A living trust is created by a trust deed and becomes effective while the trust grantor is still alive. During the lifetime of the trust, it is administered by a trustee selected by the grantor. A trust is revocable if the grantor retains the power to revoke it; otherwise, it is irrevocable, and its assets belong to the trust, not the grantor, for tax purposes. There can be certain advantages to putting real estate, like your home, into a living trust.
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Avoidance of Probate
If you transfer your house to a living trust, it will not be part of your probate estate when you die. You can specify in the trust deed that the trustee is to transfer the house to your intended heir the day after you die. By contrast, it could take months, or even longer, to transfer title to the house if it passes under your will and a probate court takes jurisdiction over it. If you and your spouse jointly own a house, however, ownership will pass to your spouse when you die with no need for probate, even without a living trust.
Avoidance of Estate Tax
Estate tax is levied on the value of property owned by a taxpayer when he dies. This tax is subject to a large exclusion, however -- at the time of publication, the tax was 35 percent of the portion of the estate's value that exceeds $5 million. If you put real estate into an irrevocable living trust, its value will not be counted as part of your estate for estate tax purposes.
If you go bankrupt or incur delinquent tax debts, your creditors may be able to place a lien on your house. A lien is a legal encumbrance on the title that can prevent the house from being sold, because a subsequent purchaser will take the house subject to the lien. This risk is particularly acute if several investors own the house as joint tenants -- a creditor of any one of them might be able to cloud the title and render the house unmarketable. Transferring ownership of the house to a trust makes it much more difficult for creditors of the owner to place liens against the house for the debts of a grantor or beneficiary. As a beneficiary, creditors might place a lien against your interest in the trust. However, since a lien against an interest in a trust does not affect the title to the house, the house would remain marketable.
It is possible to act as both grantor and sole beneficiary of a living trust. If you do this, you can place cash in the trust and have your trustee negotiate the purchase of real estate on behalf of the trust without the seller knowing your identity. If you are wealthy, this might help you negotiate a lower price than would otherwise be possible. The late Walt Disney used this technique to purchase most of the land under Disney World before anyone knew who the real purchaser was.
References & Resources
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