Estate planning should be on any investor’s “to-do” list, especially the real estate investor. The steps you take now can ensure that your investments will be passed to your family members and chosen heirs according to your wishes—not how the probate court decides.
In this article, we'll examine the living trust and the will, explain their similarities and differences, and offer our recommendations for how you can combine the best of both tools.
When you form a living trust, you (the grantor) transfer the ownership of your assets (your property) to a special fund called a trust.
You name a responsible person (the trustee) to manage the trust and make sure your wishes are followed after your passing. The trustee can be a relative or a professional from a financial institution. From that point on, the trust owns the property – not you -- a fact that allows for the privacy of both you and your heirs.
A significant advantage of a living trust is that, unlike a will, it allows for the control of your assets to pass to your designated heirs without getting tied up in probate court. Another benefit is that the trust keeps the real estate value out of the taxable portion of your estate.
Other benefits of living trusts are that they are easier to modify and more difficult to challenge than wills.
A disadvantage of a living trust is that it can be complicated and expensive to set up, and it needs competent ongoing management. The cost to set up a living trust depends on the state you live in, the type of trust, and how complex the legal document needs to be.
A will (often called a last will and testament) is a written document in which you name your minor children's guardians and bequeath your belongings and financial assets to individuals or charitable organizations. A will also can stipulate how you want your funeral or memorial service to be held. Whereas a trust becomes active as soon as you create it, a will becomes active upon your death.
All wills must go through probate, a legal process in which the court examines the documents. The probate process can be lengthy, especially if family members contest (object to) the will. As we have explained, trusts are difficult to contest, and they do not go through probate after the grantor's death.
It is wise to name an executor of your will. This trusted individual will know where your will is located and will have access to your personal and financial records after your death. Without an executor, a will is still valid, but without one, it's possible that the document might not be discovered after your death.
If you die intestate (without a will), your estate will be distributed according to your state's regulations. The state will name a personal representative (usually a surviving spouse or the oldest child) to distribute your assets, but the process takes time. Until then, your assets will be frozen.
An advantage of a will is that it can be easy and inexpensive to write -- especially with the many online tools that are available. However, your heirs may pay for your savings later by having to hire a probate lawyer.
Having both a will and a living trust is a powerful way to gain peace of mind for both you and your family.
We recommend that real estate investors have the best of both estate planning tools -- a living trust and a traditional will – by creating a pour-over will along with a living trust.
A pour-over will names your trust as the beneficiary of any property that it does not already hold. Why would this feature be important? Let's say you have neglected to place your new vacation home or other valuable investment property into your trust.
State regulations vary but, without a pour-over will, that real estate might go to an estranged relative rather than to the heir of your choosing.
No one likes to think about their own passing. But the reality is that anyone who is buying and selling property needs to consider an estate plan in a practical, deliberate manner.
We recommend that you evaluate and update your trust documents at least once a year. As long as you remain mentally competent, you can change a revocable living trust at any time. You can fund new property purchases and add the beneficiaries you want to receive any new assets, allowing for a smooth transition.
Rest assured that if you haven't worked out these estate transfer details, your state and the federal government will work them out for you after your death.
You've worked hard to build up your portfolio. We know you want your real estate investments to benefit the people you love. Making an estate plan a priority now can save time, stress, and financial worry later for your loved ones.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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