So I decided to try another test and to create my own little island. I created it by hand then created the LOD via Oscape. I added a few LOD textures with another experiment and once that was done I started out slowly by adding a few farmhouses with "is Full Load" checked. (One thing I noticed if the object has a LOD file for it, it will sometimes make it invisible in game. The solution is to copy the nif you want to use and move it to your own working folder, then create a new object in the CK and use that instead. It's the same object just different reference and that will solve the invisble issue.) The results were great again I could see the farmhouse's at a far away distance. Next I wondered if it would work with Trees. So I added a Aspen tree and clicked "is Full LOD" and again it worked great in game, could see it really far away. So I continued and added over 100 aspen trees, some rocks all checked with "is Full LOD". Started up the game and again great results with no out of the ordinary frame rate drops. At the top of a hill I could see all my trees, buildings and rocks and still had 60 FPS. See pic attached.
http://imageshack.us/photo/my-images/848/tesv2012051913072139.jpg/
I created this topic just to pass on the results of my experiment.
Some notes: from a distance like the pic as you can see I have 60 FPS. When I go down to where the trees are at, the framerate drops to around 40 FPS, so it seems that the Engine does do some sort of adjusting of the objects at a distance and up close. The results don't lie, so Bethesda must have done some coding on the engine to handle "is Full LOD".
I don't know if this is any kind of solution for anyone that's trying to create a different landmass mod, but for adding a small island off the coast of Skyrim it might be a solution.
Anyways, will be testing more and passing on the results if anyone's interested.

I'm just passing on my findings, I'm curious more than anything why this seems to be working so I'm going to keep testing and post my findings.