I am often surprised by the number of real estate investors that ask me a very simple question: Do I need a family trust? We get this question from single people, young couples, big families and even older clients. While it’s true that pretty much everyone can benefit from a family trust and having an estate plan, it is absolutely critical for anyone that owns real estate (personal residence or rentals) or owns a business entity (like an LLC).
As many of you know (or should know!), real estate cannot be transferred by someone who is deceased without going through probate. Even when there is joint tenancy, the final joint tenant can pass away without notice. The heirs are then left to probate the decedent’s estate, which can cost $1500 or more—and that’s when all the heirs are playing nice! Probate is also a public court process that can take a long time depending on the circumstances or disputes. The same is true in order to transfer ownership interests in an LLC when a member of that LLC dies.
A family living trust solves these issues and saves on cost and time. A trust is actually allowed to own property (be on title) and take ownership of business entities. This eliminates the need for probate. The trust will also dictate exactly how you want your assets allocated—something outside your control in a probate proceeding.
The trust can hold and control other assets as well, including bank accounts, CDs, stock brokerage accounts, retirement accounts and the like. People often come to us who are surprised when they find out grandma’s IRA or stock portfolio cannot be liquidated. While it is true, you can name beneficiaries on these types of accounts. But the beneficiary can die before the account holder. Unfortunately, this happens all the time. If the named beneficiary is deceased, that estate must be probated before accessing those accounts. The trust provides clarity in allocation, control over access and the comfort your heirs will have knowing that your wishes are being followed.
Sometimes, I get a follow up question: Can’t I just put my children on title as joint tenants so that they will get the property when I die? You can, but this has a number of tax and legal issues. First, it’s a taxable event and gift taxes may apply. Whereas, if they take ownership at your death, it may be tax free as part of your estate, AND they get the step up in basis—saving them taxes down the road! Also, for rental properties, we never recommend keeping these kinds of assets in anyone’s personal name for liability protection purposes (among other reasons). And remember, business ownership doesn’t transfer automatically upon death either. Only a trust can provide these benefits of immediate transfer and control of assets.
Another question asked is: I already have a will, does that work? The answer is No. While a will is helpful in defining the allocation of your assets, it cannot own property and must still be probated before you can sell the real estate, transfer an entity or access other accounts. Probate will also make the will public! This is something that most of our clients care a lot about—Privacy! A trust is a private document and not recorded publicly.
When teaching clients about real estate investing, we always discuss succession planning! Succession planning is thinking about and taking care of the transfer, control and allocation of property and assets IN ADVANCE of dying. It works like this:
First, you need to think and create plan. This begins with making lists and checking them twice. Creating a list of all your assets of any kind. Finding contacts, phone numbers and other vital information regarding the asset is paramount in creating your plan. You’d be surprised at the number of clients that don’t even know what they own! Or don’t know how title or ownership is held on their assets. Many clients are caught unawares when someone dies!
Second, the family trust is just one document in an estate plan package. Other documents include the pour-over will (works in conjunction with the trust), powers of attorney (for control of assets while you’re alive), and the “living will” or health care directive (this is the document for end of life decisions or the “whether to pull the plug” document). It’s possible you may also need estate tax savings strategies as part of your estate plan.
Third, your trust (and other documents) should work in coordination with your asset protection strategy. We have numerous vehicles for asset protection, including family limited partnerships, LLCs and corporations, as well as other kinds of asset protection trusts. This is something all real estate investors should take seriously and discuss with experienced asset protection attorneys. But these documents need to work with and not against the family trust. We use special corporate documents (like the transfer on death agreement) to connect businesses with the family trust. Many attorneys won’t use these devices and may ruin the asset protection value of your entities, so watch out for that.
Finally, you should also be thinking about management and control of your real estate after you die (not just who gets what!). Do you want your children managing your rental properties? Will they understand the market and best times to sell, or sell at all? Will they need help hiring contractors to make repairs? These should be questions you ask as you complete your succession planning—and questions many clients forget to ask. Your documents should be prepared to answer these questions.
We don’t like to think about dying. It’s part of our nature. But smart individuals who want to protect and control their assets do! Creating a good family estate plan typically runs between $2000 and $4000. This can be less costly than probate. And you get all the other benefits and the confidence in knowing you’re well prepared!
Take some time TODAY and start planning! Talk with an experienced lawyer to get your family and assets protected.
Jeffrey S. Breglio is an attorney in Salt Lake City practicing real estate, asset protection & estate planning law and provides title & escrow services. He is a regular educator at local and national real estate investor associations and is an active real estate investor himself.
234 E 2100 South, Salt Lake City, UT 84115