What is a real estate trust?
A real estate land trust is just one of many types of trusts. A trust, in legal
terms, is any arrangement in which one party holds property for another party's
benefit. The property owner never gives up control of the assets, but the trustee
becomes the owner for legal purposes.
The function of all trusts is to shield the asset owner from certain legal proceedings and tax exposure. A wealthy couple might create a trust to shield some of their assets from estate tax when they die. In the case of real estate land trusts, the trust also greatly simplifies the process of passing on the real estate to heirs or new owners
There are three main reasons people set up a trust.
- To avoid Estate taxes
- To simplify the processes of passing real estate on to heirs or new owners.
- To protect assets (similar to an LLC)
There are four parties to every trust:
- The first is the owner of the property or the grantor
- The second is the property or asset itself, known as the corpus or principal
- The third is the person or entity that holds the property or the trustee
- The fourth is anyone who benefits from the assets in the trust – the beneficiary
What are the different types of real estate trusts?
There are two main types of real estate trusts, irrevocable and revocable:
Revocable is REVOCABLE. You can change your mind. A revocable trust
is similar in many ways to have a simple LLC. You still own and control the
property. This is especially common for primary residences. Money can move from one
beneficiary to another outside of your will. This can help avoid probate fees and
make sure your assets go where you want them to go.
Irrevocable is NOT revocable. You cannot change your mind. Think of this as a corporation versus a simple LLC. You do not have control after you have given the money away. As a result you get additional advantages in addition to the benefits of a revocable trusts. Once you establish the trust, the person who owns your property has to follow the rules you’ve set. Once the rules are established, they cannot be changed either by the grantor, the trustee, or the beneficiary.
What does this have to do with insurance?
When you establish a trust, you change the ownership structure and the way in which
that the property can be managed. This changes the way the property can be insured.
With a revocable trust, since the grantor still retains control over the property
most standard insurance carriers are willing to continue to insure the property.
This is usually done by simply adding the trust as an additional insured on the
property owners existing insurance policy.
With an irrevocable trust, the grantor or property owner no longer ‘controls’ the property or makes the rules. Therefore, most standard insurance carriers are not willing to provide coverage for such properties and the insurance must be rewritten to a different type of policy.
When you are creating a trust it is important to balance all the different factors and to weigh the pros and cons of each type of trust.
If you are interested in learning more about trusts or about placing your property in a trust you should speak with a qualified financial advisor to discuss the benefits and consequences. Andrew Komarow - our friend, partner, and colleague - would be happy to assist you in making the right decision for you and your family.
As always, we would love to answer any questions that you might have. Contact Kovalev Insurance today and request a complimentary consultation to ensure your property and finances are properly protected.