Should You Put Your Rental Property in a Trust?

real estate trust

Planning for a loved one’s passing isn’t easy, but it could make settling their affairs a lot easier when their time comes. A real estate trust can make it a lot easier to organize and transfer assets in the event of an untimely loss. If you have a thriving Airbnb business, you might be wondering if a trust can help protect your properties. We get a lot of questions about real estate trusts here at Shared Economy Tax, and we’re happy to happy answer them. In fact, trusts can offer several benefits for hosts, including asset protection and added tax flexibility.  

What Are the Benefits of a Real Estate Trust?

  • Specify how your assets should be distributed after your death.
  • Tax savings and planning benefits.
  • Efficiently transfer assets automatically without a probate court.
  • Protect your assets from lawsuits and creditors.
  • Appoint a successor trustee in the event that you become incapable of managing your assets.

Major Types of Trusts

There are several types of trusts and each has its own set of pros and cons. This list doesn’t include every type of trust, but it covers the ones that are most commonly used as real estate trust. 

Living Trusts

Living trusts can help you distribute your assets after you’re gone. Unlike a will, your estate doesn’t go to probate court, so there are no fees. Essentially, you provide distribution instructions in advance so the probate court doesn’t have to figure it out. Living trusts are great for organizing your assets, and they can save you from hefty probate costs.

Revocable and Irrevocable Living Trusts

​Irrevocable trusts can help you avoid capital gains taxes, but you can’t avoid cap-gains taxes if you’re property is in a revocable trust. If you put assets into an irrevocable charitable trust while you’re still alive, you can deduct it on your taxes as a charitable contribution. Again, this benefit doesn’t apply to revocable living trusts because they don’t go into effect until after you pass away.

Domestic Asset Protection Trust (DAPT)

A domestic asset protection trust (DAPT) is an irrevocable trust that protects your assets indefinitely from future creditors. There are 15 states which currently have DAPT laws. However, they can be also upheld in states that don’t have specific DAPT laws on the book. You will want to work with a trust attorney in your state to discuss details of a DAPT and how effective they can be as case law can vary across states. 

Land Trust

A land trust is a private agreement that designates a trustee to hold a title to a property for the benefit of the beneficiary. The creator of the trust generally remains the beneficiary over the course of his or her lifetime and retains the right to direct and control the trustee.

Land trusts allow you to transfer the ownership of your home to a beneficiary without recording a change in public records. You can also use land trusts to avoid probate and retain homeowner tax benefits.

Qualified Personal Residence Trust (QPRT)

A qualified personal residence trust (QPRT) allows you to remove a personal home from your estate with the goal of reducing the amount of gift tax that is incurred by your heirs when the assets are transferred. A QPRT will allow you to remain on the property for a period of time. However, once that period has expired the property is then transferred to the heirs. The benefit of this is that the waiting period lowers the fair market value of the property which helps to lower the asset’s incurred gift tax.

What Type of Trust Is Right for Me?

Here are a few scenarios to help you sort out which type of trust is best for your situation.

You’re Primarily Concerned About Lawsuits and Creditors

An irrevocable trust allows grantors to surrender their assets in an organized manner. In some cases, you can even avoid capital gains taxes. Irrevocable trusts protect your assets from lawsuits and creditors, so they’re great if you have outstanding liabilities.

Specifically, a DAPT can help your beneficiaries obtain assets from your estate because it creates another hoop for creditors to jump through when they try to come after your assets. You also won’t occur any tax issues when selling your personal residence. In fact, you will be free to use the home tax exemption in the sale of your own as long as the trust has been drafted as a “grantor” trust.

You’ll Need Someone to Act on Your Behalf

If you think that you need long-term care, you might want to consider a revocable trust. A revocable trust is ideal for someone who is concerned about needing someone to act on their behalf to handle their assets, such as in the case of becoming mentally incapacitated due to illness.

However, revocable trusts don’t protect you from everything. For example, elderly care facilities can make claims against revocable trust assets to cover the cost of care. 

You’re Betting on a Substantial Increase in the Market Value of Your Home

A QPRT freezes the value of your home when it’s formed. This can provide substantial estate tax savings for your heirs. The home passes onto your heirs after a set time period. However, it doesn’t benefit your heirs if you don’t outlive the trust.

You Have Large Real Estate Holdings and You Want to Protect Your Privacy

A land trust can act as a privacy tool to help prevent litigants from using public records to uncover the properties that you own. Your identity as the legal owner of the real estate remains private from the public and any third-party except in the case of a subpoena or court order.

Final Considerations for Homesharers

If asset protection is your primary goal in planning your estate, we generally recommend that you set up a DAPT or a land trust. A Real estate trust is ideal for bequeathing property. However, living trusts are generally better for families. We’re not lawyers. but we can connect you with an experienced trust attorney in your state. Contact us here, or sign up for our newsletter with the form below for more tax tips.

About the Author

Miguel Alexander Centeno

Miguel Alexander Centeno is an author, speaker, and tax leader at Shared Economy Tax. A former Big 4 tax manager, he represents taxpayers in all matters before the IRS, including the U.S. Tax Court. He has been quoted in the Wall Street Journal, Fox Business, and MSNBC on tax related articles and has testified before the U.S. House of Representatives as a part of hearings for the Tax Cuts and Jobs Act. A father of three, Miguel is an avid acoustic guitar player, gravel cyclist and once-a-week yogi.
More →

Leave a Reply