Estate Planning Basics: Land Trusts and Family Trusts

By on May 17, 2018
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Land trusts and family trusts are both effective estate-planning tools that have many similarities. Both types of trusts let you avoid probate and manage assets according to your instructions. Both give you the same flexibility as owning the property outright. Also, you can buy and sell as if the property was still titled in your name.

The type of trust you choose depends largely on your goals for your assets. If your goals involve property management, a land trust may be a good choice. If you want to ensure your vacation home is passed down from generation to generation, a family trust may be a better option. Let’s take a more in-depth look at both types of trusts.

What is a Land Trust?

A land trust is a legal entity where a trustee maintains ownership of a piece of real estate for a beneficiary. The trustee is usually a bank or financial institution (in some states this is a requirement). The beneficiary is typically the owner of the property. In such scenarios, the trustee is largely, but not always, bound to manage the property according to the owner’s wishes.

Land trusts are “revocable” trusts, which means the agreement can be changed or canceled. Both corporations and individuals use land trusts to keep their real estate matters private and protected from creditors or anyone looking to make claims against them. If you own multiple properties, each property can be put into a separate trust. Doing so further ensures privacy because even though you own the property, it is titled in the name of the trust.

Advantages

Maintaining privacy is the primary reason to put your real estate into a land trust. Real estate titled in a trust is protected from liens, title and HOA claims, and potential litigation. Because your name is not on the title, it’s more difficult for others to locate your assets and go after you for them. Keep in mind, however, it is not impossible for creditors to locate your assets. Mortgage liens are public record and with enough digging, some information will turn up. Paying cash is the only way to enjoy full privacy.

As mentioned before, you can buy and sell real estate even if it is titled to a trust. Land trusts offer some flexibility when entering contracts or taking out loans. Your ownership interest in a land trust is “assignable”, which means you can change your beneficiary or give your ownership interest in the trust to a third party without changing the name of the trust. If you decide to buy property, you can transfer the title into the trust and designate yourself the beneficiary. This makes the loan assumable—able to be transferred to a new owner if sold.

What is a Family Trust?

A family trust is a legal entity where you, the owner of the property, are the trustee. You can manage your assets as you see fit. Family trusts are created to benefit people related by blood, affinity, or law. Like a land trust, family trusts are also revocable. However, instead of privacy, passing on valuable assets to future generations is the primary reason to establish a family trust.

Advantages

While family trusts do not have the same level of privacy as land trusts, there are different advantages. Establishing a family trust can help mitigate disputes over valuable assets and property, and clearly define ownership and responsibility. Leaving financial assets or real estate to your children in your will does not guarantee they will actually receive their intended inheritance. Unlike trusts, wills are public and subjected to probate, creditors’ claims, property disputes, and even lawsuits. Creating a family trust to own real estate may not solve all potential issues that may arise, but it will help you control your wealth and protect your legacy.

Costs and Maintenance

Land trusts and family trusts both have administrative costs and ongoing legal, accounting, and management fees. Fees vary per institution so it’s to your advantage to shop around. Establishing a trust doesn’t have to break the bank, but you do want to ensure it is set up properly. Don’t cut corners when it comes to professional advice.

Considerations

  • Be sure the trust is set up and managed properly. If  a trust is not set up properly or mismanaged, there is risk of the trust being declared a sham. You risk losing all benefits and you could even be penalized.
  • Choose people you trust. Once you put your assets into a trust, you no longer own or control them completely. Instead, ownership passes to the appointed trustees who must act under the terms of the trust and in he best interests of the beneficiaries.
  • Seek professional advice. Forming a trust is a big decision and can be a big responsibility. If you are going to form a trust, make sure that it is established properly, for the right reasons, and well managed.

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About Harold Goldman

I am the founder of FinancialSafetyNet.org, and a Retirement Planning and Long-Term Care specialist. I am also the President of Emes Insurance Services, Inc., a Murrieta based insurance agency designed to help people with Retirement Planning and funding for College. I believe in educating my clients to become financially competent in an effort to develop plans for guaranteed income, protection against loss and tax-advantaged growth. To contact me Call (844)-376-2265

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