I am in need of some professional advice concerning real estate in a trust. My grandmother passed Saturday leaving her sole asset, her home of 50+ years. This past September, knowing her days were numbered, she transferred her home into a real estate trust, naming my aunt trustee. What steps, if any, do we need to take to sell this home? Would we be responsible for any taxes? ie estate, capital gains etc. Could the trust take out an equity line of credit to make necessary repairs? Any help would be greatly appreciated.
Depends on a number of things - what state are you in, is your aunt willing to sell the property, what were the conditions of the trust. You should be able to get a loan but the trustee (your aunt) would have to be the applicant. You might want to check with a CPA or tax lawyer concerning potential taxes.
I am in Virginia and there are no conditions of the trust.
succession upon death should have been specified in the land trust agreement, usually to the beneficiary of the trust.
I’ll preface this by saying that I’m in FLORIDA and am basing my response on what I know about my situation: FL land trusts, and federal income taxes (although I’m still not sure I understand anything about the later).
In general, depending on the type of trust and the state you live in (YOU MUST CONSULT WITH AN ATTORNEY), the trustee is the owner of real property held in trust. So, the trustee (your aunt) can legally transfer ownership, borrow against the property, conduct business for the trust, etc. This includes executing documents to change who are the beneficiaries of the trust. In Florida, the state statutes define such things for a land trust as we know them well. In your state, it may be different. Not all states have such well-defined land (e.g. real estate) trusts.
The trustee’s powers may be defined by state statute, enumerated (spelled out) or restricted by the trust document, and/or spelled out in a will or codicil (again, consult an attorney). The deed that transferred ownership of the house into the trust (there was one, wasn’t there?) may also specify the name of the trustee and some general powers of the trustee. You must consider these all together as powers of the trustee.
Without seeing all these documents, I make a general statement that your aunt is the one who can sell the house to anyone she wishes as trustee of the trust by excuting a deed (i.e. trustee’s deed) to grant ownership to the buyer for whatever price or terms she chooses.
Of course, you’ll want to have an attorney or knowledgeable title company prepare the correct documents to ensure this is done properly. Caution: many title companies don’t have a clue about how to prepare documents for a trust. Check every document carefully and have an attorney knowledgeable in the trust lew review everything. One mistake on a deed or other doument can create real problems for you, the title insurance issuer, and lenders.
Now, the tax implications of selling the house and dividing up the gains to the beneficiaries of the trust (should be determined by the trust documents or the trustee) are numerous and varied and depends on a hundred little details–everything from how the property was transferred into the trsut to the individual tax situations of the receipients of any gains from the sale. YOU MUST CONSULT A TAX EXPERT on the implications.
My general rule of thumb is that "Transfers Trigger Taxes (TTT). " By avoiding transfers, you can generally avoid income taxes. So, selling the property out of the trust may be a bad move tax wise. You’ll trigger a taxable event for sure. Just who gets taxed depends on many factors. There’s just not enough room here to even begin to summarize 500,000 plus pages of tax code. Get and expert!
TTT is why I’m not a big flipping fan. Sure you get cash out of your deal, but you get taxed through the nose-- over 45% fed income and self-employment tax in some cases.
Instead, if you just need money to make repairs and want to keep the home as an income generating asset with appreciation (I’ll assume it’s free and clear), then “yes,” the trustee can borrow money to make repairs and maintain the property. The lender will likely require someone with credit and income to personally sign and guarantee the note. But, it’s fairly striaght foward and relatively easy to accomplish.
I especially like the consumer bank Home Equity Line of Credit (HELOC) products that you can get quickly, easiy, and many times with zero closing costs. I use these to get my cash out of my lease purchase properties. Shop around and see what you can find. Of course, if you keep the property as a rental, you’ll have to disclose that it’s an income property, not a personal residence. Rates and terms are not as attractive for investment properties, but they’re not bad if you shop around a bit.
However, many banks are unaccustomed to lending to trusts as an entity. They usually have two requirements: 1. They must understand and accept the trustee’s right to encumber the property for the trust and, 2. That someone is personally guaranteeing the debt by signing the note. I’ve had issues with ignorant lenders who didn’t understand a land trust to where I had to deed the property back to myself personally to get it refinanced. Just check with your tax expert before your aunt does anything to transfer ownership to anyone if the trust entity becomes and issue. Remember, TTT! If you can find a lender who will give the trust a HELOC loan with the trustee signing the papers, and one or more of you signing the note personally guaranteeing the loan, then you’ve got a sweet deal there. You can keep the property in trust and borrow against it for not only repairs, but whatever other needs (or wants) you have. Borrwoed money is not income–therefore it is not taxed!. Sure you’ll pay interest, but the interest will almost surely be less than any tax you’ll pay if you sell or otherwise transfer the property.
So, there you have it, trust proerpty finances in a nutshell.
Please, please, please… did I forget to say please?–consult an attorney and tax exert before doing anything! I know nothing! I see nothing! I often give completely wrong advice, and deny any responsiblity for anything–especially things I post on an Internet forum board. You have been warned.
Jimbo