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Many people put their homes in a revocable trust, and the most common trust is a living revocable trust. This is a good estate planning idea for a couple of major reasons. First, a living revocable trust avoids the need to probate your estate. I was an attorney for 20 years, but I always told people, “avoid attorneys if you can.” They are expensive, and the “justice” system is not so just.
Years ago I recall seeing the statistic that the average probate took 18 months to settle. During that time, your home, your investments, your money, and all you assets cannot be distributed to your heirs. They are tied up in a lengthy and expensive probate proceeding. You can avoid probate by using a living revocable trust. If your kids have to probate your estate, all the attorney’s fees and legal expenses are coming right out of your heirs’ pockets. Who wants that?
Secondly, there is another big reason to use a revocable trust to avoid probate. You save all that time for the sake of your heirs. Instead of waiting for a year or a long time to receive the money or assets you leave them, they have access immediately with a revocable trust. Assets can be distributed or sold by the successor trustee without a legal proceeding. How great is that?
Now here is the key to using a revocable trust when you buy a home. You can use one when you buy a home as long as you’re not getting a personal loan to buy the home. Home loans are made to individuals or to a husband and wife, not to trusts. The solution is to close the transaction with your loan, and then you can immediately use a Quit Claim Deed to transfer your real estate into the revocable trust. In Washington State, you will not incur any transfer taxes for doing that.
And here’s a rare but possible twist to buying a home with a revocable trust. I had clients who were married later in life, so each had adult children from prior marriages. They each had wisely completed their own independent living revocable trust. When they bought their new home, they wanted those two trusts to stay intact. That makes sense, but legally that can get messy. A husband and wife will purchase a home as either “joint tenants with the right of survivorship” or “joint tenants with undivided equal shares” or perhaps some other share as they might agree based on how much each puts into the house from separate funds. But . . .
If title to the new home is to be in the name of two trusts, the legal relationships that husband and wife can have do not apply, and there needs to be specific language defining how the home will be handled upon the death of the second spouse. A revocable trust will normally state that the home will continue to be controlled and lived in by the surviving spouse, but after the death of that surviving spouse, what will happen if there are two independent trusts with completely different family heirs in each trust? This is where there needs to be a master trust or an umbrella trust to clarify what will happen. After the death of the husband and wife, will the heirs on both sides of the family be forced to sell the home and distribute the proceeds according to the terms of the trusts, or can the heirs from one side of the family buy the home for their own use? Or can the heirs on one side of the family just use the home periodically without buying it? What if one side wants to sell, and the other side wants to keep the home in the family? This is why an umbrella trust or other legal instructions must be in place if there are two independent trusts.
A living revocable trust is a wonderful way to handle the ownership and control and distribution of a home, whether you have one revocable trust or two.
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You may want your real estate in a family trust, but can you buy real estate in the name of your family trust? Let’s lay the foundation for this discussion. First, a revocable living trust is a very good estate planning tool. It allows you to avoid probate and all the costs and delays associated with probate. If you don’t use any tools to avoid probate, or if you only have a regular Last Will and Testament, your surviving spouse or heirs will have to hire a probate attorney. That can cost $3,000 to tens of thousands for a larger estate. And believe it or not, many California attorneys have retired wealthy from handling one large probate, because they take a percentage of the value of the estate. The last time I checked, the average probate in the United States was taking 18 months. During that time the accounts and assets are locked up by the court. A probate is a horrendous process for surviving spouses and heirs. The Family Trust can be a good answer.
A revocable living trust allows you to completely avoid probate, attorneys, and all the delays and costs, provided the assets are titled in the name of the trust. There are some tax savings provisions in this kind of trust, but the bigger tax savings are built into irrevocable living trusts or other exotic estate planning tools for high net worth individuals. For a nice list of the kinds of trusts that can be used with explanations of their purpose, see Estate Planning Tools for Real Estate.
If you are buying your retirement home in Sequim or Port Angeles (or anywhere in the U.S. for that matter), and if you are going to apply for a loan, you will be required by the lender to make the loan application in your personal name, not the name of a trust. The real estate offer and the loan application must have the exact same buyer named. There are some exceptions, most notably if you are paying all cash, you can title the real estate any way you want.
