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Watch What You Trust

Living Trusts Require Special Care For Real Estate

In recent years, revocable living trusts have become popular tools in estate planning, even though they can cost several hundred dollars to create. The purpose of a revocable living trust is to hold and manage assets for the trust owners during their lifetimes and then pass the assets to heirs as beneficiaries without the expense and inconvenience of probate. As the name implies, the terms of a revocable trust can be changed at any time until the trust owners' deaths. Irrevocable trusts, on the other hand, cannot be amended once established.

Both irrevocable trusts and revocable living trusts make it more difficult to overturn a person's last wishes. Both also offer savings on estate taxes.

  • For example, using a living trust, an individual with an estate valued at more thatn the federal estate tax exemption of $2 million could completely avoid federal estate tax through the use of a so-called "bypass trust." In this form of trust, a person places property in a trust that allows the trust's beneficiary (often a spouse) to use any income or dividends generated by the trust's assets conveyed. The trust beneficiary may pass the assets to another person (children, for example), who may use the assets. Thus, the assets avoid immediate taxation.

At the same time, there are some special considerations relating to creditors and title insurance coverage that can affect real estate when it is place into a revocable living trust.

Exposure To Creditors:

In somewhat less than one-third of all states, a married couple can shield property from creditors by holding real estate as tenants by entireties.

Tenant by entireties is a form of ownership exclusively for husbands and wives, which allows the surviving spouse to inherit the entire property without probate proceeds. In addition, the sole debts of one spouse generally cannot attach to property.

When real estate is deeded from a husband and wife to a revocable trust, however, the transfer eliminates the special status of the entireties estate and may make it possible for creditors of one debtor spouse to attach the real estate.

Similar problems arise when two individuals hold property as joint tenants with rights of survivorship. It's important to note that the protections provided by joint tenancy vary.

In states such as Michigan, where holding property as joint tenants with rights of furvivorship helps shield real property from creditors, conveying real estate to a revocable trust will eliminate this protection. But in other states, such as Colorado, joint tenancy does not provide protection from creditors.

Doing your homework about your state's law is critical before transferring property from any joint ownership.

Loss Of Title Insurance Protection:

Another issure in conveying real property into a revocable living trust relates to the enforceability of land title insurance. When an owner conveys property to a third person or entity, such as a trust, title insurance policy protection may become invalid since the owners named in the policy no longer hold title.

Ask the title company involved if placing property in a trust affects coverage before making a transfer. If it does, the insurance company can conduct a new title search and add an endorsement to the policy that names the rust as the covered party.

The risk of a claim against a property diminishes the longer one person has owned it, in part because many liens and other claims must be filed within a limited number of years.

But because other title clouds, such as encroachments, easements, and adverse possession claims, may not appear so quickly, maintaining valid title insurance is well worth the usually small espense of adding an endorsement.

Don't Trust Carelessly:

Trusts plan an important role in modern estate and tax planning, but that doesn't mean trusts are for everyone. As with an financial decision, it's critical that property owners and their real estate and legal advisors weigh the benefits and drawbacks so that they can make informed decisions.

This article was written by Margaret A. Lourdes, an attorney in Michigan whose practice emphasizes estate planning. She is also an adjunct professor, teaching estate planning and business law, at National University in San Diego, California. She can be contacted at maggielourdes@aol.com or (734) 354-3699.

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