Understanding Personal Property Trusts for Real Estate Investors

Personal Property trusts are primarily used by real estate investors with substantial amounts of property who are prone to liability through the nature of their work or personal matters (lawsuits, divorces, etc.). When you own any property that requires a title or deed, it becomes public record. Anyone with a computer looking for good candidates for a lawsuit can look up these records can be apprised of your net worth with just a few clicks of the mouse. As a real estate investor, I find it in my benefit to keep my assets personal, and personal property trusts are the best way to do this. Personal property trusts function almost exactly like land trusts: the title to the personal property is held in the name of a trustee (this can be set up as revocable or irrevocable; I have always used the former) who is forbidden to disclose the name of the beneficiary. This way, when someone goes snooping around my assets, very little of the property I actually own will be revealed to them. However, there are other benefits to personal property trusts as well. What you need to know about personal property trusts.

1. You can put more in personal property trust than you think!

Anything that can be held in public records can be held in private trust. From corporate stock to bank accounts! However, be sure to talk to your lawyer about some of the caveats that go along with putting some assets in trust.

2. You can transfer any property into a personal property trust without paying any taxes!

There is no gift tax or income tax consequence for transferring property into a revocable, living trust! Because as far as the tax man is concerned, the property still belongs to you.

3. Purchase Options:

For real estate investors, personal property trusts can have an added benefit. If you are exercising a purchase option on a particular property, you can maintain your anonymity and make the property look less valuable to competitors by placing that purchasing option in a personal property trust.

4. Mortgages:

Mortgages are assets, and are easily found by searching through the public records. Utilizing a deed of trust not only hides these assets but can make you look like a less desirable target by making your property look encumbered.

5. Cars or Mobile Homes

The Department of Motor Vehicle's records are also open to public scrutiny. Simply placing the title of your vehicle in the name of a trustee (as long as they have an address) can help keep these holdings private.

6. Wills

Many people create trusts to avoid the tangled, costly web of probate court. Furthermore, once your will is executed, it becomes public record leaving your heirs exposed to the scrutiny you went through all that trouble to avoid. However, if your assets are owned in trust, they bypass probate (and public scrutiny) and it becomes the job of your trustee to distribute your assets to your heirs per your instructions. You also get out of having to pay any inheritance tax.

7. Placing each property with a separate trustee means additional security.

8. You can be your own trustee.

9. If your trustee lives out of state, it is that much more impossible for snoopers, creditors, and litigants to find out who the property actually belongs to.

10. The laws on personal property trusts may vary from state to state, and some title companies and lenders may insist on disclosure. Some real estate investors opt for trust stacking (combining personal property trusts with land trusts to ensure privacy). Consult your lawyer about the specific laws in your state and possible caveats.

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No change occurs in the means by which you file your income taxes. No special tax payor identification number is required. You simply use your social security numbers. However, in the event it becomes necessary for your successor trustee to begin monitoring the trust, the means by which taxes are filed will most likely change; you should consult your local tax advisor as to what these changes entail. The most common change is the requirement that your trust obtain a tax payer identification number ("TIN").

Our WY law firm can assist with this. What Happens After Death. Many wonder what exactly happens with a revocable trust after death. Upon the death of the "trust creator" (also known as the "grantor" or "settlor"), the successor trustee, your spouse, or other close family member (the persons you named as successor trustee), takes charge of the trust assets and the trust debts.

They gather them up, and itemize them. Your successor trustee then pays the debts, and distributes the remaining assets in accordance with the terms of your trust. Your trust may create new trusts, for the benefit of your grandchildren, your special needs child, or your elderly mother and/or father. Assets may be distributed outright to named beneficiaries in the form of money, real estate, cars, personal items, shares of stock, or the like. It is really no different than what happens with a will, other than the fact, the courts are not involved, and it is only the beneficiaries, and those with whom you entrusted your trust powers, who are aware of the estate details.

What Are Probate Assets?

