Understanding the Florida Land Trust Act: When and When Not to Use a Land Trust

Florida’s real estate landscape is dynamic and, at times, complex. One tool that real estate attorneys are often asked about and property owners often consider is the Florida Land Trust, governed by the Florida Land Trust Act, Sec. 689.071, Florida Statutes. This blog serves as an introduction to what a land trust is, explores the nuances of the Florida Land Trust Act (the “Act”), highlights when forming a land trust in Florida can be advantageous, and crucially, identifies when it might not be the most suitable option.

Purpose of the Act

The Act is designed to provide a legal framework for the creation and administration of land trusts within the state. A land trust, in essence, is a legal entity that anonymously holds title to real property. This tool is often employed for privacy, asset protection, and estate planning reasons. While it operates like a traditional trust in many ways, there are unique characteristics specific to this type of trust agreement.

Key Components of the Act

Trustee and Beneficiary

A land trust is considered a revocable trust that serves to provide a legal title for real property. The creator of the trust appoints another person to serve as trustee to hold legal title to real estate property for the benefit of the beneficiary (typically the same person who created the trust). Only the name of the trustee is public. The person holding legal title to the property is the trustee, while the beneficiary retains equitable ownership rights.

Privacy Protections

The Act provides privacy benefits as the public record only reflects the name of the trustee, not the beneficiaries. This can be advantageous for high-profile individuals or those seeking to keep their real estate dealings discreet.

Ease of Transfer of Property

Transferring beneficial interest in the trust is a simpler process compared to transferring traditional property ownership. Transferring beneficial ownership doesn’t require a change in the property title, streamlining the process and often avoiding transfer taxes or fees. This flexibility can be particularly useful for estate planning and business succession.

Benefits of Forming a Land Trust

Forming a land trust may seem simple, but if you’re looking to establish a land trust, it is worth evaluating the reasons for doing so. You may be able to achieve your goals without going through the time and expense of having a new trust created. That said, the following are the primary benefits of a land trust:

Privacy Concerns

Individuals who value privacy in their real estate transactions often find land trusts appealing. By shielding the identity of beneficiaries, it provides a layer of confidentiality that might not be achievable through direct ownership.

Estate Planning and Asset Protection

Land trusts are a valuable tool for estate planning. They facilitate the smooth transfer of assets to heirs, potentially avoiding probate processes and associated costs. For individuals involved in professions with a higher risk of legal liability, placing real estate into a land trust can add an additional layer of protection against potential legal claims. In cases where a beneficiary dies, becomes incapacitated, or undergoes bankruptcy, the trust continues to hold the property without disruption, ensuring stability and continuity in the property’s ownership and management.

Tax Treatment

For federal tax purposes, Florida land trusts are often treated as “grantor trusts.” Consequently, all tax events (e.g., income or deductions) related to the property typically pass directly through to the beneficiaries, and the trust itself isn’t a separate taxable entity.

Flexibility in Property Management

The trustee, holding legal title, has the authority to manage the property. This can be advantageous in situations where a property has multiple owners, each with different management preferences.

When Forming a Land Trust Might Not be Suitable

Asset Protection

Land trusts are not reliable asset protection tools. Although a land trust hides ownership from public record, a judgment debtor is required to disclose to a judgment creditor under oath their beneficial interest in any trust agreement including the debtor’s beneficial interest in a land trust. Also, a land trust is a self-settled trust because the creator of the trust is also a beneficiary. There is a well-established policy in Florida law that a creditor may levy upon the debtor’s interest in any self-settled trust. There is nothing in a land trust agreement that can protect your beneficial interest from a judgment creditor. An IRS tax lien, for example, automatically attaches to your beneficial interest in a land trust regardless of whether the IRS knows of the trust.

Tax Implications

While land trusts don’t typically trigger immediate property tax reassessment, the transfer of beneficial interest might have tax consequences. It’s crucial to consider potential tax implications before forming a land trust.

Mortgage Concerns

When considering a land trust, property owners must be aware of potential issues with existing mortgages. Some lenders may view the transfer of property to a land trust as a violation of the due-on-sale clause, triggering the mortgage’s acceleration.

Corporate Entity Alternatives

In some cases, utilizing an LLC, corporation, or different business entity might offer similar privacy and asset protection benefits without the potential complexities associated with land trusts.

Conclusion

The Florida Land Trust Act presents a valuable option for property owners seeking privacy, ease of transfer, and asset protection. However, it’s not a one-size-fits-all solution. Careful consideration of individual circumstances, including existing mortgages, tax implications, and the overall estate plan, is crucial. Whether forming a land trust in Florida is beneficial or not depends on the specific goals and needs of the property owner. As with any legal decision, seeking professional advice is paramount to making informed choices in the complex realm of real estate law.