Understanding Wills and Trusts

As provided by Leonard Spoto of Asset Exchange Company :

Many of our 1031 Exchange clients hold title to their investment property in a Trust.  To understand why it may make sense to review the basic differences between Wills and Trusts:

Will Basics:

•    A will is a legal document that states your intentions and identifies to whom you wish to pass your money and property to when you die.
•    A will must be administered by court order via the probate process.
•    Probate can be costly.  Fees are set by set by law and computed based on the gross value of the estate.  For example: an estate valued at $500,000 would cost $13,000 in probate fees.
•    A will is part of the public record.

Trust Basics

•    A trust is a device that allows you to transfer legal title of your property to another person (or to yourself as trustee) to hold for the benefit of yet another person (beneficiary).
o    Trustor – Person who owns the property and creates the trust.
o    Trustee – The person designated to make all the decisions about the money and property in the trust.
o    Beneficiary – The person who will receive the assets upon trustor’s death.
•    Revocable living trusts are income and estate tax neutral (they do not have a unique taxpayer ID number).
•    Trusts are not part of the public record and therefore private.

Who should have a trust?

Setting up a trust can be beneficial if you own a home or real estate.

What’s the point of a will?

You can prepare a will as a backup in order to pass on items such as jewelry and furniture that don’t have a legal title and to express your wishes regarding the disposition of your remains and memorial services.

Do you need a lawyer to draw up a trust?

Not necessarily but if you have multiple properties it is a good idea to work with an attorney.

Can a revocable living trust be changed at any time?
Yes. It can be amended easily at any time although it may cost a nominal fee.

What is the main purpose of a revocable living trust?
The purpose is to avoid the time and expense of probate.

Does a trust file a separate income tax return?
Not if it’s a revocable trust and trustor is also a trustee. For IRS purposes, no completed transfer has occurred. It’s not a real entity for tax purposes, so you just file your regular tax returns.

How important is the trustee in the trust?
The trustee is the person who makes all the decisions about your money while you are alive. Certainly if you are capable of setting up a trust and handling your own money, the trustee should be you.

Do you give up any control when you place your assets into a trust?
Absolutely none. It’s like creating a corporation where you are the sole stockholder, the director, and the president.

Will the bank refinance your home while it is in a trust?
This depends on the bank. Some may want you to transfer the house back into your individual name to sign the loan

Can I do a 1031 Exchange with my property in a Trust?

Remember, although we can provide you with some basic information regarding Wills and Trusts, you should consult your tax advisor to see what is best for your specific situation.

If you need a recommendation to an estate attorney please reach out to Cheryl at 415-999-3450 or cheryl@cbower.com.

About Cheryl Bower

Cheryl has been a Lyon Hoag (Burlingame, CA) resident since 2004. She was raised in the Richmond District (San Francisco, CA). Licensed as a Realtor since 2005, she represents buyers & sellers in the San Francisco & San Mateo County real estate markets.