Putting a home in trust, or selling a home in trust is a new subject for most. In today’s article I’ll share with you everything you need to know to make the best decision.
Trusts are a popular estate planning tool that can provide numerous benefits to those who choose to use them. Whether you’re looking to protect your assets, reduce taxes, or provide for your loved ones after you’re gone, trusts can offer a flexible and effective way to achieve these goals.
However, as with any financial decision, it’s important to weigh the pros and cons before making a decision about whether or not a trust is right for you. In this article, we will explore the benefits and drawbacks of trusts and help you determine whether or not setting up a trust is the best choice for your unique situation.
What is a trust?
A trust is a legal arrangement in which one or more persons (the trustees) hold the title to property, such as real estate, for the benefit of one or more individuals (the beneficiaries).
The purpose of putting your house in a trust is to manage and protect your property and assets, and provide for their distribution according to your wishes, in a manner that is private, efficient, and reduces taxes and other expenses.
There are several types of trusts, including revocable trusts, irrevocable trusts, and living trusts. In a revocable trust, you retain the right to change the terms of the trust, modify the distribution of assets, or revoke the trust altogether, while in an irrevocable trust, the terms of the trust cannot be altered once it has been established.
That might be a lot of definitions, so let’s break it down a bit further:
Who is involved when setting up a trust?
Let’s say you have a valuable antique vase that you want to give to your grandchild, Tommy, as a graduation gift. However, you’re concerned that Tommy might not be ready to properly care for the vase just yet, and you want to ensure it will be protected until he’s ready.
You decide to give the vase to your good friend, Sarah, and ask her to hold onto it until Tommy’s graduation day. Sarah agrees, and you provide her with specific instructions on how to care for the vase and when to give it to Tommy.
In this scenario, you are the grantor, giving ownership of the vase to Sarah as the trustee. Sarah is responsible for holding and caring for the vase until Tommy, the beneficiary, is ready to receive it as a gift.
Just like you might give responsibility of holding on to the vase to a friend, you can also do that with your house or other property you might have, through a trust. The key players in a trust include:
Grantor:
The grantor is the person who creates the trust and transfers ownership of their assets to the trust.
Trustee:
The trustee is the person or entity responsible for managing the assets held in the trust, following the terms of the trust agreement and any applicable laws.
The trustee of a trust can be anyone the grantor trusts to carry out the terms of the trust. This person can be a family member, friend, professional advisor, or a corporate trustee, such as a bank or trust company.
Beneficiaries:
The beneficiaries are the people or entities that receive the benefits of the trust, either during the grantor’s lifetime or after their death. The grantor can specify who the beneficiaries are and how the assets in the trust will be distributed to them.
Attorney or Professional Advisor:
An attorney or other professional advisor may be involved in the creation and administration of the trust, providing legal or financial advice to the grantor and trustee.
Why do people put their houses in trusts?
People put their houses in trusts for a number of reasons, including to protect their assets, to ensure that their property is distributed according to their wishes after they pass away, or to avoid the time and expense of probate court.
Putting a house in a trust can have both benefits and drawbacks, and it’s important to consider both when making a decision. Here are some of the pros and cons of putting a house in a trust:
Pros of putting a house in a trust
1. Estate Planning:
A trust can be an effective estate planning tool, allowing you to control how your assets, including your house, are distributed after your death. This can help you ensure that your property is distributed according to your wishes and avoid probate, which can be a lengthy and expensive process.
2. Asset Protection:
A trust can provide protection for your assets, including your house, from creditors or potential lawsuits. By transferring ownership of your property to a trust, you may be able to shield it from creditors or other claimants.
3. Privacy:
Trusts can be more private than probate, as they are not a matter of public record. This can provide you with added privacy and confidentiality as you manage and distribute your assets.
4. Simplified Transfer of Ownership:
A trust can make it easier to transfer ownership of your house to your beneficiaries upon your death. This can be especially beneficial if you have multiple beneficiaries, as it can help you avoid any potential disputes or complications that may arise.
Cons of putting house in a trust
1. Cost:
Creating a trust can be expensive, as it typically requires the services of an attorney or other professional advisor. Additionally, there may be ongoing costs associated with maintaining the trust, such as annual tax returns, accounting fees, and trustee compensation.
2. Complexity:
Trusts can be complex and difficult to understand, especially for those who are not familiar with estate planning or trust law. This can make it challenging to navigate the trust process and ensure that all requirements are met.
3. Limitations:
Trusts can have limitations, such as restrictions on how assets can be used or transferred. This can make it difficult to access or sell the property if you need to, or to provide for unexpected expenses.
4. Loss of Control:
By transferring ownership of your house to a trust, you might give up some degree of control over it. This can be difficult for some people, especially if they have a strong emotional attachment to their property.
It’s important to carefully consider these pros and cons and seek the advice of a qualified attorney or financial advisor before deciding to put your house in a trust. They can help you weigh the benefits and drawbacks of this decision and develop an estate plan that meets your specific needs and goals.
Cost of a trust
The cost of setting up a trust can vary depending on several factors, including the type of trust, the complexity of the trust terms, and the location where the trust is being established. Here are some of the factors that can impact the cost of setting up a trust:
Type of Trust:
The type of trust you choose can affect the cost of setting up the trust. For example, a revocable living trust may be less expensive to set up than an irrevocable trust, but the latter may offer more protection and tax benefits.
The cost of setting up a revocable versus irrevocable trust can vary depending on several factors, such as the complexity of the trust, the jurisdiction where the trust is established, and the attorney’s fees.
