Every year we receive telephone calls from people who own property that is titled in a trust or are the trustees of trusts that own property. Often, they have either already sold the property or are contemplating its sale. The purpose of this article is to alert readers to the importance of understanding the trust before selling or transferring property – into or out of a trust. This is all about unintended consequences!
Trusts are established for reasons that we don’t always think about, or remember, when we decide to sell our homes. For example, when real property is sold, the proceeds of the sale must be paid to the “owner.” If your home is owned in a trust, when it is sold, the trustee or manager of the trust receives the proceeds of the sale. If your home has been transferred into an irrevocable trust, you may have maintained a “life estate” in the home. This assures you the right to live there for the rest of your life — and the obligation to pay the costs and expenses of ownership. If you have a life estate, the value of the life estate, and of the “remainder interests” in the property (the interests of those who receive the property after your death) must be calculated before the sale. If this step is overlooked or incorrectly handled, the trust could be violated and the protection that was sought when the trust was established could be invalidated.
If you plan to sell your house, condominium or cooperative apartment which is titled in a trust, either revocable or irrevocable, and will purchase replacement property, it is important that the replacement property also be titled in the trust. Again, to do otherwise might undermine the goals you had expected to accomplish when you established the trust.
If you own property in multiple states, upon your death, a probate proceeding will be necessary in each state. This is known as “ancillary probate.” To avoid the cost, expense and delay of ancillary probate, implement a trust and transfer these properties into the trust.
Finally, if you decide to transfer assets into a trust that you have implemented, before doing so it is important to confirm that the assets you wish to transfer can properly be titled in a trust. A qualified retirement account, for instance, cannot be titled in a trust as this would constitute a “distribution” of the account and would cause the entire account to be taxed as income in the year of the transfer. Jointly owned property must also be carefully considered so as to ensure that any transfer to trust will be effective.
If you are considering transferring real or other property into a trust, please give us a call and Berwitz & DiTata LLP can discuss your options with you.