A good insight into the pros and cons of transferring investment property to a Trust

Trusts are becoming an increasingly popular ownership structure for most families’ and property investors’ valuable real estates in the United States because of 3 major benefits

  • The tax benefits
  • Asset protection
  • Estate planning and the advantages it offers

To start with, a trust is a right in property, which is held in a fiduciary relationship by one party for the benefit of another. The trustee is the one who holds title to the trust property, and the beneficiary is the person who receives the benefits of the trust. Once assets are put into the trust they belong to the trust itself, not the trustee, and remain subject to the rules and instructions of the trust contract.

While there are a number of different types of trusts living trusts tend to come in two basic flavors: revocable and irrevocable. Most clients will instinctively favor the revocable version. After all, why should they want to put their money into something they can never change, when they could put it into something they retain control over — and can even cancel altogether — instead?

Obviously, there must be good reasons to opt for the irrevocable variety. Not being able to revoke the trust is part of a compromise that comes with several other benefits. The simplest difference between the two is that assets remain in the grantor’s estate in a revocable trust but move out of the estate in an irrevocable trust. The primary reasoning behind the irrevocable trust is that there are many good reasons for clients to want to move assets out of their estate. The Revocable trust offers the opportunity for the grantor to avoid probate provided you have listed one of your children or a trusted advisor as a trustee. Property in a revocable trust allows for the assets to transfer ownership without the need for probate.

The implication of revocable trust with the property still in your estate is made a bit glaring with these monetary statistics

If you are fortunate enough to have the amount of assets above the federal tax exemption amount (currently $11.18 million for an individual or $22.36 million for a married couple), you may still have to pay federal estate taxes (as well as any state estate taxes) because property in a revocable trust stays in your estate (in 2017 these figures were $5.49 million and $10.98 million respectively).

It appears that the irrevocable type of trust offers the major benefits of having a Trust ownership structure even without the need to deal with figures above or below the tax exemption amount

Here are some simple ways to explain to your clients what they’re gaining by going with the irrevocable trust:

Asset protection: In a revocable trust, the grantor maintains ownership of the assets, so there’s always the potential to lose them to creditors or lawsuits. An irrevocable trust moves those assets out of the grantor’s hands, and the grantor is no longer considered to own them. An independent trustee makes all the decisions regarding investments on behalf of all the trustees, which may or may not include the grantor.

Avoiding capital gains taxes: In irrevocable trust, assets usually do not incur capital gains taxes. That’s not possible with a revocable trust. (Keep in mind, though, that transferring assets through an irrevocable trust may result in gift taxes being owed.)

Avoiding estate taxes: The assets in a revocable trust remain in the grantor’s estate, so if they’re close to qualifying for the federal estate tax, those assets could easily push them over the limit. With an irrevocable trust, those assets are no longer part of the grantor’s estate and as such not subject to estate taxes

This article does not completely address the subtleties involved in either type of Trust. When you have a real estate investment property, figuring out the right strategy to minimize your risk and maximize protection for the assets is crucial. In our 15 years of working in this industry, we have discovered that although irrevocable trust may appear better on paper than revocable trust – different factors surrounding an individual ownership and transfer of an asset have a major influence in determining which type of trust is suitable for each client.  At Kathy Chan Group, we work directly with a team of trusted legal advisors, estate planners and others to establish a business relationship with you, diligently analyze your estate investment goals, safety and the usability of the type of trust that best fits your target.

Our business culture is aimed at helping multi-generational families maximize wealth through smart real estate investment choices and expert wealth planning.

Visit our core service page to learn about us, what we do and how we can help you maximize the benefits of transferring your investment properties to a reliable trust. Let’s work with you to earn what you really deserve.