The information below comes from North American Realty Services (NARS), which promotes enhanced versions of the Illinois-style land trust. The language is a bit stilted, but it gets across the points. Basically, you transfer your properties into a trust. You no longer own the properties; the trustee does. But, because you retain the power of direction, you can direct the trustee's activities. Note: I'm not a lawyer or accountant, so this is neither legal nor accounting advice.
There are other proponents of land trusts. Within the investor community, these include Bill Bronchick and Minh Pham. You can Google them and get their contact information.
Anyhow, here's the explanation NARS:
There are two primary ways to transfer ownership in real property â€“ 1) by a transfer of the propertyâ€™s legal and/or equitable title to an acquiring party, or 2) by a transfer of a beneficiary interest in a title-holding entity (such as a land trust) which owns the property. Our use of the â€œIllinois-typeâ€ title-holding land trust model entails the propertyâ€™s legal and equitable title being vested with an unbiased third-party corporate trustee for the duration of our arrangement. In such a transaction the co-beneficiaries (you and I) remain 100% in full control of any and all of the actions of the trustee and all matters relating to the property and its title. When using this method of transfer, maximum legal safety and asset protection is attained, and no benefits or advantages of real property ownership need be foregone. One might think of this method of transfer and asset protection as being analogous to holding the property in Escrow for the term of our agreement, in order to best protect the property, itâ€™s title and both our respective interests.
Although not widely known and grossly under utilized by the vast majority of legal, accounting and real estate professionals, the land trust (Illinois-type title-holding trusts) is in-fact, valid in virtually all states, (excepting only Louisiana and Tennessee due to those stateâ€™s characterization of use in trust and use in land being indistinguishable). The land trust is highly respected by those who understand it as a foremost viable and protective real property transfer and holding device. Vesting the propertyâ€™s ownership with a land trust trustee effectively shields the property from virtually all legal perils (e.g., creditor judgments, IRS tax liens, divorce actions, bankruptcy, partition, charging order, probate, spousal claims, etc.). The land trust is authorized either by specific statute, specific authorization or by the land trustâ€™s exclusion from prohibitions within a jurisdictionâ€™s statute of land uses. It is important to know that, despite its relatively sparse use over the years, the land trust model has been employed in real property transfer since before the beginning of the twentieth century (promulgated first by Chicago Title and Trust of Illinois in 1899, and restructured into its present form in the early 1920â€™s by Chicago Land Title).
Unlike other inter-vivos (â€œlivingâ€) trust structures, it is the beneficiary/ies and not the named trustee who holds the power of direction and management, or control over the actions of the title-holder trustee. In other words, it is the beneficiaries (you and I) who make all the decisions (100%) relative to the property, its title and any and all duties and actions of the trustee.
In view of the fact that the propertyâ€™s ownership is wholly vested in the nominated trustee, the property remains protected from virtually any legal action that would attempt to involve the trustâ€™s beneficiaries or itâ€™s property (even including attempted tax lien actions by the IRS). Although the beneficiaries can be sued in personam (against the person) for their own actions, a suit in rem (against the property) is not available to claimants.
While the IRS continues to treat all beneficiaries of land trusts as owners of Realty for income tax purposes, the actual ownership by beneficiaries is that of personalty (personal property versus real estate) and therefore protected under any stateâ€™s personal property law (IRR 92-105; The Doctrine of Equitable Conversion; Blackâ€™s Law, 6th ed, pp 332/538). This feature of the land trust form creates excellent protection from partition by judgment creditors, charging orders and outside creditor judgments and their resulting liens.
Another important feature of this very versatile transfer device is the simplicity of conveyance of the benefits of real property ownership to a second party without the need for lender involvement, new title insurance or formal escrow settlement.
By combining the title-holding land trust form and a possessory agreement (i.e., a full payout lease), the benefits of real estate ownership can be effectively transferred to a named co-beneficiary without a violation of a mortgage lenderâ€™s â€œdue-on-saleâ€ admonitions