Here’s the answer for estate planning purposes. Purchase your home in your personal name (or as husband and wife), and after closing transfer title into your Family Trust with a Quit Claim Deed. There is no transfer tax or excise tax when you do that. You will only have the cost of the preparation of the Quit Claim Deed from yourself to your trust, and the recording fee (about $11.00).
Since 70% of Americans do no estate planning at all, I strongly recommend that couples get this all done so your surviving spouse or heirs will not have to be stressed out with the costs and delays associated with a probate. I have met with many widows in Sequim whose husbands never completed any estate planning, and it causes so much stress and anxiety, not to mention financial chaos. A Family Trust is an excellent estate planning tool and a blessing for your spouse.
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Buying real estate involves some legal decisions, and one of those legal issues is how to hold title. How you hold title to your home or land is an estate planning decision. I used to do estate planning as an attorney for my real estate clients, and during my legal career to be sure that I was giving my clients good and competent advice, I became a Certified Estate Planner and a Registered Financial Adviser (including a series 7 license and life insurance and long term care). Here I will share briefly how you might hold title when buying real estate.
Married couples typically purchase their real estate simply as husband and wife. In Washington that means you will hold title as “joint tenants with the right of survivorship.” That means that if or when a spouse passes away, the surviving spouse owns the property. But buying real estate also means thinking about estate planning tools like a revocable living trust. This is a trust that allows you to bypass probate and with the use of a trustee you appoint in the document, you can be sure that your property will be transferred to your beneficiary without legal delay and without lawyers.
There are other estate planning tools, and if you have a lot of assets and income, you will probably want to do more exotic estate planning than the average Joe. I have an extensive description of estate planning tools at Estate Planning with Real Estate.
If you own a very successful and profitable business, you definitely want to do some estate planning to shield your personal wealth from business liabilities, and that may involve revocable as well as irrevocable trusts and other business entities, such as LLCs, corporations (sub chapter S or C), and partnerships. Buying real estate is no small matter when it comes to tax planning, business planning, and estate planning. Read also Real Estate and Estate Planning.
I am retired from real estate law practice, but as your buyer’s agent, I will be diligent to give you good counsel when buying real estate in Sequim or Port Angeles.
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What does real estate and estate planning and death have in common? We all will die eventually. And a substantial percentage of us will have serious health issues before we die, including diabetes, heart disease, liver failure, Alzheimer’s, and so on. The truth is we all eventually grow old and the strength and vibrant youth we once knew fades.
If you own a home, and other possessions, you fall into one of two classes of people. The first group makes up about 70% of the American population who have not done any estate planning. When they die, or become incompetent to handle their affairs, the estate is a legal disaster for them and their children.
The second group is made up of the 30% of Americans who have taken the time and money to think through and complete their estate planning so that in their elder years they and their children will have order, not chaos, good tax planning and an orderly distribution of assets. Here is a true life example of chaos from lack of planning, and this chaos has caused great problems for the entire family. It has also put an elderly man into what he feels is a living hell.
The story begins with an elderly couple who lived in rural Alaska. They raised their family and lived a very humble lifestyle, mostly because the father made very little money in his contracting business. Contracting in Alaska is a feast or famine business, and that is especially true in the “bush” communities of Alaska. One of the children moved to Sequim where he raised his own children.
The father was a typical Alaskan, conservative, rugged, independent, and spontaneous. Despite having conversations with his adult children about the importance of estate planning (i.e., a basic will or a revocable living trust), and agreeing he needed to take care of his legal affairs, he never had any estate planning done. He procrastinated for almost 50 years until it was too late. In 2009 his wife passed away after struggling with cancer for many years. She had written her own will, which was invalid because it did not comply with state law, but it didn’t matter as she had nothing of substance to leave.
