For most people, death is hard. So, there’s little reason to complicate death further by not making a plan for what happens to all your assets. That way the people who get your stuff are the people you want to get your stuff, and it’s done so with minimal fees and inconveniences.
That’s why a trust is such a good idea!
What are the types of trusts and probate?
A trust is an arrangement you set up to manage your assets in the inevitable face of your death.
The person who sets up and funds the trust with their assets is known as a grantor; a beneficiary is one or more people who end up getting some or all of the contents of the trust; and the trustee is the person whose duty it is to make real the promises laid out in the trust document. Sometimes a grantor is also the trustee. When this is the case, a successor is named who will step in if the trustee becomes unavailable due to death or illness.
A trust is a fiduciary arrangement. A fiduciary is any person who is ethically or legally bound by trust to you. While the term “trust” is being used in a technical sense in this context, its technical meaning is the same as one of its many colloquial meanings. Trust is when you employ someone else to carry out a task in the future. In the case of trusts, that task is realizing the wishes contained within the trust, like distributing assets to beneficiaries.
There are other types of fiduciaries:
- asset managers
- financial advisors
- financial planners
There are two types of trusts:
A revocable trust is an aforementioned arrangement wherein the role of the grantor and trustee is performed by the same party. This person still manages all the assets. In the case of an irrevocable trust, a trustee is appointed by the grantor. Now the assets no longer belong to the grantor, and the grantor no longer manages those assets. It is possible, however, for the grantor to still use the properties if that’s a stipulation of the trust.
Unless you have a will that stipulates your property be a part of the trust in the event of your death (known as a pour-over will) or if you don’t have a will at all, then the state may decide who gets the property after you die. If that’s the case, then your property will go through a legal process known as probate. I
Probate is a judicial process that does all of the work that you would have done had you set up a will or trust yourself. Since setting up a will or trust already takes time, you can imagine how much longer probate takes given that the grantor is deceased. The process can be even more drawn out if it’s contentious. For these reasons, it’s not uncommon for probate to take between 10 and 18 months.
And that’s if it’s uncontested!
There are four ways that an estate may end up in probate court
1. The grantor has a will but there’s not a valid or correctly funded trust.
2. The grantor died without creating a will.
3. The trust gets contested because of validity, capacity, fraud, or undue influence.
4. The property wasn’t included in the trust, so probate is necessary to figure out what to do with the property.
Probate is a thorough process. The court either certifies the trustee specified by the grantor or appoints a trustee if need be. Then the value of the estate is calculated, the beneficiaries are settled on and reached out to, creditors are contacted for their final chance to collect on unpaid debts, the property is distributed, and the trustee is freed of their responsibilities.
The probate process gets pricier and dragged out even further if some of your assets are located in different states. In this case, the assets are governed by the state in which they are located rather than in the state in which the grantor lived. For this reason, multiple probates may be necessary. These additional probates are known as “ancillary probates”.
What are the steps to fund your real estate trust?
As you can see, trust saves you a lot of time, money, and hassle. It may seem like it would be a complicated process, but it’s actually much easier to set up a trust than you’d expect. Although, it will take work!
Step 1: Contact Your Attorney
First, get in touch with a lawyer in the county and state where your property exists. Have the lawyer put together a new deed that will transfer the asset from your personal name into your name as trustee.
Step 2: Sign all necessary documents
You may have to sign other documents. This may include local, county, or state tax forms, or a certificate or memorandum of trust. Your attorney from the previous step should get all these documents ready for you, including those necessary to retitle your property.
Step 3: Obtain approval from your association
If your property is a condo or governed by a homeowners association (HOA), you may have to check in with someone to get permission. This may be required in the event of having to record a new deed. The HOA may also ask for proof that the trust exists. In that case, you can share the memorandum of trust without revealing personal information about the rest of the trust.
Your lawyer should be able to help you deal with the HOA.
