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Accounting and Tax Tips Blog

Life is short. Although thinking about the what happens when you or loved ones pass away, forcing yourself to do it ahead of time will make things much easier for your loved ones when it comes dealing with your finances and assets. It is the responsible thing to do. With home sharers who own property, one of the most common questions we get is whether a trust is a valuable vehicle for asset protection and estate planning. 

Putting your home in a trust offers a number of benefits, namely asset protection. To help guide your considerations on estate planning and asset protection, here are the different types of trusts and a brief overview of how they can work on your behalf.

What Are the Benefits of Trusts? Trusts offer many benefits for homesharers. Namely, they allow you to:

  • Specify the conditions on how and when your assets should be distributed after your death;
  • Lower the amount that your heirs will owe in estate and gift taxes, in certain circumstances;
  • Make sure that your assets are efficiently distributed to your heirs without you having to go to probate court. Probate court may cost roughly 5% to 7% of your estate;
  • Provide better protection of your assets from lawsuits and creditors;
  • Appoint a successor trustee who will be responsible for managing your trust after your death but also in the event that you become incapable of doing so.

These reasons are just the basics of why setting up a trust could be beneficial. However, there are many considerations that are unique to your situation that you should consider discussing with your estate-planning attorney before you decide to put your home in a trust.

Major Types of Trusts and the Benefits Each Offers

There are many different types of trusts that each have their own unique advantage and disadvantages. While this is not an exhaustive list because it excludes the provisions that an attorney can insert into the agreement on your behalf, these are the most commonly-used types of trusts when it comes to protecting personal assets, including real estate.

What Is a Living Trust?

A living trust is a document that instructs how your possessions should be distributed after you’re gone. Unlike a will, your estate won’t go into probate so you don’t have to worry about the courts getting involved in supervising your assets. Essentially, you’ll be doing all of the paperwork required to distribute your assets, with the help of an attorney, ahead of time rather than leaving it up to your loved ones to go to probate court.

Revocable Living Trust vs Irrevocable Living Trust

​Setting up an irrevocable trust can help you avoid capital gains taxes, which is something that is not possible when you set up a revocable trust. In addition, if your assets are put into an irrevocable charitable trust while you’re still alive, you’ll be able to take a charitable income tax deduction on those assets. This is another benefit that would not occur with a revocable living trust since the transfer of assets does not occur in that instance until you’ve passed 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. Since it is usually set up as a revocable trust, you would not lose the property to your personal creditors. In addition, you also get the added benefits of avoiding probate and retaining your tax benefits as a homeowner.

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 makes it so that the grantor’s assets are no longer considered their own. In addition to the fact that you won’t incur capital gains taxes in certain instances, this type of trust can help to protect your assets from lawsuits and creditors.
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 a 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 family history or illness.

However, keep in mind that the assets in a revocable trust are exposed to elderly care facilities. As a result, the assets in the revocable trust may end up being used for those costs instead, despite the fact that they were intended to be left to their heirs.

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

If you’re okay with giving up your home early, a QPRT will freeze the value of your home at the value at time the trust is created which can benefit your heirs by delivering substantial estate tax savings. The home will simply pass to your heirs after a predetermined amount of time. However, you must outlive the term of the trust in order for it to be beneficial to your heirs.

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. These are ideal in situations where you plan to leave your estate to a distant relative or to charity. However, if you have children or a spouse and you want to make sure that they are cared for, a living trust is generally a responsible option for families. One final note here is that we are not attorneys. If you’d like to connect with our team so that we can connect you with an experienced trust attorney in your state, connect with us here