While there are a wide range of options when it comes to passing real estate between generations, setting up a family trust is by far one of the easiest avenues. With proper estate planning and the help of a wealth advisor, you can rest assured knowing your home, business, or investment real estate will transfer smoothly.
When considering what will become of your real estate after you pass away, it’s best to start weighing out your options early. Perhaps you’re considering setting up a family trust, which is generally thought of as one of the most effective ways to transfer real estate. Or, maybe you’d rather do so in your will instead? Some might also be considering a Family Limited Partnership (FLP)—another tax-advantaged avenue—to pass investment real estate to their children.
With so many options, how do you know which is right for your needs? Whether it’s your primary residence or a beloved vacation home, passing real estate to your heirs doesn’t need to be a complicated process.
While every option has its pros and cons, family trusts tend to the favored choice. What are the benefits of setting up a family trust for your real estate, and why could it be a great fit within a high-net-worth individual‘s estate plan? With a little guidance, you’ll soon be well-versed on the matter.
Pros and Cons of Putting Family Real Estate Into a Trust
A trust is a legal means to transfer assets between two parties. In most cases, people use trusts to pass wealth, real estate, and other assets to their heirs. The parents who create the trust, known as the “grantors,” name a trustee (someone to manage the trust after they pass away) and name their children as beneficiaries (those who will receive assets within the trust).
The Benefits of a Trust
People choose to put real estate into trusts for several reasons. For starters, trusts keep the family out of probate court, which is not the case when real estate is transferred via a will. Most of the time, the court system has to approve a will before any property transfer occurs. Therefore, instead of waiting months or even years in probate court, your family will inherit your assets within days or weeks—thanks to the trust. This will save your family from significant legal and accounting costs, in addition to the missed opportunity costs an asset might incur being tied up in probate.
Larger families should consider the complexity and the dynamics of their family, understanding that there is a higher probability of malcontent with more parties involved. The clear stipulations of a trust keep everything neat and orderly, with the appointed trustee acting as the authority figure.
A well written trust should also cover your wishes if you become incapacitated before you pass away. If you can no longer take care of yourself or you can no longer responsibly manage your assets, the provisions in your trust should act as a safety net to ensure the smooth transfer of responsibilities and wealth.
Drawbacks to Consider
Putting your home in a trust also comes with several downsides to bear in mind. When you put an asset in a trust, you’re effectively turning ownership of it over to the trust. Many lenders prefer to loan money to people, not trusts. If you’re refinancing your home, you may have to temporarily pull your property out of your trust to refinance your loan and then put the property back into the trust once your financing is in order. This toggling back and forth will need to be done by you or an attorney, as you retitle your home. There are some lenders willing to lend to you individually, while keeping your home in your trust. Be sure to talk with your lender prior to refinancing.
Transferring assets also comes with its fair share of paperwork, which could cost you time and money in attorney fees. However, the time and money spent ensuring your assets switch hands according to your wishes should be significantly less than those incurred in probate.
The pros of putting your property into a trust far outweigh the cons. That’s why setting up a family trust for your real estate should be considered in your estate planning process.
How Do I Set Up a Family Trust for Real Estate?
Setting up a family trust for your real estate is straightforward, especially with the help of a wealth advisor who can guide you through the following four general phases:
- Take Inventory: Make a list of all the real estate-related assets you wish to include in the trust.
- Gather Paperwork: As you’re taking inventory, be sure to gather any necessary paperwork associated with those assets. Your attorney will need documents including deeds and insurance policies.
- Name Beneficiaries: Decide who will receive assets within the trust when you’re gone. Consider how you will pass your wealth to your children and grandchildren. You might want to consider skipping a generation to maximize the transfer of wealth.
- Name a Trustee: Most grantors act as the primary trustee while they’re still alive. Your living trust will require you to name a successor trustee to take over management and make distributions after you pass away. Consider naming a corporate trustee, rather than an individual. You might outlive a successor trustee, or they may decide they don’t want the role, which then leaves you in a bind. A corporate trustee guarantees more stability in succession.
Is Putting Real Estate Into a Will an Option?
Yes, you can also choose to transfer real estate through your will. However, as mentioned above, wills are subject to probate court, which can delay the transfer of ownership by months or even years.
Furthermore, parties can contest the will if they disagree with its stipulations. A will goes into effect only after you die, whereas a most trusts are active from creation—and often revocable. This leaves plenty of time to change allocation of assets while the owner is alive and well, should the grantor decide to disclose the terms of the trust and some sort of dispute arises.
An irrevocable trust also keeps your affairs private and protected from creditors. Let’s say one of your beneficiaries declares bankruptcy. If their share of the inheritance (i.e., real estate within the trust) remains locked in an irrevocable trust, their creditors cannot come after it. Wills are best used to pass along personal items, stipulate memorial arrangements, and name guardians of minor children. Your assets are almost always better protected with trusts.
How a Family Limited Partnership Can Also Transfer Real Estate
A lesser-known, slightly more complex option for property transfer is the Family Limited Partnership (FLP).
Think of an FLP as going into business with your family members. An FLP is a vehicle that uses gift-tax laws to transfer assets in a tax-advantaged setting. The parents act as general partners who control voting rights and own a percentage share of the assets—in this case, real estate. The children act as limited partners. Parents can gradually transfer ownership shares of the FLP to their children, avoiding gift taxes by keeping such transfers under the annual exemption line. Furthermore, any income generated from an FLP remains in the FLP.
Keep in mind, assets within an FLP need to have a real business purpose. Investment properties are one of the best examples of what you’d put into an FLP, whereas your family home is not. Your home undermines the tax and liability structure of an FLP, since you’re not using it as a business.
There are other considerations for a FLP. For example, whatever you distribute must be done so according to the percentage of ownership; both evenly and at the same time. So for example, if your children own 20% of the FLP, and you distribute $1000, your children would get $200 and you get $800 at the time of distribution.
Lastly, the schedule for when you withdraw funds must also be considered, as money from an FLP is not designed to be distributed on a regular basis in the form of income. If you want to withdraw on a yearly basis, consider making that transaction in July one year, and December the next.
There are a number of moving parts to consider when planning wealth succession, regarding real estate but also beyond. Should you have further questions regarding business and wealth succession planning, consider reaching out to a financial advisor to discuss which options work best for you.
Setting Your Family up For Success
While there are a wide range of options when it comes to passing real estate between generations, setting up a family trust is by far one of the easiest avenues. With proper estate planning and the help of a wealth advisor, you can rest assured knowing your home, business, or investment real estate will transfer smoothly. Consult with Polaris Wealth Advisory Group today to learn more about incorporating living trusts in your estate plan.
This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Polaris Wealth Advisory Group unless an investment management agreement is in place.
