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Creditors Claims Against Land Trusts

Article written by Attorney Kevin O'Flaherty
Updated on
May 11, 2020

In this article, we’ll cover, “what is a land trust?”, “what are the benefits of a land trust?” “is a land trust considered nonprobate?”, “can a creditor file a claim against a land trust in Illinois?”

A land trust in Illinois provides a unique opportunity for individuals to handle the ownership of real estate property that is not widely available to other states across the country. However, land trust laws can differ from state to state so be sure to seek out the proper professional guidance when considering a land trust for your real estate property. 

The land trust is a legal agreement by which the established title to the real estate is held by a trustee, but all the power, rights and conveniences are controlled by the original landowner, called the beneficiary under the trust, whose interest is essentially hidden under the trust. 

Typically, when creating the land trust the landowner will transfer the title of the property to the new trustee of the property, usually another person or a bank, by way of a deed in trust. This enters the landowner (beneficiary) into a trust agreement with the trustee, which essentially reserves all the rights and decision making of the property to the landowner, who is referred to as the beneficiary under the trust. Under the land trust the trustee has the right to hold title over the property and to handle business and legal matters of the property at the behest of the beneficiary.

Under the trust agreement the primary beneficiary (original landowner), can also name co-beneficiaries who will retain power over direction of the property in business or legal matters. However, the primary beneficiary still retains sole power to direct the sale or other business of the property without the input of the co-beneficiaries. 

What are the benefits of a land trust?

There are a number of benefits associated with land trusts, which we’ll cover below

Privacy for the owner of the property.

In many businesses and professions it is beneficial to separate personal life from business life. For example, a psychologist who deals with high-risk patients on a regular basis may want to hide their personal information from patients to diminish the risk of contact outside of the office. Another example may be an investor purchasing multiple properties for a type of business that may be viewed as negative or improper to any given group of people. The business owner may not want to shoulder the burden of discrimination from public inquiries about the business. This also allows co-beneficiaries to hide their identities under the trust from other co-beneficiaries. However, certain government agencies can still access this information through the appropriate legal channels.

Avoiding Probate

Probably the most obvious reason for a land trust is probate avoidance. Although different from a living trust a land trust will still allow the real property covered under the trust to pass outside of probate upon the death of the beneficiary. Furthermore, the trustee, probably a bank or other entity, has to act according to the land trust agreement (whatever the primary beneficiary dictated in the land trust upon death), there can be no contesting by the heirs during probate. Ultimately, the property should pass to those assigned in the most up to date version of the agreement.

Ease of Convenience

What is termed Ease of Convenience means the land trust allows for a simple way to sell or mortgage property when multiple owners are involved. Since all interests in the property are conveyed under the trust is unnecessary to obtain the usual paperwork from all the beneficiaries and/or spouse that would normally be involved in the selling or mortgage of a property.

It is important to note that a land trust is not as all-encompassing and protective as a living trust, but it is a fine and inexpensive tool for handling certain real estate needs and for avoiding probate of real estate assets.

Can a creditor file a claim against a land trust.

Generally, creditors cannot file claims directly against a land trust. The rules may be different from state to state, but in Illinois under a land trust agreement and/or in joint tenancy the property held in the trust does not become part of the probate estate upon the death of the original landowner (beneficiary, under the land trust) and is not available to pay off debts. However, liens can be filed against the property in a land trust in pretty much any state, but previous court decisions in Illinois have upheld that creditors attempting to place liens on the property listed under the land trust have no legal right to enforce the lien against the co-owner of a joint tenancy property protected in a land trust. This protection does not hold up if debt is owed by the surviving beneficiary of the land trust or in certain situations when an IRS claim is involved.

How is a land trust created?

A land trust is created by signing a short trust agreement, typically when the real estate is purchased or at some point after the purchase. For more information on estate planning and protecting your personal and business assets visit Learn About Law or call O’Flaherty Law at 630-324-6666.


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Creditors Claims Against Land Trusts

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