A trust is an estate planning tool that could help you limit your liability, avoid probate, and structure inheritances for your friends and family members. Additionally, for many families, establishing a trust is the first step toward ensuring that their homes can be passed down to the next generation without having to worry about unexpected conflict and complications.
Read more to learn how to put your home in a trust, or contact Landskind & Ricaforte Law Group, P.C. to speak to a Brooklyn estate planning lawyer and schedule your initial consultation.
The Purpose of Home Trusts
An ordinary estate plan may consist of only a few separate documents, such as a last will and testament, advance health care directive, and powers of attorney. Although these documents can help New Yorkers protect themselves and their families, they give a great deal of power to the courts. Without a trust, your home could be subject to probate, the time-consuming process of dissolving and redistributing a deceased person’s estate.
During probate, problems can and often do arise. Problems can take many forms, ranging from unrealistic creditor claims to estate lawsuits and unexpected taxes. If your estate has to go to court, it must fund its own defense—taking money and assets away from your heirs.
The Advantages of a Home Trust
Trusts can eliminate succession-related complications by keeping trust-controlled assets firmly outside the purview of New York’s probate system.
By transferring control of estate assets to a trust, you could:
- Avoid probate in its entirety
- Separate trust assets from estate assets
- Protect trust-controlled assets from creditor claims
- Exert more control over the terms of your heirs’ inheritances and distributions
The Limitations of a Home Trust
However, establishing a trust can sometimes come with a trade-off: certain types of trusts give you greater flexibility but less protection, while others afford extraordinary protection at the cost of any flexibility. In either case, home trusts must be established in strict accordance with New York state law. Any oversight or omission, no matter how minor, could come with a big cost.
The Structure of a Residential Trust
Most trusts have a similar structure, consisting of at least three distinct parties. These parties almost always include:
- A grantor. The grantor, sometimes termed the “trustor,” is the person who establishes and funds a trust. Funding can take the form of money, a home, or most any other asset. If you create your own revocable living trust, you would be considered its grantor.
- A trustee. The trustee is a person who manages trust-controlled assets on behalf of the beneficiary. Depending on the type of trust you establish, you may be able to serve as your own trustee for the duration of your lifetime. After you pass away, the trust will be administered by a successor trustee of your choosing.
- A beneficiary. Your beneficiary is any person who will receive gifts, distributions, or other benefits from your trust. Anyone can be a beneficiary: your surviving spouse, your children, or even a pet or charity.
Almost every home and residential trust has these three components. However, different circumstances call for different solutions—and the type of trust that works best for a friend or relative may not be the one that works best for you.
The 3 Different Types of Home Trusts
Most home trusts fall into several broad categories: revocable living trusts, irrevocable living trusts, and subcategories of both. New York also allows residents to establish special residential trusts, which can only be used for a primary place of residence.
1. Revocable Living Trusts
A revocable living trust is a trust established during your lifetime. You can:
- Serve as your own trustee
- Retain near-exclusive rights to your trust's assets
- Change or terminate your trust at any point until death
After you pass away, your successor trustee will begin transferring trust assets in accordance with the terms of your trust. Administration typically takes place outside of probate and provides fewer opportunities for disgruntled heirs or predatory creditors to file claims against your estate.
However, since revocable living trusts let you retain access to your trust-controlled assets, they may not be removed from your estate. This could raise a greater threat of complications, including taxation-related liabilities.
2. Irrevocable Living Trusts
Irrevocable living trusts are subject to more stringent restrictions than their revocable counterparts. If you establish an irrevocable trust, you cannot:
- Serve as your own trustee at any point
- Use, access, or sell certain trust-controlled assets
- Change or revoke your trust without obtaining permission from your trustee and all of your beneficiaries
Irrevocable living trusts may seem overly restrictive, but they come with big benefits. Since establishing an irrevocable trust usually involves ceding authority over certain assets to your trustee, these assets will no longer be considered part of your estate—meaning they are not only exempt from probate but may be exempt from creditor claims and estate taxes, too.
3. Qualified Personal Residence Trusts
A qualified personal residence trust, or QRPT, is a distinctive type of irrevocable living trust. It lets you transfer control of your home or primary residence to a trust for a set period of time, typically ranging from between five and 20 years. Once this set period of time has elapsed, the trust’s ownership interest in the home will be transferred to your heir or a designated set of beneficiaries.
Qualified residence trusts can help you:
- Reduce or eliminate gift and estate taxes
- Exclude your retained interest in the property from gift tax assessments
- Retain control of your home for the duration of the trust; even if the trust expires while you are still alive, you have a right to remain in your home as a renter
Qualified personal residence trusts serve a very specific purpose compared to generic types of revocable and irrevocable trusts. In general, they work best when you, the grantor, outlive the trust—if you pass away before its term expires, your estate will incur more standard tax and liabilities.