Real Estate Trusts: Pros & Cons
Real estate trusts work hard for you because you’ve worked hard, bought a nice home and built up some equity in it. You are getting up in age and are considering placing the home into a real estate trust. You’ve heard that a real estate trust is the way to make sure that the house goes to a family member of your choosing if and when you pass.
Although placing the home into a trust will avoid the hassle of probate court and save on estate taxation, there are also some distinct disadvantages. In this article we will explore some of the pluses and some of the minuses of placing your home in a trust.
Probate Avoidance – if your home is in a trust at the time of your death it will not be included in your probated estate. That means the beneficiary listed in the trust will immediately take ownership of the property and any personal possessions (cars, furniture, TVs and projectors, bank accounts, etc.) that are placed in the trust along with it without going through the probate procedure.
Probate can be costly and nothing could be done with the home or possessions, like selling them, without the court’s prior approval.
With a trust, everything in the trust would be transferred immediately to the beneficiary and that person could proceed in any way and at any time that they choose.
Estate Tax Avoidance – upon your death, the state government will step in and tax the transfer of your estate. The tax is based o
n a percentage of the total value of the estate and the rate varies from state to state. This tax is paid out of the assets before the beneficiaries receive any distribution. Depending on the type of trust, a trust could prevent this from occurring.
Creditor Collections – let’s face it, when we die we don’t usually see it coming. There are usually some debts that still remain. A trust can also protect your home and property from being attached. Anyone you may have still owed money to may be able to attach your property.
Deed Transfer on Death – many states allow what is called a “transfer on death” deed. The problem with this deed is that if, by chance, a beneficiary dies before the grantor, or is a minor at the time of the grantor’s death, a “transfer on death” deed is no longer valid and the property would have to then go through probate. An additional problem with a death deed is that the property involved has to be a single-family home. What if you own an apartment building or commercial real estate? A trust would protect your property if a situation like this occurs.
Cost Disadvantages – designing a trust is more complicated than making a simple will. A lawyer’s assistance is recommended and they don’t work on the cheap. A trustee must be designated. There could be fees associated with the trustee for maintaining any paperwork from year to year. The are real estate trust transfer fees at the local level. When you transfer the title of your home from your own name and into the name of your trust.
Trust and Taxes – if your trust also includes other assets, such as an investment account or savings accounts, and they are not immediately distributed, tax returns must be filed annually. For instance, the beneficiary is to receive partial distributions when they reach certain ages. The trust remains in existence and is subject to income taxes. Also, there may be certain tax breaks available to a probated property that are not available to trusts.
One More Thing
What if you own the property jointly, say with a partner. If you die, your partner would automatically be granted complete ownership of the property. If this partner is not a family member, or the person who you would like to receive your share of the property, a trust will prevent this automatic transfer because the trust would “own” your share of the property. The trust didn’t die, just you. The trust would protect the named beneficiary’s interest in the property.
As you can see, there are many things to consider when establishing and funding real estate trusts. That’s why hiring an estate planning attorney is so important. There are several complications involved in setting up a trust properly. A competent estate attorney can guide you through the entire process.