Considerations When Funding a Trust with Your Real Estate Holdings

Generally speaking, people own two kinds of real estate – a primary residence and/or investment property (residential rental, commercial real estate, etc.). So when the time comes to design an estate plan, the natural question is: Should I put my house or investment property in my living trust? There are several factors to consider before adding your property to your trust.

In California, there are several ways to hold title to a piece of real estate. You can, of course, do so under your own name. When two or more people are involved (married or otherwise), they can hold title in one of numerous ways:

  •  Community property – A jointly owned asset between spouses
  • Tenants-in-common – Two or more people each hold title to an equal share of the property or some other stated percentage. Each person can sell, transfer or otherwise dispose their share of the property, usually without disrupting the other shares.
  • Joint tenancy with right of survivorship – In the event of one owner’s death, the property passes to the surviving joint tenant (the deceased person’s will is generally not relevant here).
  • Community property with right of survivorship – If a spouse or domestic partner dies, the property passes to the surviving spouse or partner (also unaffected by the deceased person’s will).

These are the most common ways people hold title to property. If you decide you want to put that property (or more specifically, your share of that property) in your trust, you must re-title your interest into the name of your trust. Many people forget to do this; they see the property listed in the initial inventory of their trust and figure that by naming the property as an asset of the trust, it automatically is transferred into the trust.  However, in California, a transfer deed (e/g/ Grant Deed to Revocable Trust) must also be executed and recorded with the County Recorder where the property lies.  If you fail to do so, your future beneficiaries will experience difficulties transferring the property into their names and the County Recorder will probably need a court order through probate for such a transfer. 

An exception to this is when the property is held with right of survivorship (Joint Tenancy with Right of Survivorship or Community Property with Right of Survivorship) and the property transfers to the other person(s) listed on the title.  However, what happens when all persons on title antiviral pass away?  Answer: expensive and time consuming probate.

Drawbacks with placing property in a trust

 In the vast majority of situations, your primary residence should be placed in a trust. Why? Again, to avoid probate and/or other unnecessary delays and costs in transfers to your beneficiaries. As a side note, in California, this act of transferring this type of property is excluded from a reassessment by the County Assessor’s Office and therefore is not subjected to reassessment and what can result in a supplemental property tax.

However, if either your primary residence or investment property is subject to a mortgage, your deed of trust (mortgage note) may include a term that stipulates, “Upon transfer of the property, the mortgage may come due and payable in full.” (Often, in this case, the lender may look the other way and not require that the mortgage come due. But it’s always advisable to check with a lender before making a transfer of this kind.)

Your liability with investment property in a trust

A more pressing concern is this: Whether you keep investment property in your individual name or add it to your living, revocable trust, all of your assets remain together in one big pot that may be subject to attachment by creditors.

People who own investment property are typically more vulnerable to liability from third parties than owners of just their private residence. Investment property owners have tenants, tenants often have guests and, in the case of a commercial property, customers may be involved. In all of these situations, you as the owner have little to no control over possible accidents that may occur.

With every person who comes into contact with your property, you’re exposed to various liability claims (a customer falls, another makes a claim under the Americans With Disabilities Act, etc.). Let’s say you’re sued by a tenant or customer and you lack sufficient insurance coverage to cover that claim. In such a situation, everything that is held in your name—including property you’ve placed in a basic living trust—is subject to collection by the claimants.

There are alternative solutions including but not limited to getting an “umbrella insurance policy” or placing the real estate holding in an LLC or other business entity. Before making any decision about this critical issue of how to hold title to your property(ies), contact an experienced estate planning attorney and learn more about your options.