One way to protect real estate is through a trust. Doing so has its advantages, but there are also potential drawbacks to take into account. In this article, we’ll explore the benefits and disadvantages of placing real estate in a trust.
How to Use a Trust to Protect Real Property
A trust is an arrangement in which a trustee holds your property. This can help protect you from certain liabilities, such as legal actions, seizure from creditors, and some taxes. Trusts are a common component of estate planning since they help preserve wealth for your heirs.
Types of Trusts Used for Real Estate
There are two primary categories of trusts: revocable, and irrevocable. Each type has its uses.
Revocable Trust
In a revocable trust, you still maintain control and ownership of the real estate placed therein. That means you’ll still report on your tax returns, and it will count toward to total valuation of your estate when you pass on. However, it can help structure ownership and spare your heirs the expense (and stress) of probate.
Irrevocable Trust
In an irrevocable trust, you relinquish all control over the asset and the structure of the trust. The benefit here is that it isn’t part of your estate, meaning it is shielded from both estate taxes and seizure by creditors. Also, the privacy afforded by an irrevocable trust can function as an additional layer of security.
Advantages of Using a Trust for Real Estate
There are a number of reasons to place real estate holdings into a trust. These include the following:
Avoid Probate
As stated, the primary use of a revocable trust is to avoid putting your estate through the probate process. In Illinois, all estates worth more than $100,000 will need to go through probate, which can take months. A trust makes sure your real estate assets are passed on to your heirs immediately and without the conflict that often arises during probate.
Less Expensive than an LLC
In addition, setting up a trust may be less expensive than using an LLC. LLCs must abide by strict rules of governance, and they may not be subject to higher fees and insurance premiums.
Potential for Liability Protection
Irrevocable trusts also add liability protection since you technically do not own the asset. Instead, it’s owned and operated by the trust, potentially deterring lawsuits and creditors.
Drawbacks of Using a Trust for Real Estate
Using a trust to manage real estate also has some drawbacks, of course. These include:
Higher Liability Insurance
Trusts used to own and manage rental property may be subject to higher liability insurance premiums than simply owning it in your own name. That said, it may not cost as much as an LLC.
Lost Control
In an irrevocable trust, you lose control of the asset, meaning you have no say in how it’s managed, operated, or distributed after the trust terms are set.
Harder to Get Financing
It can also be harder to mortgage real estate held in trust since lenders often prefer dealing with someone with accessible wealth. In the event of a default, they’d want to be able to seize your property.
Protecting Real Estate with a Trust
If you’re considering using a trust to protect your real estate holdings, it’s generally best to consult with a legal professional. Hart David Carson, LLP has experience with both real estate and trusts, so contact us to get started.