This is the fourth in a series about how to own real estate, or how to “hold title.” As I mentioned before, the way you hold title affects how the ownership of a property can be transferred and how the property can be financed, improved, used as collateral or taxed. This week I’ll talk about holding title in trusts.
I am not an attorney or an accountant, and I wouldn’t consider giving advice on how anyone should hold title. This column is intended to spark a discussion between you and your accountant and/or attorney—people who have the education and training to help guide your decision-making when it comes to owning property.
And while I just said I won’t give advice, here’s some advice on trusts in general: DO NOT GO TO THE INTERNET AND DOWNLOAD A TRUST AGREEMENT. Trusts and the reasons for them can be incredibly complex. This is a topic to discuss with your family, your accountant, and your attorney.
Okay, here’s some of what you need to know about trusts. Trusts are a way to hold title, usually used when spouses who have a significant estate want to bypass the need for probate and postpone estate taxes, and pass their property on to their children or others. For significant estates the probate fees are a percentage of the gross estate (no deduction for debt) and there may be capital gains as well as inheritance taxes which can be as high as 50 percent of the value of the estate.
There are several types of trusts, and I’m only going to review trusts as they pertain to holding title.
Trusts are an excellent way to delay inheritance taxes. While a married couple may live in the home, the home can belong to the trust. When one of the spouses dies, title to the property remains part of the trust until the second spouse dies. The surviving spouse maintains control over the property and has a right to occupancy until his or her death, at which time the beneficiaries of the trust (usually the children or grandchildren) receive title to the property (unless the trust stipulates that the wealth is managed by a trustee until the beneficiaries reach a certain age).
Trusts are excellent ways to ensure that minors or young adults who need a little more time to mature can receive ownership without control, preventing access to millions of dollars to someone who—at age 23—believes a $150,000 car and a $200,000 boat appear to be good investments. The trust can allow for funds to be released at a specific ages and amount, or for specific uses like higher education.
Another type of trust is a charitable remainder trust. This allows wealthy individuals or those with no heirs some tax benefits while retaining the income potential of their investment. It works like this: the property owners give their property (usually an investment property) to a charitable organization, but retain a significant portion of the profits derived from the operation of the real estate. The owners retain control and at the same time gain a tax benefit for their charitable gift. If they donate a million dollar property, for example, they may receive a portion of the rent while the remainder of the rent is reinvested in the charity. Bear in mind that a trust can own far more than just real estate. It can hold notes receivable, business assets, stocks and/or bonds.
If you have questions about real estate or property management, please contact me at firstname.lastname@example.org or visit www.realtyworldselzer.com. If you have questions about how you should hold title, call your attorney and/or accountant.
Have suggestions about what I should write? Let me know. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.