Step 4: Obtain approval from your lender
If the real estate you’re adding to your trust isn’t your primary or secondary residence and is also mortgaged, then you may have to get approval from your lender to get a new deed. This is another task your attorney should be able to help you complete.
Step 5: Record a new deed
Once the new deed is complete, then you have to record your deed among the land records of the county in which your real estate is found. The county, like the HOA, may need to see evidence of your trust, in which case you can put that memorandum of trust to use again.
This is yet another task your attorney should complete for you. The lawyer will give you the original, recorded deed afterward.
How much are the recording fees and other costs?
The expenses associated with arranging a trust depend on the state you’re in. Some states don’t charge recordation or transfer taxes with property is put into a revocable living trust. Others may have a nominal tax. Some states see the transfer as a sale and charge full taxes. Keep all these fees on the local, county, and state levels in mind so you’re not caught off guard.
Will putting real estate in my trust cause any inconvenience?
For the most part, transferring real estate into a trust won’t affect you. The whole process may just feel easy to you, as may buying new real estate on behalf of your trust. The transfer won’t affect your mortgage. Retitling your property in the name of the trust shouldn’t trigger your mortgage’s “due on sale or transfer” clause if there is one.
Refinancing may require a smattering of effort since some lenders want you to do all your work under your own name and put your property into the trust afterward. Listing your trust as the owner of your property on your insurance may even make it easier for your trustee and beneficiary.
Check with your insurance agent to see if this is the case.
What about an out-of-state property?
Transferring property from another state will, as previously mentioned, save you a lot of time, money, and effort. Your lawyer can handle this for you by reaching out to a title company, or you can get a lawyer in that state to handle things for you.
What about a contaminated property?
If your property has been contaminated in any way, by chemicals, for example, you can still put it in your trust. The trustee or beneficiary, however, may be held responsible for the cleanup. It goes without saying that if you’re the trustee that it’s on you to handle the cleanup.
Tell your lawyer if you’re in this situation.
What about community property status?
Community property status, which is anything that’s jointly owned by a married couple, can still continue within your living trust. If you live in a state that reduces taxes on assets that have community property status, then you may want to retitle your real estate as community property so that the amount of capital gains tax paid on the asset is lower if the property ends up being sold after a spouse dies.
Should you appoint a family member as trustee?
It’s not advised to put a family member or beneficiary as the trustee since it may create contentious family dynamics. Of course, there are exceptions, like if your beneficiary or trustee is your only living relative. Instead, it’s recommended to choose an independent third party or a corporate trustee. Even if you have just one family member this may be the best route since it’s a lot of work to be a trustee.
Other considerations before putting real estate in trust
Putting your real estate in a trust may have some effects when it comes to interacting with lenders, taxes, and insurance. So, perform your due diligence so that you don’t end up creating any messes for yourself, your trustee, or your beneficiary.
After all, a trust is meant to make things easier!
Buying and Selling
Pragmatically speaking, many lenders won’t let you buy or sell a home in the name of a trust. So, you may need to add or remove your property depending on the situation. This may impede your plans to refinance or take equity out of your house as well.
Tax Benefits of Ownership
Putting your property in a revocable trust won’t have any effect on your home sale exclusion or mortgage interest deduction. Do check, however, to see if putting the property in the trust won’t prompt a property tax reassessment because the state or county no longer thinks of the property in the trust as a primary residence for tax reasons.
Homeowners and title insurance
You may have issues with your title or homeowner’s insurance if you transfer your property into a trust. So, check to make sure your title insurance will still cover you if you become the trustee of your living trust.
You definitely don’t want your title insurance to lapse because man lenders stipulate that you have it, and it keeps people from claiming an ownership interest, liens, encroachment, easement, etc.
You also want to confirm whether or not the trust will change the terms of your policy.
Now that you know everything it takes to set up a trust and all the benefits of doing so, go get one! If you’re waiting until it’s too late you’ll end up suffering the consequences of waiting until it’s too late or, even worse, your trustee and beneficiaries will. Certainly not something you want to have as your legacy when you shuffle off this mortal coil!