A Way to Protect Your Why

[Connor Holly]

First and foremost, I am not an attorney but highly recommend that if you do own real estate (which if you are reading this you likely do) that you also speak to an estate planning attorney. Allow me to put emphasis on estate planning attorney, just as your real estate attorney specializes in real estate and a brain surgeon specializes in brain surgery so does an estate planning attorney specialize in estate planning.

So, what happens to your real estate properties if you died? Do you want them liquidated ? Or perhaps you want your significant other to keep the properties as a source of income. Have you had this conversation with that person, do they even have the desire/skills to take over where you left off?

There are seemingly an endless amount of questions we can ask as we enter this dark conversation and I find few people want to enter into this domain, but it’s necessary. As a Certified Financial Planner™ the first thing we need to address when speaking with a client is mitigating their risk and the use of living trusts is one way in which we can do so, especially when it comes to real estate.

I do not want to get into too many details here but there are many different types of trusts used for a number of different purposes. The four common factors to decide are whether your trust is revocable or irrevocable and whether your trust is a living trust or testamentary trust. Revocable means you can make changes to the trust after it has been established, irrevocable you cannot. A living trust is funded with assets while you are alive and avoids probate while a testamentary trust is created when you die (created by your will) and does not avoid probate. For simplicity, we will focus on revocable living trusts since I will make the assumption that most people reading this will want to retain their assets and manage them while they are alive.

OK, so what what is a living trust? Think of it as a legal wrapper but in reality it is legal document that looks like a contract which you design with an estate attorney and you will fund it with assets such as cash, brokerage accounts, cars, boats, real estate, etc.

It is important to understand that only your belongings without a beneficiary go into a trust (most of the time). Things such as 401(k)'s, IRA's, and life insurance policies have beneficiaries. When you die, the assets in these accounts are quickly and easily transferred to your beneficiaries. Things like real estate do not have this luxury. Do know, your beneficiary designations trump your will, meaning if you had an ex-spouse as beneficiary of a large life insurance policy but your will says to leave everything to your new spouse, your ex will receive the funds regardless of what your will outlines. Be sure to check your designations every few years.

When you create a trust, you appoint a trustee, who will have the job of managing the trust and its assets. The trustee must follow the rules of the trust. Most people appoint themselves as trustee so that they can continue to manage their assets while they are alive and will appoint a successor trustee so that if they die or become incapacitated, this successor trustee can take over and manage the properties. Your successor trustee does not have to be your spouse, it can be any person you desire or even a business (corporate trustee). For example, if your wish is to provide an income stream for your spouse and/or children when you die, you can name a successor trustee to manage your properties and distribute income to your loved ones as outlined by your trust.

A living trust can be a great tool to not only let you dictate the future of your hard earned real estate portfolio while you are still alive but can help reduce estate taxes, ensure a step-up in basis of your properties to eliminate or reduce capital gains and avoid reassessment of your properties when you die so there won’t be a large increase in property taxes.

Long story short, please go see an estate planning attorney!