Real Estate and Living Trusts – Things to Consider
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Living Trusts are a common estate planning technique for avoiding probate and facilitating management of assets in the event of incapacity. If someone has a living trust, it usually makes sense to transfer transfer his or her real property to the trust as part of the trust funding process. This is particularly important for out-of-state real estate, so that no probate will be required in that jurisdiction.
The transfer is done by way of a new deed, which will need to be prepared by an attorney licensed in the state in which the property is located. The cost is usually about $200 per deed.
However, here are some things to be aware of when transferring your real estate to your living trust:
1) Mortgage – Virtually every mortgage has a due-on-sale clause, which means the mortgage company can call the loan due if you transfer your property. However, the federal Garn-St. German Act (Title 12 of the US Code 1701-j-3; aka the Federal Depository Regulations Institutions Act of 1982), provides that there is no due-on-sale violation when a property is placed into a legitimate inter-vivos trust by a borrower who is a natural person, so long as the borrower is, and remains, a beneficiary of the trust; and the trust is revocable and does not confer occupancy rights to another. This covers most living trusts. Of course, you are still liable for the mortgage after the property is transferred to the trust.
2) Title Insurance – When you buy real estate, you generally obtain title insurance to cover you should there later be a question about your legal ownership of the property. As part of the process of transferring your real estate to your trust, you should contact the title insurance company to ensure that your coverage will continue under the trust. Make sure you have it in writing.
3) Homeowner/Hazard Insurance – Likewise, contact your insurance company or agent to make sure your property will still be insured. Again, if it the wording is not in the policy itself, get it in writing.
4) Rental Property – If you have rental property, you should not put it directly in the trust. I always recommend owning rental real estate in a Limited Liability Company to protect your other assets should your tenant sue you. Your living trust can then own the LLC.
5) Married Couples – When married couples own property together in NC, it is generally Tenancy by the Entirety, which means no interest in the property can be sold without both spouses agreeing, the property is protected from creditors of either spouse. This is an important benefit, which is lost if the property is placed in trust. An estate planning attorney can counsel you as the best way to handle it based on your particular set of circumstances.
6) Time-Shares – Time-Shares are generally considered real property and thus will trigger probate in the jurisdiction in which they are located. Thus, it’s a good idea to put them in a living trust also.
7) Foreign Property – Countries with legal systems based on English law, such as Canada, Australia, New Zealand, Bahamas, Bermuda,, British Virgin Islands, Cayman Islands, South Africa, etc., generally recognize trusts, so you may be able to change ownership to either your U.S. trust or a trust prepared pursuant to local law. Civil law countries (most other countries in the world) may not recognize trusts.
