TRUSTS
A trust is a device by which:
- one person (Trustor) transfers ownership of property to someone else (Trustee)
- Trustee owns the property
- Trustee holds or manages the property for the benefit of a third party (Beneficiary)
The trustee is a fiduciary, who acts in confidence or trust and has a special legal relationship with the beneficiary. The trustee’s power and authority are limited by the terms of the trust agreement, will, or deed in trust.
Illinois permits real estate to be held in trust as part of a living or testamentary trust or as the sole asset in a land trust.
Living and Testamentary Trusts
A property owner may provide for her own financial care or for that of the owner’s family by establishing a trust. This trust may be created by agreement during the property owner’s lifetime (living trust, also called inter vivos trust) or established by will after the owner’s death (testamentary trust).
The person who creates the trust conveys real or personal property to a trustee (usually a corporate trustee), with the understanding that the trustee will assume certain duties. These duties may include the care and investment of the trust assets to produce an income. After paying the trust’s operating expenses and trustee’s fees, the income is paid to or used for the benefit of the beneficiary. The trust may continue for the beneficiary’s lifetime, or the assets may be distributed when the beneficiary reaches a certain age or when other conditions are met.
Land Trusts
Illinois permits the creation of land trusts, in which real estate is the only asset.
As in all trusts, the title to the property is conveyed to a trustee, and the beneficial interest belongs to the beneficiary. In the case of land trusts, however, the beneficiary usually is also the trustor (original owner names himself as the Beneficiary). The beneficiary retains management and control of the real property and has the right of possession and the right to any income or proceeds from its sale.
Beneficial Interest — Beneficiary
- The beneficial interest is personal property.
- One of the distinguishing characteristics of a land trust is that the public records usually do not name the beneficiary.
- A land trust may be used for secrecy when assembling separate parcels. There are other benefits as well.
- A beneficial interest in a land trust, being personal property, can be transferred by assignment, making the formalities of a deed unnecessary.
- The beneficial interest in property can be pledged as security for a loan without having a mortgage recorded.
- The beneficiary’s interest passes at the beneficiary’s death under the laws of the state in which the beneficiary lived.
A land trust ordinarily continues for a definite term, such as 20 years. If the beneficiary does not extend the trust term when it expires, the trustee is usually obligated to sell the real estate and return the net proceeds to the beneficiary.
Land trusts are used in Illinois.
However, Illinois law requires that the trustee disclose the beneficiary’s name to certain parties under specific circumstances. The beneficiary’s name must be revealed:
- to the concerned housing authority within ten days after receiving a complaint of a violation of a building ordinance or law,
- when applying to any state of Illinois agency for a license or permit affecting the entrusted real estate,
- if selling the entrusted property by land contract (seller financing),
- if the trustee is named as a defendant in a private lawsuit or criminal complaint regarding the subject real estate (the beneficiary’s identity can then be “discovered” by the plaintiff),
- if a fire inspector or another officer is investigating arson. Real Estate Investment Trust
Single Taxation
A real estate investment trust does not have to pay corporate income tax as long as 95 percent of its income is distributed to its shareholders.
To qualify as a REIT, at least 75 percent of the trust’s income must come from real estate. Investors purchase certificates in the trust, which in turn invests in real estate or mortgages (or both).
Profits are distributed to investors without being taxed at the REIT level (Single Taxation).
