Living Trusts

February 16, 2024

Tim Clarke

A living trust allows you to avoid probate and minimize estate taxes, but transferring property into one takes careful planning. Consult an estate attorney

Estate planners often recommend Living Trusts as a viable option when contemplating the manner in which to hold title to real property.

When a property is held in a Living Trust, title companies have particular requirements to facilitate the transaction.

While not comprehensive, answers to many commonly asked questions are below.

If you have questions that are not answered below, your title company representative may be able to assist you, however, one may wish to seek legal counsel.

What is a Living Trust?

A living trust is sometimes called an inter-vivos trust. This means it is created during the lifetime of the settlors.

It is not created by wills after death like some other trusts. The living trust usually ends after the settlors die.

At that point, the assets in the trust are distributed to the beneficiaries named in the trust.

Who are the parties to a Trust?

A Family Trust is a typical trust in which the Husband and Wife are the Trustees and their children are the Beneficiaries.

Those who establish the trust and transfer their property into it are known as Trustors or Settlors.

The settlors usually appoint themselves as Trustees and they are the primary beneficiaries during their lifetime.

After their passing, their children and grandchildren usually become the primary beneficiaries if the trust is to survive, or the beneficiaries receive distributions directly from the trust if it is to close out.

Settlors/Trustors

Those who establish the trust and transfer their property into it. They usually appoint themselves as Trustees.

Trustees

The people who manage the assets in the trust. The settlors usually appoint themselves as Trustees initially.

Beneficiaries

The people who receive assets from the trust. Often the settlors' children and grandchildren.

Benefits of Living Trusts

Avoid Probate

Avoid the potentially time-consuming probate process on trust assets after death.

Minimize/Defer Taxes

Can help minimize or defer estate taxes when structured properly.

Creditor Protection

Can shield assets from attack by certain unsecured creditors.

Holding Title in a Living Trust

Can a Trust hold title to Real Property?

No, the Trustee holds the property on behalf of the Trust.

Trustee Holds Title

The Trustee holds legal title to property on behalf of the trust. The trust itself cannot technically own property.

Homestead Property

Property held in a qualifying trust can still be homesteaded.

Borrowing Against Property

The Trustee has the power to borrow against trust property unless the trust terms prohibit it. But not all lenders will lend against property held in a trust.

"In Trust For" Arrangements

Holding title "in trust for" another person through a private verbal agreement is inadvisable and can cause major issues.

Title companies cannot protect against a trustee not acting as agreed in a private verbal trust.

Is a Trust the best way to hold my property?

Only your attorney or accountant can answer that question.

Some common reasons for holding property in a Trust are to minimize or postpone death taxes, to avoid a time consuming probate, and/or to shield property from attack by certain unsecured creditors.

What taxes can I avoid by putting my property in trust?

Married persons can usually exempt a significant part of their assets from taxation and may postpone taxes after the first of them to die passes.

You should check with your attorney or accountant before taking any action.

Can I homestead property that is held in a Trust?

Yes, if the property otherwise qualifies.

Can a Trustee borrow money against the property?

A Trustee can take any action permitted by the terms of the Trust, and the typical Trust Agreement does give the Trustee the authority to borrow and encumber real property.

However, not all lenders will lend on a property held in trust, so check with your lender first.

Can someone else hold title for me “in trust?”

Some people want to keep their names off the property title. So they make a private verbal agreement with a third party trustee.

However, these private verbal trust arrangements can be illegal. They are also very risky. The trustee listed as the legal owner has full control over the property.

A title insurer cannot protect the real owners if the trustee does something improper.

Even if the trustee verbally agreed to act in the interest of the real owners. The trustee is the only one legally empowered to transfer or borrow against the property.

Trust Administration

Funding the Trust

The settlors must formally transfer ownership of their assets to the trust through new deeds, assignments, etc. to effectively make the trust active and operational. Assets not transferred formally will not be part of the trust.

Trust Registration

In some states, the settlors may need to legally record or register the trust documents in specific county offices where they hold property in order to allow the trustee to act on behalf of the trust.

Trust Tax ID Numbers

A separate tax ID number is required for the trust to file tax returns and report income, deductions, gains, losses, and credits.

