved. In practice (regardless of whether a land trust is used or not). Further, the liability of the property held in the land trust passes to the beneficiary. An LLC or other entity can be a beneficiary of a land trust, but ultimate liability is not avoided by using a land trust.
With our American legal system run a mess and contingency fee lawyers galore, I am not in favor of the free flow of information as it relates to property ownership. Because there is no federal land trust law (only state-by-state), it is unlikely in most states to legally compel LT beneficiaries to voluntarily disclose information about the title or status of their property.
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