A residential property is typically the most expensive asset held by people across the income spectrum. It is also a legacy asset that has the potential to be the most contentious among beneficiaries in the event of the property owner’s death. If the owner does not state clearly what he wants done with the property in a Will or a Trust after he dies, this omission inevitably leads to probate court, which is costly and can take years to reach an outcome.
One solution in estate planning is for a person to set up a Trust and place his property assets into the Trust. If we exclude those who are lucky enough to own investment properties, the property assets that we are talking about here comprise the family home. The person who sets up the Trust, or the settlor, can still have control over the family home as a Trustee, though it now belongs to the Trust and not him.
This means that, in the event of the settlor’s death, the path is clear for a transfer of property assets to the beneficiaries without waiting for a probate court’s decision. The property can be immediately sold if that was the settlor’s intention, and the proceeds distributed to loved ones. Meanwhile, if the Trust also contains a rental property, the Trustee can disburse the rental income to the beneficiaries on a regular basis. It should be noted that all rental income is paid to the Trust, and all rental expenses are paid by the Trust.
One key advantage of setting up a Trust is that after the settlor’s death, the property in the Trust can be protected from the settlor’s creditors. This is important, especially if someone is running a business as a sole proprietorship or an unlimited partnership. A Trust also helps to maintain privacy if an individual does not want his ownership of property to be known to the public.
Furthermore, the beneficiaries’ creditors also cannot touch the property assets if they remain in the Trust. In fact, a Trust allows a settlor to add conditions on how or when heirs receive an inheritance, and Trustees can be given discretion that aligns with the settlor’s wishes when it comes to disbursing benefits to loved ones.
There is also a chance that the settlor might get incapacitated and unable to manage the Trust. If not already done, another Trustee can be selected to manage the Trust to protect its assets. It is advisable to prepare for such contingencies when the settlor sets up the Trust. If a person names his spouse as a co-Trustee, this can further simplify and protect the family home that has been put into a Trust. The spouse can remain a Trustee, managing all the assets that the settlor has transferred to the Trust.
Using a Trust can also transfer ownership faster than a Will would have. Finally, it is important to note that if a person writes a Will and sets up a Trust for his property assets, he has to ensure that the instructions in both Will and Trust are in agreement. If the family home is put in a Trust, it should not also be put in a Will. This could create confusion among loved ones and delay the inheritance process.
In the next blog post, we return our focus to Wills and look at who should be appointed as executor in your will.