Fortunately, not all assets require probating. Life insurance, annuities, certificates of deposit ("CD"), savings accounts, and the like are generally exempt from probate. This is because you have a "contractual agreement" with those holding this money, to pay it to a beneficiary named in the contract or agreement. For example, a life insurance policy is nothing more than a contract that requires you to pay a monthly premium for a stated period of time; in exchange, you receive the insurance company's promise to pay the insurance proceeds to those you named as beneficiaries.

The courts will not address these types of "contractual agreements" because an insurance company, a "third party," is holding the money, the court simply assumes the insurance company paid the money to those named in the policy. The important thing to remember however, is that the above "contractual agreements" may contain beneficiaries that, because of a divorce, death, marriage, or the birth of a child, are no longer appropriate. Many people forget to adjust their beneficiaries over the course of their life, and the dreaded ex-spouse has, on occasions, received their late ex-spouse's life insurance proceeds when they were probably meant for someone else.

The advantage of the trust is that if you make your trust the beneficiary on all your "contractual agreements" like life insurance, any time you want to make a change in the disposition of your estate, you only need to make the changes in one document, the trust. No longer do you need to contact, or notify insurance agents, estate planners, or bankers of desired changes in your estate plan. Buying And Selling Assets During Your Lifetime. Having a revocable trust does not affect your ability to buy and sell assets. The only change necessary, is that when you buy a titled asset, i.e. a car, home, boat, or the like, the title should be in the name of the trust instead of your personal name. Assets titled in the name of the trust are then considered a trust asset and will be distributed according to the terms of your trust. If you do not want an asset any longer, you are free to sell it or give it away. The point is, your control over the assets is not restricted in any way.

If you purchase an asset and neglect to title it using your trust name, you can simply obtain a new title at a later time. Our trust package walks you through titling these assets, and even provides sample letters you can use to change your titled assets. Read more articles on wealth management here. Making Changes: Making changes to a revocable trust are simply made by writing an amendment to the original trust document. While it is simple to make changes to your trust, it is also important to discuss such changes with competent legal counsel. While rare, it is possible to make unintended changes to your trust which may have negative implications. Incapacity.

If you become incapacitated, the your named "successor trustee" takes over and manages your affairs according to the terms of the trust you created. Before your successor trustees take over the management of the trust, two doctors must sign affidavits which state that you are not competent to manage your daily affairs. The trust requires that these affidavits must be served upon you before any action can be started. Living trusts are useful in some states to escape creditors, as trusts in general are considerably more difficult to attach than are personal assets. The Disadvantages of the Revocable Trust.

If you own assets, there are few disadvantages to the revocable trust. The single largest problem with the revocable trust is that it takes time to re-title your "title assets" in the name of the trust (again, this is required to avoid probate). It is important to remember, that any "titled assets" not modified to reflect the trust as the beneficiary, or owner, will be subject to probate. There is also a "myth" circulating that suggests a revocable trust will save you taxes. There are no tax savings in utilizing a revocable trust. The federal estate tax laws (and the inheritance or estate tax laws of most states), provide that any assets over which a person has the right to revoke and claim as their own (such as in a revocable trust) are includible in the gross taxable estate, even if no will is ever probated. Probate Defined. The word "probate" has several different meanings, which has been at the heart of much confusion.

The narrowest definition of the word "probate" is, the process by which there is a legal determination that a certain document requesting that your assets be disbursed is in fact your last will and testament. Once a last will and testament has been "probated" it means that there has been a signed legally binding determination that this document is the last will and testament of the decedent, which will be used to administer the estate and distribute the assets. In many states, this is usually the least difficult part of the estate administration process. However, in certain other states, such as New York, Florida, California and Texas, this procedure can be burdensome, expensive, or both.

The second meaning of the word "probate" is sometimes used to describe the assets which passed according to a will or by intestacy. Intestate Estate. An intestate estate describes an estate who's assets are distributed by statute, because the person who died had no will or other estate planning document. In other words, if you do not have a will or similar estate planning document, your state or local government will decide where your assets are to be distributed.

 

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