In general, a revocable trust tends to be less expensive to set up than an irrevocable trust because it allows the grantor to retain control over the assets and make changes to the trust as necessary. A revocable trust also does not require the same level of ongoing administration as an irrevocable trust, which can result in lower costs.
On the other hand, an irrevocable trust typically requires more planning and documentation than a revocable trust, which can result in higher upfront costs. Additionally, an irrevocable trust may require ongoing administration, such as filing tax returns or complying with state laws, which can result in additional costs over time.
However, it’s important to note that the decision to set up a revocable or irrevocable trust should not be based solely on cost. Both types of trusts have their advantages and disadvantages, and the appropriate type of trust will depend on the grantor’s specific needs and goals. It’s always a good idea to consult with an experienced attorney who can advise on the best type of trust for your particular situation.
Legal Fees:
The fee structure and range for setting up a revocable or irrevocable trust can vary widely depending on several factors, such as the attorney’s experience and expertise, the complexity of the trust, and the geographic location.
In general, you can expect to pay a higher fee for an attorney who has a lot of experience in estate planning and has established many trusts. The attorney’s hourly rate will also impact the total cost. Depending on the attorney’s rate, the complexity of the trust, and the time spent on the project, the fees could range from a few hundred dollars to several thousand dollars.
For a relatively straightforward revocable living trust, an attorney may charge a flat fee that could range from around $1,000 to $3,000, or more. For an irrevocable trust, which is usually more complex and requires additional planning and drafting, the fees could be higher, often ranging from several thousand to tens of thousands of dollars.
It’s important to note that the fee structure and range can also depend on the attorney’s billing method. Some attorneys charge a flat fee, while others charge an hourly rate or a combination of both. It’s always a good idea to discuss the attorney’s fee structure and range upfront, so you have a clear understanding of the costs involved in establishing the trust.
Trustee Compensation:
The compensation for a trustee of a revocable or irrevocable trust can vary depending on the terms of the trust agreement, the size and complexity of the trust, and the geographic location. There is no fixed or typical compensation for a trustee as it can be customized and agreed upon by the grantor and the trustee.
In general, trustee compensation can be based on a percentage of the trust assets or income or a flat fee. The percentage-based method is often used for larger trusts and can range from 0.5% to 2% of the trust’s assets or income per year. The flat fee method is often used for smaller trusts and can range from a few hundred to a few thousand dollars per year.
It’s important to note that trustee compensation is subject to the terms of the trust agreement and the laws of the jurisdiction where the trust is established. Some states have laws that limit the amount of compensation that a trustee can receive, while others allow greater flexibility in setting compensation.
It’s also worth noting that the trustee may incur additional expenses while managing the trust, such as investment management fees, tax preparation fees, and legal fees. In some cases, these expenses may be paid out of the trust assets, and the trustee’s compensation may be adjusted accordingly.
Ultimately, the trustee’s compensation should be fair and reasonable and should reflect the time and effort required to properly manage the trust. It’s a good idea to discuss trustee compensation with the trustee and seek guidance from an experienced attorney or financial advisor.
Trustee Bond:
A trustee bond, also known as a fiduciary bond, is a type of insurance policy that is often required when a person or institution is appointed as a trustee of a trust. The purpose of the bond is to protect the beneficiaries of the trust against any losses that may be caused by the trustee’s actions.
There are several reasons why a trustee bond may be required, including:
Legal requirement: In some jurisdictions, the law requires that a trustee be bonded to protect the interests of the trust beneficiaries.
Protection against fraud or misconduct: A trustee bond can provide a level of protection against fraud, theft, or other misconduct by the trustee. If the trustee engages in any of these activities, the beneficiaries can make a claim against the bond to recover any losses.
Peace of mind for beneficiaries: A trustee bond can provide peace of mind to the beneficiaries of the trust, knowing that there is an additional layer of protection in place to safeguard their interests.
Compliance with trust provisions: Sometimes, the trust agreement may require that a trustee be bonded as a condition of serving in the role.
The cost of a trustee bond can vary depending on the size of the trust and the trustee’s level of experience and financial standing. Generally, the bond premium is a percentage of the amount of the bond, typically ranging from 0.5% to 1.5% of the bond amount per year.
It’s important to note that a trustee bond is not a substitute for responsible and ethical conduct by the trustee. Rather, it is a safety net that can provide an additional level of protection for the trust beneficiaries in case of any wrongdoing or losses caused by the trustee’s actions.
Tax Considerations:
There may be tax implications of setting up a trust, and you may need to consult with a tax professional to determine the tax impact of the trust on your estate.
Other Expenses:
Other expenses, such as filing fees, title search fees, and appraisal fees, may be required to set up a trust.
The cost of setting up a trust can range from a few hundred dollars to several thousand dollars, depending on the factors involved. It’s important to consult with a qualified attorney or financial advisor to get an estimate of the cost of setting up a trust and to understand the costs associated with maintaining the trust over time.
The bottom line
So, are trusts worth it? Should you put your house in one? Ultimately that choice is up to you.
Trusts can be a powerful tool for estate planning and asset protection, but it’s important to carefully consider all of the pros and cons before making a decision. They can be a good choice for those looking to avoid probate, reduce taxes, or provide for their loved ones, but they may not be the best choice for everyone.
If you’re unsure whether a trust is right for you, it’s a good idea to speak with a financial advisor or attorney who can help you make an informed decision.
Whether you’ve inherited a house or you’re trying to get a trust on a new home, speaking with Gary here who can help point you in the right direction and provide valuable help. He can provide you with a quick and stress-free solution for selling your property throughout the process.