What is a Real Estate Trust?

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Real estate can be a solid investment when a piece of property increases in value over time. If you’re thinking about purchasing investment property, it’s helpful to know that you can buy it in your own name or you can buy it in the name of another entity. This entity can be a real estate trust or an LLC, or limited liability company. There are several considerations if you decide to make use of this option.

Liability is an issue for property owners who want to become landlords. Most owners want to protect their personal assets in the event the property is the subject of a lawsuit, such as when a renter sues due to injury or damage to personal property. Transferring the title to another entity such as a trust or LLC will limit liability to only the assets controlled by that entity.

While an LLC can provide liability protection against lawsuits, it’s more complicated than a real estate trust because you must set up a business or corporation that will hold the title to the property. For many buyers, setting up a real estate trust is a simpler process that streamlines title transfer to beneficiaries while limiting liability.

A trust is a legal relationship that makes it easier to pass an asset such as real estate between parties. Unlike an LLC, it does not require a separate entity to be set up. Instead, the trust is represented by a document that describes its terms and conditions. This legal document is known as the trust agreement.

The trust agreement describes assets that are included, how they are to be managed and how they will be distributed if the creator of the trust, known as the grantor or trustor, dies or becomes incompetent. It names beneficiaries of the trust assets in case of distribution; these are typically family members, friends or charities. The trust agreement can specify the distribution of assets and income to beneficiaries at any time and not just when the trustor dies.

A trust agreement will also name a trustee who will be responsible for managing the trust. This trustee can be the owner of the trust or a relative or friend. A bank or trust company can also be named as trustee. Besides managing trust assets, the trustee must collect and invest income from the property in a responsible manner. Accounting for all income and expenses and filing and paying taxes are additional trustee responsibilities.

After the trust agreement has been created and signed, the trust is funded by transferring the property title from the owner to the trust. Until this step is completed, the trust has no effect.
There are two main types of trusts: revocable and irrevocable. A revocable trust gives the creator the power to take back the title of their property or amend the trust agreement at any time. With an irrevocable trust, the creator surrenders ownership of the property and no longer has control over it (unless the creator of the trust is also the trustee). The trustee retains control until eventual distribution of the trust assets. Irrevocable trusts are rarely used for estate management since control of property is relinquished during the owner’s lifetime.

A revocable real estate trust is a useful estate planning tool because it can keep property from going through probate. It can also help protect property from creditors. However, an LLC can be a better choice when the property is a multifamily apartment building or a piece of commercial property. Some experts note that these properties pose an increased financial risk, with more people visiting on a daily basis. In the case of a lawsuit, an LLC will protect the owner’s home and personal assets if insurance does not cover a judgement.

Both an LLC and a real estate trust could cost thousands of dollars to initially set up, depending on lawyer’s fees and the costs of transferring titles. Besides being more complicated to setup up than a trust, an LLC can also be more expensive with annual states fees ranging from $75 to $250. In some cases, a real estate trust may also have recurring trustee fees if it’s not managed by the trustor, a family member or friend.

It’s possible to set up your own real estate trust by creating a trust agreement that identifies the trustor, trustee and beneficiaries. Many people turn to a lawyer or estate planning attorney for help with the process, especially if the trust includes complex conditions or assistance is wanted with transferring property into the fund. If you want to do it on your own, be sure to follow state regulations in regard to having the trust document properly signed, witnessed and notarized. ■

Sources: legalzoom.com, nolo.com and extension.iastate.edu.