Would you be surprised to learn that a revocable living trust could be the most important document in your estate plan when it comes to passing on real estate to your heirs?
Some folks think, “Why don’t I just add my child’s name to the deed of the home? Seems like a simple and inexpensive way to leave little Johnny our home in the case of our death.”
But, this “approach” (if it can be deemed one), comes with a whole host of problems including exposure to creditor claims, divorce claims, title issues, bankruptcy claims, and income tax challenges on capital gains. So, there has got to be a better way, right? Absolutely!
As financial advisors, one common question we receive is whether it’s better to own a primary residence in a trust or under an individual’s name. To provide some clarity, this article will discuss the advantages and disadvantages of both options. The decision ultimately depends on your financial goals, risk tolerance, and unique personal circumstances, but we find that using a revocable trust plan as an alternative works well for many families.
Owning Your Primary Residence in a Trust
Pros:
- Estate planning benefits: Placing your primary residence in a trust, specifically a revocable living trust, can help you avoid the time-consuming and costly probate process upon your passing. Your heirs can receive the property more efficiently, as the trust allows for seamless transfer of assets.
- Privacy: Holding your property in a trust can offer greater privacy, as the trust’s name, rather than your personal name, will appear on public records. This can help shield your identity and deter unwanted attention.
- Asset protection: Depending on the type of trust you establish, placing your property in a trust may provide some protection against creditors and lawsuits. Whether it is real estate or other assets, you are protecting them from divorce or other creditor claims mentioned above.
Cons:
- Initial setup and ongoing costs: Establishing a trust can be a complex process that may require the assistance of an attorney, resulting in legal fees. Additionally, trusts require ongoing administration, which can include annual fees or other costs.
- Limited control: Although a revocable living trust allows you to maintain control over your property during your lifetime, other trust structures may offer less control, particularly when it comes to management decisions or distribution of assets. This is why we typically recommend a revocable living trust to hold your child’s inheritance in a separate share for their benefit when you pass, whether it is real estate or other assets.
- Complexity: Trusts can be complicated, and managing one may require a thorough understanding of trust laws and tax implications. This could be overwhelming for some individuals.
Owning Your Primary Residence in Your Name
Pros:
- Control: Owning your primary residence in your name grants you full control over the property, allowing you to make decisions about maintenance, improvements, and sale without consulting a trustee.
- Simplicity: Direct ownership is less complex than a trust, eliminating the need for additional administration, legal fees, or ongoing costs.
- Tax benefits: Owning your primary residence in your name allows you to take advantage of various tax benefits, such as mortgage interest deductions and the capital gains tax exclusion upon the sale of the property.
Cons:
- Estate complications: Without proper estate planning, your primary residence may be subject to probate upon your passing, resulting in a lengthy and potentially expensive process for your heirs.
- Lack of privacy: Owning your property in your name means your personal information will be publicly available, potentially exposing you to unwanted attention or solicitation.
- Limited asset protection: Owning your primary residence in your name offers less protection from creditors and lawsuits than holding it in a trust.
Deciding whether to own your primary residence in a trust or your name is a personal choice that requires careful consideration of your financial goals, risk tolerance, and estate planning needs. Trusts offer potential benefits in terms of estate planning, privacy, and asset protection, but come with added complexity and costs. On the other hand, direct ownership provides more control, simplicity, and tax advantages, but may lack the same level of protection and privacy.
If you are nearing or in retirement and are unsure how to hold your assets for their best protection now and after you pass, we encourage you to reach out and schedule a call with the financial planners at URS Advisory today. We can help you determine what course of action is appropriate for your specific situation.
URS Advisory LLC does not provide tax or legal advice. Please consult a qualified attorney for assistance with any tax or legal issues such as wills and trusts. The information related to estate planning in this letter is general in nature and does not constitute tax or legal advice or a solicitation for any such service.