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? The trust helps you hold the property for your benefit and the benefit of whomever you decide to own it after you.
You can become the trustee of the property, and when you die, your successor becomes the trustee. The trustee is merely the administrator of the assets in a trust. If you're the creator of the trust, you have certain powers over where your home will go once you pass away. One of the benefits of a trust is that it provides legal protection of your assets or your home, which can help you shield your estate from future economic problems.
The first step in buying a home in trust is to establish a living trust. A living trust is created during a person's lifetime whereby a designated trustee is allowed to manage the assets or the home for the benefit of the beneficiary. The homeowner must decide what type of living trust to open, and that decision will largely depend on who will have the legal right to inherit and sell the home.
For example, you might choose to have your successor be your son, who will become the new trustee upon your death. However, you will also need to decide if the successor trustee will be a beneficiary and how the proceeds are to be distributed if the home is sold following your death.
There are two types of trusts that you can establish—a revocable trust, and an irrevocable trust.
Buying a Home with a Revocable 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 or grantor of this type of trust has full control over the trust at all times and can change it whenever they please. The grantor can assign beneficiaries or in some cases, be the beneficiary of the trust and can change it at any time.
For example, 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—a revocable 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.”
If you purchase a home with a revocable trust, the trust legally owns the home. If you're the grantor or writer of the trust, you own the home through the trust. You can assign beneficiaries for the trust so that in the event of your death, they will inherit the home. A trustee could also be assigned to help you manage the legal documents, or you can assign yourself as the trustee. The benefit of the trust is that the home won't go through the lengthy court process of probate, which reviews your will and approves the beneficiaries. Also, by avoiding probate, who you leave your home to will not be of public record as in the case of a will. A will is a legal document that stipulates the heirs to your assets following your death.
However, the key tenet with a revocable trust is that you are in control and can dissolve it if you choose to do so.
Buying a Home with an Irrevocable Trust
Conversely, an irrevocable trust does not allow modification or terminations of the trust without the permission of the beneficiary. The trustee acts as a fiduciary who is responsible of managing the assets for the beneficiary. A fiduciary is someone who acts or manages assets on behalf of someone else.
Often, an irrevocable 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.
For example, 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. However, it's extremely important, with an irrevocable trust, that you're confident in the selection of your beneficiaries.
Consider Estate Planning
Both revocable and irrevocable trusts are estate planning instruments. There are some crucial steps to take when doing this type of estate planning.
The Level of Control
The first step is to decide how much control you want over the assets, including your home. Consider the levels of control that each type of trust offers you as the writer but also the beneficiaries. Also, it's important to think about how you want your home or assets managed, including the ownership of your home, whether it could be sold, or what happens if you become ill or incapacitated.
Call in the Professionals
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 and that the financial advisor would know. Conversely, you could receive advice from the financial advisor that doesn't make legal sense. It's crucial to make sure all three of you are communicating effectively.
Each professional has their respective strengths. Financial advisors are useful in allocating money for the future expenses of the estate while an attorney is versed in what will keep an estate out of probate court. Trusts are serious legal documents and should be treated as such, especially when it comes to your home.
Estate and Trust Expenses
It's also important to consider the maintenance expenses of the estate for at least 20 years because you'll need to include that amount in the estate. For example, a lawyer might charge anywhere between $1,500 to $3,000 to establish a living trust, whether it's revocable or irrevocable. Of course, rates and expenses can vary depending on the level of work involved.
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's important to seek the help of professionals to ensure that the trust and your estate are established correctly and to your wishes.