Although we aren’t, and don’t claim to be, Estate Planners or Tax Advisors, we thought it would be helpful to write about trusts due to our past experiences in real estate transactions. This month’s column shares our understanding and some previous experiences with trusts, along with the benefits of holding your property in a trust.
There are two common types of trusts that we encounter most often in residential real estate transactions: A Revocable Trust, also known as a Living Trust, and an Irrevocable Trust. A Revocable Trust can be altered or amended at any time and becomes irrevocable upon the death of the Settlor, also known as the Grantor or Trustor. An Irrevocable Trust may not be modified, amended or terminated in most cases. However, our understanding is that there are some exceptions to this. There are distinct differences between these two types of trusts, including asset protection, tax benefits, etc. You should consult with a professional that specializes in estate planning to determine which trust type is right for your situation.
Where real estate is concerned, we advocate holding property in a trust for the following reasons:
1. Avoiding Probate – This is probably the biggest reason to hold your property in a trust. Generally speaking, a person’s estate is distributed to heirs and beneficiaries according to their trust or Last Will and Testament. In the absence of a will or trust, a person’s property, and any debt owed to creditors, is handled through probate. Probate is simply the legal process for distributing ones property after they have died. Probate can be a slow process, can get expensive, and is a public proceeding that can be intrusive into a person’s private matters. We have had past experiences where the court appointed administrator of a property or estate had to spend well into the thousands of dollars, and it took over six months before the probate court issued written approval for the sale of a property.
2. Incapacity Protection – Another helpful component of a trust is that it identifies a Successor Trustee that maintains the legal authority to facilitate the instructions in a trust, not only when a person has died, but also when they are still living and no longer able to care for themselves. We recently experienced a situation where the Settlor (our client) of a trust was unable to sign contracts and disclosures due to Parkinson’s-related symptoms. In this particular case, the Settlor granted Power of Attorney to the Successor Trustee so that they were able to complete the transaction.
3. Privacy – As stated earlier, a probate proceeding is a matter of public information. When a trust is in place, it is never filed with a court and therefore it doesn’t become public record for anyone to see.
Why would someone choose a Trust over a Last Will and Testament? In our experience, a trust is preferred over a will, in many cases, because it creates a fiduciary relationship that allows a person to give another party (Successor Trustee) authority to handle their assets for the benefit of the beneficiaries named in the trust. A will, on the other hand, is a legally enforceable document that identifies how you want your affairs handled and assets distributed upon your death. Again, consult with a professional that specializes in estate planning to get a better understanding of these important legal instruments and which is best suited for your particular situation.
When selling a home that is held in a trust, you should also be aware of the different real estate contract requirements. It is always recommended that you work with a real estate professional that understands the different requirements, can clearly explain these requirements and guide you through the process that can often times be somewhat complicated.