Is The Secrecy of a Land Trust Lawful?
Land Trusts (LT) have been used in the United States for over 100 years, chiefly for privacy of ownership. Many people, for various reasons, want to own real estate without public knowledge. Perhaps they are a celebrity, politician (President Obama owns his house in the Chicago suburbs in a LT) or an individual that just doesn’t want the general public to know their private business. Such persons might also fear the wrath of disgruntled tenants, vendors or building inspectors. Further, if it were public knowledge that the richest man/woman in town owned local rental character perhaps rent increases and maintenance requests would be perceived differently.
Since title to character ownership is public information many real estate owners and real estate investors opt to take title to their real estate investments in LT’s. Land trusts keep up title in the name of a Trustee and the trust itself. The Beneficiaries of the LT are not disclosed to the public and are only named in the Trust Agreement (a non-recorded contract between the Trustee and the Beneficiary). The advantageous Owners can be individuals, a corporation, a Limited Liability Company or another trust. consequently, the true advantageous holders can be buried thorough for privacy and asset protection reasons (with no document on the public records suggesting true ownership and control).
The advantageous interest holder of a LT is liable for what happens on the character that is held inside the trust. consequently, most real estate investors will own the advantageous interest via another entity (i.e. a corporation or limited liability company). Unfortunately, some LT beneficiaries are unscrupulous and attempt to conceal ownership to avoid conflict of interest and/or building code violations. Consider for example, Chicago alderman, Thomas Keane, who owned an interest, by a land trust, in a corporation that obtained a lucrative parking lot with city owned O’Hare International Airport. The alderman did not show his ownership interest when he voted to grant the contract (see Land Trust Secrecy-Perhaps a Secret No More, 23 DePaul L. Rev. 509,511 n.10 (1973)).
The technique in using a LT to hide ownership has been raised to an art form in Cook County, Illinois. It is estimated that over 90% of the character owned in Cook County is held in a land trust!
So, why is it important to record title in an individual’s name or the Trustee of a LT? Everyone who owns character places in the public records some kind of document recording their interest. Failure to do so raises the risk that later purchasers or creditors of a past owner may deprive the present claimant of his title. But it is also true that the recorded title need not disclose the personal name or clarify him/her in any way! Instead, a nominee, corporation, trustee or other entity may be interposed as legal title holder. Its relationship with the advantageous interest holder may be (as mentioned before) represented by a private unrecorded document that is not disclosed to anyone without a court order or discovery course of action instituted.
Is it immoral to not show the true identity of the controlling party of a piece of real estate? Some would say yes but, once you own real estate in your own personal name and experience some of the inherent legal risks you might be more understanding of those who do not want to own title in their individual name. Real estate ownership carries risk and sometimes excessive oppressive risk. While it is true that real estate ownership should carry with it some responsibilities (i.e. to continue, comply with building codes, meet minimum housing standards, etc.), it should not be a target source for contingency fee lawyers and other frivolous legal attacks.
Furthermore, some real estate investors are concerned about Federal and State government intrusion in their lives (read: Patriot Act). Since there is no requirement to itemize specific character ownership details on your IRS 1040, holding real estate in a 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 -LLC’s and Corporations), they are the last useful non-entity entity obtainable to owners of real character (land, improved character, commercial buildings, residential buildings, real estate options, real estate contracts, etc.). Yes, LLC’s and Corporations offer more direct asset protection benefits, but the Land Trust provides more privacy of ownership and indirect asset protection benefits. consequently, it is best to link Land Trusts, LLC’s and Corporations together for the best of both worlds.
By structuring the Land Trust with an LLC or Corporation as the beneficiary, the real estate investor creates a rare structure with symbiotic benefits. For example, changing ownership of the advantageous interest (being held by an LLC), would effectively change the owner/control of the title holding LT without public notice or knowledge. Not only would this be a deeply private move of ownership and control but taxing authorities would be left out of the loop resulting in substantial tax savings!
Some theorists continue that character should be owned only in individual names so the “public good” can be served by holding owners accountable for what occurs on character (liability for people and condition). At the Federal level some already refer to two statutes of importance: The Freedom of Information Act (1976) and the Privacy Act of 1974 as reasons to compel ownership in the name of individuals and not trusts (or at the minimum limit the privacy of Land Trust’s by legislation).
In Arizona, for example, the fear of organized crime prompted action by its legislature (see New York Times, March 30th, 1976 at 20, col 4). The AZ legislature enacted, as an amendment to the recording statute, a provision requiring every conveyance to or from a Trustee to include the names and addresses of the beneficiary or persons representing the beneficiary. However, it is unclear under this law if the Trustee of another Trust (i.e. a personal character trust), a corporation, or a nominee can be listed as the beneficiary and nevertheless comply with the law.
In Illinois the land trust statutes seemed to have evolved from legislative apprehension over slum housing problems and corruption among public officials (as with the before stated Thomas Keane case). A 1963 law enacted in Illinois requires complete disclosure of a Land Trust beneficiary “within 10 days of receiving a notice or complaint of violation of any ordinance relating to condition or operations of real character 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 non-compliance of the law, no- where does it spell out specific procedures to compel disclosure.
Iowa’s dominant concern when it comes to privacy of ownership is the possibility of hiding ownership of character by nonresident aliens. Under Iowa law (see character Rights of Aliens 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, the prohibition on nonresident alien ownership in Iowa speaks of “acquiring title to or holding” real estate. It is unclear whether indirect ownership (i.e. via a Land Trust or nominee) is extremely. It is also interesting that the Iowa law mentions no penalty for non-compliance!
What is interesting about some states attempt to control LT information (and force disclosure) are their statutes are event-based. The event that triggers disclosure is the move of title into or out of the trust. Occurrences after conveyance 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 own character privately and the interests of the general public (and some governmental agencies). While it is true that some nefarious characters will attempt to use a land trust to avoid code requirements, tax re-assessments or the due-on-sale clause, a great majority will not. Most people who utilize a land trust do so with good intentions in mind. (i.e. 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 should be held accountable), but in the typical residential real estate sales transaction the buyer is protected via the seller disclosure laws, title companies and attorneys involved in the transaction (in spite of of whether a land trust is used or not). Further, the liability for the character held inside a land trust flows by to the beneficiary. While an LLC or other entity can be the beneficiary to a land trust, ultimate liability is not avoided by using a land trust.
Because our American legal system has run a muck and contingency fee lawyers abound, I do not favor the free flow of information as it relates to character ownership. Since there is no Federal land trust law (only state-by-state), the likelihood of legally powerful LT beneficiaries to disclose information voluntarily about the title or condition of their character is doubtful in most states, if at all.