Within a couple of months of her passing, the father was rushed to Anchorage Providence Hospital where the doctors told him that he must be on dialysis for the rest of his life, and since his little town clinic did not have expensive dialysis equipment, he could never go home. At 75 years old and now completely blind, not being able to go back home where he had lived for 48 years was nearly a death sentence. Alone in a hospital in a room with someone else who was incapable of conversation and far from family who could not afford to visit regularly, life went from difficult to hellish.
Because there was a lack of estate planning for such a scenario, applications for federal assistance through medicare/medicaid programs have become paperwork nightmares of denial after denial. Before a Fairbanks facility is willing to take the father in, where he could be closer to some of the adult children and grandchildren, the facility is demanding that he sign a lien or deed giving up his house. Income and asset limitations have created an impossible scenario. The father has essentially lost everything he ever owned, feels like a prisoner in a room, and being blind has eliminated what little independence he had left. In addition, he has nothing to leave his children as an inheritance since it will now all be taken for medical bills.
Good estate planning could have avoided much of this chaos. Of course, health issues are beyond estate planning, hence the need for good estate planning. But for those who neglect good nutrition and regular exercise for a lifetime, you know that you substantially increase the risk of serious sickness or disease when you get old.
If you own a home, you have an important asset that ought to be handled for estate and tax purposes, for health and welfare purposes, and as an expression of love and care for your children. By the way, the child who moved to Sequim . . . is me. The photo above is of me, my father and my late mother.
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Perhaps a true story will make the point best. A couple take care of the husband’s elderly mother until one day she passes away. In those last months, the couple care for her with love and great personal sacrifice, even great financial sacrifice.
The mother left a sizable estate, and her written will divided her substantial estate equally among the four adult children. Seems simple enough, right? Every once in a while, and far too often, there is an adult black sheep in the family who is so dysfunctional, he or she will hire attorneys to get more than his or her fair share. So determined is such a person, he or she will intentionally seek to hurt and destroy the other siblings to get what he wants, which is more than the money. Usually such a person is full of hate deep down, unexplainable hate that motivates them to behave incorrigibly toward their siblings.
Greed is alive and well in the world today, and it finds fertile soil in a probate process that is subject to a defective judicial process, fostered by attorneys with their own agendas and judges who wouldn’t know what Solomon’s wisdom was if it bit them in the nose. It is in this fertile soil that the black sheep finds a support system to do his or her evil.
This probate lasted five (5) years, and the siblings’ inheritance was eaten by attorney’s fees and costs, and interestingly enough, by the black sheep’s theft of much of the estate prior to their mother’s death. That’s too long a story to tell here.
There is no question that if the deceased mother had known what her adult child would do to her other children, and that that child would completely annul her Last Will and Testament, she would be rolling over in her grave. You can bet if she had know that her children’s inheritance would go to attorneys, she would have burned the money first, or more likely, she would have set up an indestructible estate plan.
There are intelligent ways to make sure this never happens to your estate, but you have to create an effective and intelligent plan while you are yet alive. Avoid probate at all costs! Attorneys are quite famous for stacking up massive attorney’s fees, and then they get paid first out of the estate funds. And while the average probate takes as much as 18 months, many take much longer.
Use techniques that avoid probate, such as the revocable living trust, the irrevocable life insurance trust, payable on death instruments, the right of survivorship (in appropriate cases), insurance benefits (life insurance payoffs are tax free), and there are many more.
Be sure that the title to your real estate is vested appropriately to accomplish your estate plan, and if you own a business, incorporate a business succession plan into your comprehensive plan. Create an indestructible estate plan, and do it today.
Not motivated to take action yet? Okay, let’s try another approach. Think of the one attorney you dislike the most. Imagine buying him or her a brand new Lexus or Corvette with your money, the money you intend to leave to your own children. Wait, it gets even better. Imagine buying a Cadillac for your attorney, a Cadillac for the opposing attorney representing the black sheep, and a Cadillac for the estate attorney (yes, the estate as an entity gets an attorney too). Motivated yet?
Chuck Marunde, J.D.
Retired Real Estate Attorney
Sequim & Port Angeles Real Estate, LLC
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