Using a Revocable Living Trust to Transfer Real Estate

If you have been reading our blog, you have heard us talk about revocable living trusts (RLTs) before. If you haven’t, or if you don’t quite remember the ins and outs of a RLT, we will go through a quick review before moving on to our main topic of the day: should you place your real estate into a revocable living trust?

An Overview: What is a Revocable Living Trust?

A RLT can be broken down in a few different ways. First, by the words in the name:

Revocable - the trust can be changed or revoked at any time after it has been created (until it becomes irrevocable, which occurs when the creator dies)

Living - the trust goes into effect while the person who creates the trust is still alive (this is in contrast to a testamentary trust, which only goes into effect upon the creator’s death).

Trust - an estate planning mechanism that holds assets and distributes them to specific individuals or entities in accordance with an instruction document that can define when, how, to whom, and for what purpose assets should be distributed.

So, a RLT is an estate planning tool that lets you place your assets into a trust while you are alive, make changes to it whenever you like, and then distribute those assets in a controlled and organized manner. Next, we can look at the respective players in a RLT:

Grantor - the creator of the trust and the person who funds the trust with assets.

Trustee - the person who is in charge of administering the trust, managing the assets, and distributing them in accordance with the trust instructions.

Beneficiary -  the person(s) or entity that will ultimately receive the asset distributions in accordance with the trust instruction.

A RLT is basically an agreement between the grantor, the trustee, and the beneficiary that lays out how assets will pass from the current owner to a future owner. The special thing about a RLT is that there is more than one trustee (a primary trustee and successor trustee). When the RLT is created, most grantors will name themselves as the primary trustee. By doing so, they can retain control over all assets placed in the trust. In essence, nothing will have changed with regard to bank accounts, real estate, investment accounts, and any other assets placed into the trust. However, once the grantor/primary trustee passes, the trust will become irrevocable and the successor trustee (this can be a loved one, attorney, nonprofit or corporate trustee) will take on the responsibility of administering the trust.

In the State of Colorado, creating a living trust means drafting the trust document with your estate planning attorney and signing it in front of a notary public. Once signed and notarized, you must “fund the trust” by transferring assets to the name of the trust. For real estate and personal property, this means physically changing the titles of your property from your own name to the name of the trust, and for accounts and insurance policies, it means changing the beneficiary designations to the name of the trust.

Main Advantages to Using a Living Trust in Colorado

There are a variety of reasons why RLTs are increasing in popularity as an estate planning tool. However, a RLT is not necessarily right for everyone. Take a look at the following benefits and then talk to an experienced estate planning attorney about whether a RLT is right for your estate plan:

1. Transfer assets outside of probate.

Transferring assets through a RLT keeps those assets from passing through the probate process. This process can be expensive and slow, but most importantly, it is also public. When an estate goes through probate, the will and list of assets are placed on the public record. Not only does this expose your estate to view from the general public, but it also gives your loved ones the opportunity to assess what was left to whom and to contest the will in court if it is not what they expected or believe they deserve. On the other hand, RLTs are entirely private. The trust document is not filed in the public record, and it does not have to be made available to your family and friends.

2. Control your assets during your life and after your death.

If you have beneficiaries who are under the age of 21; who may be vulnerable to divorce or creditors; or who are not equipped to inherit large sums of money at once, a RLT may be the right estate planning tool for you. Trusts, as opposed to a simple will, allow the grantor to set parameters that restrict how assets are distributed to beneficiaries. For example, trust instructions can set dates or milestones on which assets are released, restrict the use of funds to things like education and healthcare, or designate how often distributions should be made over time. These controls, which will go into effect after the grantor dies, are unique to the trust mechanism. Under a RLT, the control is even greater because grantors can exercise full control of the assets up until their incapacity or death.

3. Plan for the possibility of incapacity.

A will, as well as testamentary trusts, go into effect as soon as an individual passes away. For this reason, they have no bearing in circumstances involving the grantor’s incapacity due to illness, accident, or old age. A RLT, on the other hand, can provide that the successor trustee step in to control the assets if the primary trustee is no longer able to do so. This automatic passing of the baton can happen much more smoothly and quickly then if there is no RLT -- in that situation, a court would need to appoint a guardian to act on behalf of the incapacitated person.  

4. Take advantage of (eventual) protection from creditors.

While the grantor is still alive and the trust is revocable, a RLT offers no protection of the assets from creditors. This is because the grantor still retains control over the assets. However, once the grantor passes and the trust becomes irrevocable, creditors can no longer attach the assets placed into the trust.

5. Avoid ancillary probate requirements.

Probate in any state can be a challenging process, but going through probate in more than one state can be a nightmare. If you own real property in more than one state, your loved ones may end up going through the probate process more than once. If you own, for example, a primary residence in Colorado and a vacation home in Utah, it may be in your best interest to place both properties in a RLT to avoid going through probate in more than one state.

What is the Effect of Funding a RLT with Real Estate?

Like most other assets, it is possible to fund a RLT with real estate. The rules are slightly different depending on whether the real estate is the grantor’s primary residence or not, but the mechanism by which the property is placed into the trust is the same. Once the RLT has been established, the grantor will need to retitle the property in the name of the trust and record a Certificate or Declaration of Trust with the real estate records. This memorandum eliminates the need to record the whole trust document, which would contradict the privacy imperative of trusts.

If you own the property outright, the retitling is relatively simple. If you have a mortgage, the complexity of the matter will depend on whether the property is your primary residence or not. Under the federal Garn-St. Germaine Act (1982), property owners can transfer real estate into a trust without triggering the mortgage’s “due on sale or transfer” clause, that requires the loan be paid when property is transferred. To take advantage of the Act, the property needs to have a regular mortgage, it needs to be the residence of the grantor, and it needs to have five or fewer units. If not all of these requirements are met, we recommend consulting with an experienced estate planning attorney and your mortgage lender to determine whether placing that property into a RLT makes sense for you.

There are Some Challenges to Look Out for When Transferring Real Estate into a Revocable Living Trust

While transferring real property into a RLT should not trigger any tax liability or need for reassessment for property tax purposes, there may be some challenges that you should look out for. Make sure to discuss each potential concern with an experienced estate planning attorney so that you are prepared for whatever comes your way. For example, not every insurance company likes insuring properties that are held in a trust. You should check with your home and title insurance companies to make sure that they will continue to insure your property after the transfer.

If you ever want to sell, refinance, or take equity out of your home, you may also need to remove the property from your RLT. This is one of the benefits of a revocable trust, however. It is possible to remove property from and replace property into a RLT whenever necessary.

Contact Stewart + Gordon to Learn More

If you own real estate (especially real estate in multiple states) and you are interested in learning more about revocable living trusts, feel free to give us a call. We would be happy to discuss your options with you and determine whether a revocable living trust is right for you. Our office number is (303) 337-2400.