Insights: Series 1

How Trusts Work with Real Estate

Trusts are an important part of estate planning, and often the best way to leave your northern Michigan home to your family.

When you’re fortunate enough to own a vacation property in northern Michigan, a properly formed estate plan can help make sure that your property will be managed according to your wishes for the rest of your life and after your death.

But equally as important, you can ensure that your children or other heirs will receive the benefits and support you intend.

When it comes to your real estate, one of the most important estate planning tools is something called a “trust.”

What is a Trust?

In very general terms, a trust is a legal agreement created for managing the things you own (your “assets”). One particularly important type of asset that is often part of a trust is real property, such as family¬†homes, cottages and recreation land here up north.

While there are many potential uses for a trust, they are created primarily for the following reasons:

  • As a means to protect and preserve your assets.
  • To control what you want done with your assets (usually, but not always, after your demise).
  • Reducing taxation.
  • Maintaining privacy.
  • To help your heirs avoid the probate process.

Trust Basics

As part of your estate plan, you’ll create a trust agreement in which you’ll likely be named as the “settlor,” “grantor” or “transferor.” These terms are used to refer to the source of the assets going into the trust.

The individual responsible for managing the trust after its creation is called the “trustee.” And those who will receive the benefits of the trust, usually your children but also other family members, are named as “beneficiaries.”

Also, and depending on the type of trust you have, the agreement can provide the terms, or instructions and guidelines, by which the trustee, and sometimes your beneficiaries and even yourself, must abide.

Trusts Are for Everyone

It’s important to know that trusts are not only for the rich. The benefits of trusts, including future cost savings, can easily outweigh their expense to set up. Trusts are used by many families and individuals throughout Michigan regardless of their wealth status.

What Happens to Real Estate Without a Trust

Before you can understand the value of putting your property in a trust, let’s see what could happen when it is not.

It’s not hard to imagine that most families will want their children to inherit their homes and vacation properties, or at least have the final say in who does.

But when you don’t place your home or other real estate into a trust, and instead rely solely on a will or forego a will altogether, your property will likely get caught up in the probate process. And because probate follow’s the state’s intestate succession rules, it determines who inherits your property.

Worse still, unless you specify otherwise through a will or use a trust as described below, your property could very well be transferred to heirs as tenants in common. This detail is usually considered a negative, especially when it comes to residential real estate.

Unlike joint tenancy (or joint ownership), if a property is owned by tenants in common, when one dies their share of ownership is then passed on to their heirs instead of the other owner. In many cases, this can make for uncomfortable bedfellows. As an example, the surviving owner could easily land up co-owning a home with someone they, or you, don’t even know.

For these sorts of reasons and more, understanding the advantages of utilizing trusts with real estate is all that more important.

Trusts and Real Estate

Just as there are many different types of assets that can be put into a trust, including real estate, all trusts are not the same, nor are they one-size-fits-all.

Though highly dependent upon your unique circumstances, there are three specific trusts that are commonly used in conjunction with vacation homes and cottages in northern Michigan. These include:

  • Revocable Living Trust
  • Cottage Trust
  • Domestic Asset Protection Trust (DAPT)

These popular and powerful estate planning structures are explored more in-depth in our article Common Trusts for Real Estate in Northern Michigan where we outline their primary use cases, provide examples, and review their pros and cons.

Use Trusts to Your Advantage

As you can see, trusts are very important estate planning tools for families who own homes and other property in northern Michigan.

Trusts come in many shapes and sizes, and they don’t have to be prohibitively expensive. Especially considering the real problems and expenses that could result when your property is held outside a trust, their benefits can easily outweigh their cost.

But estate planning and trusts can be complex issues, so it’s vital to seek out and get experienced professional help.

To get started, consult with your trusted legal, accounting and financial advisors. You’ll want to find a specialized estate planning and trust attorney at the very least. If you’re not familiar with any such professionals, you might ask for references from family, friends and neighbors.

All content on this website is for information purposes only. Any information contained herein is not intended to provide legal or financial advice, nor does it create an agency relationship. All information is made available without any guarantee, warranty, or representation of any kind. It is your sole responsibility to seek the services of your own legal, financial, accounting, and real estate professionals prior to any such related decisions or transactions.

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