When you buy a home, you have the option of buying the home in a trust. Why opt to purchase a home in a trust? By getting a property in a trust, you hold the property for your benefit and the benefit of whomever you decide to own it after you. You essentially become the trustee of the property, and when you die your successor then becomes the trustee. Being the trustee of a property allows you certain powers over where your home will go once you pass away, and can also enable you to shield your estate from future economic problems.
The first step in buying a home in trust is deciding who will have the legal right to sell the home. Let’s suppose you choose to have your successor be your son, who will become the new trustee upon your death. From there, you need to decide what type of trust to set up for the estate. There are two basic types — a revocable trust, and an irrevocable trust.
A revocable trust is typically outlined in the “Trust Agreement” to the “Declaration of Trust.” Think of it as the contract you are signing that establishes the rights and heirs of the estate, which you are creating. The owner of this type of trust has full control over the trust at all times and can change it whenever they please. Let’s say the son you appointed as the future trustee of the estate does not want the estate, or you would like to now give it to a daughter—this type of trust allows you to change the parameters within it. You can appoint several different trustees or beneficiaries. Depending again on how you set the documents up, all or one of the future trustees can change the document at any time as well. Revocable means “capable of being canceled” and follows as such for this type of “contact.”
In contrast, an irrevocable trust does not allow modification or terminations of the trust without the permission of the beneficiary. The trustee now acts more so like a fiduciary who is charged with the responsibility of maintaining the assets for the beneficiary. Often, this type of trust is used to avoid taxes on gifts that are above the taxable limit—in this case, real estate. Irrevocable trusts can also be useful in situations where you want to protect the estate from possible future financial problems. Let’s suppose you have built a sizable estate, but your children fall on hard financial times later in life. Irrevocable trusts can protect assets from creditors given that assets were put into them before there were credit problems. With an irrevocable trust, though it is extra important to be confident in the selection of your beneficiaries.
Both revocable and irrevocable trusts are estate planning instruments. There are some crucial steps to take though when doing this type of estate planning.
- Decide how much control you want over the assets
- Find a financial advisor AND an estate planning attorney. No proper trust, trust document or meeting should ever be conducted without BOTH of these professionals present. Each has their own specialty, and you will need both of them to direct the dispersion of your assets appropriately. The biggest mistake consumers make is meeting separately with their advisor and attorney, only to find out after the legal document is drafted that there are issues. For example, by meeting with your advisor and attorney separately, you could lose out on possible tax advantages that the attorney wasn’t aware of, that the advisor is privy to, or receive advice from the advisor that doesn't make legal sense. It's crucial to make sure all three of you are communicating as each professional has their respective strengths. Financial advisors are useful in allocating money for the future expenses of the estate. Whereas an attorney is far more versed in what will keep an estate out of probate court. Trusts are serious legal documents and should be treated as such.
- Consider the maintenance expenses of the estate for 20 years, and factor that into the amount that will be kept in the estate. Deciding on if you want to contribute maintenance expenses into a trust can help you determine what kind of trust to select.
The Bottom Line
Buying a home in a real estate trust can give you and your beneficiaries advantages that otherwise would not be available. Preparing an estate trust in anticipation of future economic troubles or avoiding a family court fight for an estate can ease the transferring of assets seamlessly and help set your family up for the future. It is important to have the right people there to ensure it is done correctly.