ESTATE PLANNING: TRUSTS AND REAL ESTATE
– DO NOTHING
– JOINT TENANCY (with right of survivorship)
– LIVING TRUST
When the Owner dies, then, the following can apply to and affect the deceased’s estate, respecting both personal and real property:
Probate is done under court supervision and control: to make certain that assets (both real and personal property) are collected, preserved and evaluated (appraisals cost $); that businesses are able to continue; that legal debts are paid to creditors; that applicable taxes (income, estate and death taxes) are paid and that the persons (heirs) entitled to the assets, after probate is complete, actually receive them. This takes time–between several months and a few years; money– between 5-8% of the estate’s value, depending upon the size and complexity of the estate; and is NOT private, but a matter of public records (in the County Courthouse).
Small Estate Probates are available when the assets are less than $75,000. The asset is titled directly into the name(s) of the heir(s); this can be a problem if they have outstanding judgements against them. Holding in trust would avoid both the small estate administration and the problem with the judgements.
Out -of-State Real Property, if property is owned in other states/countries, then, separate probates must be created in each jurisdiction where an asset is located, thus multiplying costs and potential complications.
Estate/inheritance taxes are levied on the value of the estate at the time of death. The Federal Government requires that they are paid within 9 months, with the estate remaining open longer if there is a dispute. “Death” or “inheritance” taxes are levied by the state where the asset is located and where the decedent resided. The federal estate tax exemption was extended at the end of 2012, but who knows for how long? The federal tax law allows unlimited transfer of assets between spouses without taxation, but this does not extend to other persons.
Oregon has its own inheritance tax, currently levied on estates exceeding $1,000,000. If a couple owns property whose value exceeds this amount, using trusts to pass the property on can allow avoidance of some inheritance taxes.
State “intestate” laws are the laws of the state where the decedent resided and where the asset is located for those instances in which the decedent did not make a will. In other words, it is a “will” promulgated by the state legislature for people who did not make one for themselves. If no heirs are found and there is no will specifying where the estate’s assets will go, they go to the state. So, anyone who would like to give to charities, non-relatives, etc., they had better make a will or put their assets into a trust.
This is a special way of holding title among two or more owners–it could also be called “winner take all”. Each owner is considered to “own” 100% of the property.
When a Joint Tenant (“JT”) dies, his/her interest in the property “vanishes”, leaving the other Joint Tenants in ownership. If all but one dies, the survivor then owns the asset entirely. But, this creates a number of problems in many cases.
Probate is avoided only on the death of the first JT’s to die; when the final JT dies, holding full title to the property, probate applies.
Estate/inheritance taxes are not avoided on death of the last survivor.
Gift taxes may apply (for example: if parents bring children or other persons on title as JT’s);
Income taxes may have to be paid by the survivor(s)–see my “thinking about giving the property to the kids?”
Liens may apply to the property if one or more of the JT’s have marital, legal or financial problems;
Unintended “heirs” may be brought in–see my handout on this issue;
A will does not apply: property held in JT will NOT pass by will, except for the last to die.
The decedent is able to direct who gets what and, if there is a trust effective upon death as part of the will, he/she can control what happens after death as well.
Probate: if there is a will, there MUST be a probate; not necessarily if there is a trust.
Estate/inheritance taxes still apply, but if a trust or trusts are established by the will at the time of death, some inheritance and estate taxes can be avoided.
AKA “loving trust” by some practitioners. Such a trust allows the property owner to set up, while still alive, to whom the assets should go, in what proportions and when–it allows for control to continue after his/her death.
The property is transferred by the owner into the trust and the trust instrument sets out how and by whom it is to be administered. The administrator (the “trustee”) can also be the trust’s originator (the “trustor”), or someone else of the truster’s choosing.
There are also advantages to the trust that can benefit the owner prior to death (see below).
NOTE: We are discussing a “revocable” living trust; that is, one that can be changed or revoked, during the trustor’s lifetime. An “irrevocable” trust is a different matter entirely and is NOT part of this discussion.
WARNING: While one can do this without an attorney, it is NOT advisable, because there are many pitfalls that the DIY non-attorney would not be aware of and, once deceased, he/she cannot come back to fix any problems. Most, if not all, of the problems mentioned above can be avoided through the use of a properly drafted trust; for example:
Probate can be avoided because title to the assets are transferred into the trust prior to death, the trust continues to be the “owner” of the assets after death.
Estate/inheritance taxes can be avoided, to the extent permissible, using the exemptions allowable under the law.
Income tax issues that could arise if property is gifted to others prior to death are not a problem when the trust owns the property–see my “thinking about giving the property to the kids?” This relates to the “Step-up in basis” allowed upon death.
Property taxes will NOT go up because of a transfer to a living trust; also, the lender will not consider it to be a breach of the agreement, whereas transfer to an LLC is prohibited by the loan documents.
Privacy is maintained because the terms of the trust are not made public, as is the case with a probate (will and intestate). It is neither recorded nor registered publicly; the deeds used to transfer properties into the trust will be public, but they do not disclose the terms of the trust itself.
Control can be exercised by the decedent as to who gets what and when, even after death, within permissible bounds; prior to death, the property owner can amend the trust to reflect his/her wishes–obviously, this sort of control cannot be exercised after passing on. Also, the Trustor remains in charge, while alive and competent; if the Trustor becomes incompetent or otherwise unable to manage his/her affairs, the estate will continue to be managed according to the wishes set out in the trust document and it is not subject to Court control and interpretation.
Disability/incompetence can be addressed in a living trust so that, if the estate is in the trust and the owner becomes disabled (illness, accident, etc.) or incompetent (e.g. Alzheimer’s), the person in charge of the trust (the “trustee”) can carry on without having to go to court to have an administrator appointed under court control. This CANNOT be done without the trust.
Other states will recognize a properly drawn and executed trust from another state; the various parties can live in different states and even different countries.
Flexibility: While the trustor is still alive and competent, the terms of the trust can be changed; the trust can buy, sell, rent out, borrow against, property, etc., just as the owner/trustor could before the trust.
Cost: A revocable living trust is usually not a financial burden; and, compared with the potential costs of not having a trust (probate, estate/inheritance taxes, income taxes, court administration fees), it can be quite a bargain.
NOTE: We are Real Estate Brokers, not attorneys, accountants, financial planners, etc. We are qualified to advise on real estate matters only. What we present here is for information purposes only, not for advice. For legal, accounting, tax and financial advice about your personal circumstances, please consult with the qualified professional of your choice.
© Copyright 2017 by Ronald P Bush JD