What Is a Real Estate Trust? What You Need To Know

 

A real estate trust is a legal arrangement that allows you to transfer the ownership and management of your property to a trustee, who holds it for the benefit of your beneficiaries.

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A real estate trust can be a useful tool for estate planning, tax saving, asset protection, and privacy.

In this article, we will explain the basics of real estate trusts, the different types of trusts, and the benefits and drawbacks of putting your property in a trust.

 

How Does a Real Estate Trust Work?

A real estate trust is created by a document called a trust agreement, which specifies the terms and conditions of the trust, such as:

1.The name and address of the grantor (the person who creates the trust and transfers the property)

2.The name and address of the trustee (the person or institution who manages the trust and follows the instructions of the grantor)

3.The name and address of the beneficiaries (the person or persons who will receive the income or assets from the trust)

4.The property that is transferred to the trust (such as a house, a condo, a land, or a mortgage)

5.The purpose and duration of the trust (such as to provide income for the grantor’s lifetime, to avoid probate, or to reduce estate taxes)

6.The grantor transfers the property to the trustee by signing a deed that names the trustee as the new owner of the property.

7.The deed then needs to be recorded with the local county recording office. Once recorded, the trustee is now “on title” as the legal owner of the property.

8.The trustee has a fiduciary duty to act in the best interest of the beneficiaries and follow the instructions of the grantor.

9.The trustee can collect rents, pay taxes, maintain the property, sell or buy property, or distribute income or assets to the beneficiaries according to the trust agreement.

10.The beneficiaries have no legal rights to the property until they receive it from the trustee.

11.The beneficiaries may also have to pay income taxes on the income they receive from the trust.

 

What Are the Different Types of Real Estate Trusts?

There are many types of real estate trusts that serve different purposes and have different advantages and disadvantages. Some of the most common types are:

Revocable Trust

Also known as a living trust, this is a trust that can be changed or canceled by the grantor at any time during their lifetime.

A revocable trust allows the grantor to retain control over the property and make changes to the trust as they wish.

A revocable trust can avoid probate, which is the court process that validates a will and distributes assets after death.

Probate can be costly, time-consuming, and public.

A revocable trust can also make it easier to manage property in case of incapacity, as the trustee can act on behalf of the grantor without needing a court order.

However, a revocable trust does not offer any tax benefits or asset protection, as the property is still considered part of the grantor’s estate.

Irrevocable Trust

This is a trust that cannot be changed or canceled by the grantor once it is created.

An irrevocable trust transfers ownership and control of the property to
the trustee permanently.

An irrevocable trust can offer tax benefits and asset protection, as
the property is no longer part of the grantor’s estate.

For example, an irrevocable trust can reduce estate taxes by removing assets from
the taxable estate, or protect assets from creditors or lawsuits by placing them beyond
the reach of creditors.

However, an irrevocable trust also means giving up flexibility and access to
the property, as well as paying higher fees and taxes for creating and maintaining
the trust.

Land Trust

This is a type of irrevocable trust that holds only real estate as its asset.

A land trust is often used for privacy reasons, as it conceals the identity of the true owner of
the property from public records.

A land trust can also make it easier to transfer property without disclosing
the sale price or triggering due-on-sale clauses in mortgages.

However, a land trust does not offer any tax benefits or asset protection, as the beneficiary is still liable for taxes and debts related to the property.

 

What Are the Benefits and Drawbacks of Putting Your Property in a Trust?

Putting your property in a trust can have various benefits and drawbacks depending on your situation and goals.

Realestate agent [PHOTO COURTESY OF THE MOTLEY FEE]
Realestate agent [PHOTO COURTESY OF THE MOTLEY FEE]
Some of the possible benefits are:

Avoiding probate

Probate can be a lengthy, expensive, and public process that can delay or reduce the inheritance of your heirs.

By putting your property in a trust, you can bypass probate and ensure a smooth and private transfer of your property to your beneficiaries.

Saving taxes

By putting your property in a trust, you may be able to reduce or eliminate these taxes by removing the property from your taxable estate or taking advantage of tax exemptions or deductions.

 Protecting assets

If you have creditors, lawsuits, or other liabilities that may threaten your property, you may want to protect it from being seized or garnished.

By putting your property in a trust, you may be able to shield it from creditors by transferring the ownership and control to the trustee.

 Planning for incapacity

If you become mentally or physically incapacitated and unable to manage your property, you may need someone to act on your behalf.

By putting your property in a trust, you can appoint a trustee who can handle your property affairs without needing a court order or guardianship.

Providing for beneficiaries

If you have specific wishes or instructions for how you want your property to be used or distributed to your beneficiaries, you may want to put them in writing.

By putting your property in a trust, you can specify the terms and conditions of the trust, such as when and how much income or assets each beneficiary will receive, or what restrictions or incentives you want to impose on them.

Some of the possible drawbacks are:

Losing control

Depending on the type of trust you create, you may lose some or all of the control over your property once you transfer it to the trustee.

You may not be able to change, cancel, sell, or mortgage your property without the consent of the trustee or the beneficiaries.

You may also lose some of the benefits of owning the property, such as tax deductions or homestead exemptions.

Paying fees

Creating and maintaining a trust can involve various fees and expenses, such as legal fees, recording fees, trustee fees, accounting fees, and filing fees.

These fees can reduce the value of your property and estate over time.

Facing complications

Setting up and administering a trust can be a complex and time-consuming process that requires careful planning and execution.

You may need to consult with an attorney, an accountant, a financial planner, and other professionals to ensure that your trust is valid, effective, and compliant with the laws and regulations.

You may also need to coordinate with other aspects of your estate plan, such as your will, your power of attorney, and your beneficiary designations.

 

 

Conclusion

A real estate trust is a legal arrangement that allows you to transfer the ownership and management of your property to a trustee for the benefit of your beneficiaries.

A real estate trust can have various benefits and drawbacks depending on your situation and goals.

Before putting your property in a trust, you should weigh the pros and cons carefully and consult with qualified professionals to help you make an informed decision.

 

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