Trust Distributions After Death

Distribution Instructions

The trust includes instructions for distributing assets to beneficiaries after the settlors pass away. This often outlines specific gifts and assets intended for certain named beneficiaries.

Trust Administration Rules

The trust documents outline rules, powers and limitations for the trustee to follow in managing and distributing trust assets to beneficiaries after the settlors' deaths.

Trust Contest Rights

Heirs not included or unhappy with distributions may have rights under state law to contest the trust and distributions after the settlors die in certain cases.

Final Thoughts From Tim

As a real estate professional in the Triangle area for over 15 years, I've worked with many clients buying and selling properties held in family trusts.

My advice for those considering putting real estate into a living trust is to carefully weigh the pros and cons with your estate planning attorney and financial advisor.

While trusts can avoid probate and provide other benefits, they also come with administrative complexity that can be burdensome for trustees and beneficiaries.

Transferring property into the trust, registering it properly, obtaining tax ID numbers, filing returns, and managing distributions after your passing all require knowledge of legal and tax technicalities.

Additionally, trusts impact how real estate sales proceeds get distributed and taxed after liquidation.

Beneficiaries should understand capital gains, depreciation recapture and other tax consequences when trust properties are sold.

And all beneficiaries and heirs should be informed upfront of distribution plans to avoid potential trust contests.

My recommendation is to think through your goals, understand all trust administration responsibilities, and consult closely with an estate planning attorney when considering a living trust.

An attorney experienced in trust and real estate law can draft terms aligned with your wishes and advise trustees on staying compliant with state laws.

An accountant can also project tax implications after any future real estate liquidations.

With proper planning and guidance from professionals, living trusts can be extremely useful estate planning tools in handling real estate assets.

But make sure you understand and can handle all legal and tax responsibilities before committing your properties to a trust.

Please reach out if you would like to discuss further!

Frequently Asked Questions about Trusts

What happens if I don't transfer all my property into the trust?

Any property not formally transferred into the trust remains in your personal ownership.

After your passing, this property may need to go through probate, defeating one of the main benefits of creating a living trust.

Be sure to execute new deeds, assignments, etc. to transfer all intended property into the trust.

Can I make changes to the trust terms after creating it?

Yes, as the settlor you can amend trust terms anytime as long as you are still mentally competent.

Amendments must be done formally through a trust attorney. You cannot change terms verbally or through an informal letter.

Does property transferred to my trust affect my property tax rate?

No, transferring property into your own living trust does not change homestead or other property tax exemptions in North Carolina.

It is still treated as your personal property for tax purposes.

Is a living trust expensive to set up and maintain?

The initial legal costs of drafting a customized living trust range from 1,500 to 5,000, depending on the complexity of your assets and distribution wishes.

Ongoing administrative costs also apply if you act as your own trustee or use a third party, but are typically low.

What happens if no beneficiaries are named in the trust?

If no beneficiaries are named, assets will go to any surviving joint trustees after the settlors pass away.

If there are no surviving trustees either, then the assets are disposed of according to state law. Always name both primary and contingent beneficiaries.

Can I name my living trust as the beneficiary of retirement accounts?

Yes, you can name your revocable living trust as the designated beneficiary of 401(k)s, IRAs, life insurance policies and other accounts to avoid probate.

This is a common estate planning technique.

Where should I keep my trust documents?

Keep the original signed trust documents in a safe but accessible place, either at your home or with your trust attorney.

Also provide copies to all acting trustees, executors, beneficiaries, and any real estate agents assisting with trust property transactions.

Can a living trust save me money on capital gains taxes?

It depends. Living trusts themselves do no provide any income tax savings.

However, trusts give you more options to manage capital gains tax liability when liquidating real estate by dictating the distribution timing.

Who should I appoint as a successor trustee?

Consider naming a responsible beneficiary, family member, or trusted friend who is organized and comfortable handling financial and legal matters.

Discuss with whomever you name to ensure they understand the role and are willing to serve.

Can I name minor children as trust beneficiaries?

You can name minor children as beneficiaries, but assets cannot be distributed directly to them.

Instead they would be held in a custodianship until the child reaches 18 or 21 years old, depending on state law.

Tim M. Clarke

About the author

17 years as a Realtor in the Research Triangle, Tim seeks to transform the Raleigh-Durham real estate scene through a progressive, people-centered approach prioritizing trust & transparency.

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