Estate planning is an important piece of the puzzle when it comes to managing and protecting assets. As a financial advisor, you play a critical role in supporting and guiding your clients through this process. However, it’s no secret that certain aspects of estate planning can present confusion for both you and your clients.
That’s where we come in to help. This guide will tackle a popular topic that raises many questions: how do you fund a trust with real estate?
Keep reading and we’ll address some of the most frequently asked questions by financial advisors and clients on this topic. We’ll provide you with the information needed so that you can support your clients through the process effectively.
Why Put Real Estate into a Trust? Know the Benefits
Before we get to the how, let’s talk about the why.
Upon your suggestion, your client may be wondering why they should put their real estate into a trust.
This is where you get to come in: as a financial professional, you can help them consider the numerous advantages and benefits that are associated with funding a trust with real estate.
Benefits of Putting Real Estate into a Trust
1. Trust Assets Bypass Probate
Retitling real estate into a trust offers numerous benefits beyond avoiding probate. When a property is placed in a trust, it bypasses the probate process, allowing for a smoother and quicker transfer of assets to beneficiaries. However, the advantages go far beyond this.
2. Protect Assets Even More
Placing real estate in a trust can provide better asset protection, ensuring that the property is managed and transferred according to your client’s wishes, even if they become incapacitated.
3. Get Access to Tax Benefits
Additionally, trusts can offer tax benefits, depending on the specific circumstances and the way the trust is structured.
Living Trust vs. Testamentary Trust
A common point of confusion is the difference between a living trust and a testamentary trust. Here are the key differences explained.
Living Trust
A living trust is set up and goes into effect during the grantor's lifetime. This means the property in the trust is managed according to their instructions, effective immediately. This type of trust offers immediate control and greater flexibility.
Testamentary Trust
A testamentary trust is created upon the grantor’s death, typically through a will. While it can hold real estate, the property would still need to go through probate before being transferred into the trust. This could delay the management and distribution of the property, which is why many opt for a living trust when it comes to real estate assets.
To learn more about the differences between a living trust and testamentary trust, as well as the benefits and drawbacks of each, read our guide here.
Co-Owners of Real Estate Within a Trust
Another common question is whether a co-owned property can be placed in a trust. The answer is yes, but there are important considerations:
Co-owned properties can be transferred into a trust, but all co-owners must agree to the transfer.
The trust must be structured in a way that respects each owner’s interest in the property.
For shared assets like real estate, it’s crucial to clarify ownership percentages and the rights of each co-owner within the trust.
Using a Pour-Over Will vs. Trust for Real Estate
A pour-over will is designed to transfer any assets not explicitly included in an existing trust into said trust upon the grantor’s death. This can be a great safety net, but may not always be the best strategy especially when it comes to real estate. Here’s why.
What Happens if You Put Real Estate into a Pour-Over Will Instead of a Trust?
If real estate is not placed directly into a trust but is instead addressed through a pour-over will, it could still be subject to probate. This can create unexpected complications, delay the transfer, and potentially increase costs.
Also, because a pour-over will only goes into effect upon death, the property is not benefitting from the trust’s advantages and protection during the grantor’s lifetime.
Funding a Trust with Real Estate
It’s easy to throw around phrases like “putting real estate in a trust,” but that understandably leaves people feeling confused. Here’s an explanation of what it means to put real estate in a trust, and the steps it takes to do it correctly.
How Does One "Put" Real Estate Inside of the Trust?
The process of funding a trust with real estate involves transferring the title of the property from the individual owner(s) to the trust. This means the property is no longer owned by the individual directly but by the trust. To do this, a new deed must be prepared, typically a quitclaim deed, which names the trust as the property owner. This deed must then be recorded with the local county recorder’s office where the property is located.
Here is a summary of the generally recommended steps:
Prepare a new deed, such as a quitclaim deed
Name the trust as the property owner
Record the deed
Note that this is a simplified version of events. A detailed step-by-step process is covered in our Trust Funding guide.
What is Involved in Putting Your Primary Home into a Trust vs. Other Types of Real Estate?
Primary Residence
When placing a primary home into a trust, the homeowner(s) need to know whether the property has a mortgage. That’s because taking this action can trigger a due-on-sale clause. However, most lenders allow transfers to a trust without requiring loan repayment, provided certain conditions are met. We recommend consulting the mortgage lender for this information.
Other Real Estate
For other types of real estate, such as rental properties or vacation homes, additional considerations include the impact on rental income, insurance, and tax implications. It’s important to review the specific terms of the trust and consult with an attorney to ensure compliance with local laws and regulations.
Can Real Estate from Other States and Countries Be Included in a Trust?
Real estate located in different states can generally be included in a trust, but the process may require additional steps, such as preparing and recording deeds in each state. Foreign real estate can also be included, though this often involves navigating complex international laws and tax considerations. Advisors should recommend that clients consult with legal experts who specialize in international estate planning to address these complexities.
How to Support Your Clients with Real Estate Trust Funding
What You Can and Can’t Advise On
As a financial advisor, it’s important to recognize the limits of your expertise when advising clients on real estate trust funding. While you can provide general guidance on the benefits and process, specific legal and tax advice should be deferred to attorneys and tax professionals.
Here are some examples of questions that should be deferred to others:
If the property is owned by multiple parties
The property is not the client’s primary residence
The property is not located in the United States
Your client has multiple business interests or real estate holdings involved
Making sure your client has holistic advice from respective experts in these areas will help prevent any unfavorable estate planning outcomes.
Trust & Will’s Leading Estate Planning Platform for Financial Advisors
When it comes to your client’s desire to protect their assets and property, setting up a trust and funding it with their real estate can be a great option to present. As discussed in this guide, a real estate-funded trust comes with several advantages. Bypassing probate, enhanced asset protection, and getting trust-specific tax advantages are all difficult to turn down. As a financial advisor, your role is to guide them through the process and provide general advice. Remember, it’s best practice to refer your clients to a specialist when it comes to specific legal and tax questions. They’ll appreciate everything you’re doing to help secure their property’s future and provide peace of mind – not just for them, but for their loved ones as well.
To learn how Trust & Will can make estate planning easy and accessible at affordable rates, visit trustandwill.com/advisors.
About Trust & Will
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