Trust Funding With Real Estate
Perhaps the most common reason clients create a trust is to protect real estate from probate. How the trust is funded with real estate depends on the specific situation.
How to Fund Your Trust with Real Estate
Real estate can fund a trust either by being conveyed to the trust or by some version of a beneficiary deed conveying to the trust upon the owner’s death. The method used depends on several factors. Transfer to the trust could trigger fees from municipalities or homeowner associations. If a mortgage is involved, interest rates can be higher when a trust is involved. The real estate might be a timeshare, and we want the option to disclaim any interest in the timeshare at death. Or some other issue arises that makes a current transfer not possible. In those situations, a beneficiary deed may be a better option.
Whether a deed of conveyance or a beneficiary deed, the process is similar. We start by ordering an ownership & encumbrance report to confirm the last deed in the chain of title, legal description, and liens. The deed is drafted, executed, and then recorded with the clerk and recorder. The end result is the real estate avoids probate upon the owner’s death.
Is Holding Real Estate in a Trust Necessary?
The question comes up, is holding real estate in trust really necessary? Often it is a personal decision about making it easier for the family. What tips the scale in favor of the trust is real estate in multiple states. For example, a client with real estate in Colorado and Arizona sees a large cost savings when both properties are in the trust. Without the trust, there would typically be two probate proceedings. A primary proceeding and then an ancillary proceeding in the other state(s). This can get expensive depending on the state.
DIY or Hire a Pro?
Most trust funding can be done by the client with the help of their financial advisor. However, when it comes to real estate, deed drafting and recording is best left to the professionals licensed in the state where the real estate is located. Real estate laws vary widely from one state to another. Contrary to popular belief, a quitclaim deed is not a deed that you use when you don’t want to hire a lawyer. A quitclaim deed is a specific type of transfer used in specific situations. What might be a minor, easily corrected error in one state might create a large cloud on title in another.
We prefer real estate be conveyed into the trust at the time of purchase. This accomplishes three goals. First, it gets the client used to buying and selling in the trust’s name. A quality real estate professional will know how to write up the contract. Second, the title insurance is issued in the trust’s name avoiding arguments that coverage does not continue upon conveyance to a living trust (the ALTA policy specifically states that coverage does continue). Last and certainly not least, it avoids additional legal fees from your lawyer because the title company usually prepares the deed.
Two Final Points
Finally, two points worth mentioning. Taking title in a trust is usually a good idea, but not always. The other point is about real estate located outside the United States. In most U.S. states, there is not a large, additional fee or tax when transferring real estate to your living trust. Not so in many foreign jurisdictions. In foreign jurisdictions, probate can be nothing less than a financial nightmare. Trusts may not be recognized. Forced heirship laws and death taxes usually apply. Before purchasing foreign property, figure out the best way to hold the property and be prepared to hire a lawyer in that country to guide you through the process.