Trusts: An Investor’s MOST Powerful Tool!

Trusts are my favorite real estate investing tool, with many reasons to use them. Once you begin using Trusts in your real estate investing business, you’ll have ‘aha’ moments fairly often.

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Like life before your spouse or children, once you ‘get’ the Trust concept, you can’t ever imagine your life without them. Even you kids will be glad you started using them!

Be forewarned: Many newbies will sometimes get MASSIVE blowback from attorneys, CPA’s, Realtors, title reps, escrow agents, etc. All self-proclaimed experts, in many instances these folks generally have NO idea about using Trusts, and might suggest “they’re illegal”, or worse, that they “don’t do anything useful”. I will give you a few great resources at the end of this post of real experts that can not only teach you, but also attorneys that use these tools, and can help you get started… NOW!

As a real estate investor, I essentially use a type of Living Trust, which is also revocable, and designed to hold real property (Real property = real estate; Personal property = chattel, aka, ‘your stuff’). One of the most important reasons to use a Trust is privacy: If you currently own an investment house in your name or an LLC, any judgements attached to you personally will probably get attached to it and other houses you might own. If you have significant equity, and a judgement is attached to the house, you might end up losing all that equity in a sale of the property.

But using a Trust could prevent that. How? Because technically, you don’t own the house: The Trust owns the house. So if you get a judgement on you, and the house is owned by the Trust, more than likely, it will be difficult for an attorney to find record of your Beneficial Interest in that property.

Keep this in mind: Don’t do all the work of setting up a Trust and then name it the ‘Joe Smith Family Trust’. Unless your name is NOT Joe Smith!  We’re looking for anonymity here, folks. Keep it something easy and arbitrary. You might name it the Maple Street 628 Trust. Or the Red Bicycle Trust. Maybe even Trust #193629239872. Anything that doesn’t refer to you, your name, or your business.

Here’s a brief overview of what’s required to put a property into a trust:

  1. Trust Agreement – This document spells out the conditions of the trust, including the name of the Trustee (the person who controls the Trust), the Beneficiary (the person/people that have benefit of the Trust, and can direct the trustee to act on their behalf. There may also be a Successor Trustee, Successor Beneficiaries, a Director (who does work on behalf of the beneficiaries if the Trustee doesn’t) all spelled out.  The Trust Agreement also stipulates the real property that is to be included in the Trust, the timeframe, conditions, and other important parts. The Trust Agreement is typically not recorded.
  2. Deed to Trustee – This document is a deed that transfers the subject property into the Trust. This is the official recorded document that stipulates the name of the Trustee of record.
  3. Trustees’ Certification – You’ll get this for the escrow/title people to know that there is a Trust, who the Trustee is, and that it’s valid.  With this doc, you probably won’t show anyone the trust Agreement.

So if all you want to do is gain more privacy, that’s about all you’ll need.  If you want to do more, you can, and it’s usually simple – Transferring/selling/assigning the Beneficial Interest, borrowing money against the property, making certain your heirs will get the specific properties, etc., can all be handled with a few docs by a qualified attorney.

Here’s a SMALL list of reasons that I LOVE using this entity to invest in real estate:

  • Privacy – Don’t let everyone know how many properties you own – they can deter people from frivolous lawsuits
  • Generational Transfer – When properties are OWNED in a Trust, the Beneficial interest transfers to the ‘Successor Beneficiary’. Yes, this avoids a probate situation. And yes – it IS ABSOLUTELY legal!
  • Lower Costs – If you have an LLC in California, you need to pay the annual fee for the LLC, $800, plus the tax rate of 8.84%. Every year. This fee doesn’t apply to Trusts.
  • Avoids Probate – A truly POWERFUL reason to use a Trust, and perhaps the most important for most people. A will simply can’t provide this same level of security for your heirs.
  • Avoid Lengthy Foreclosure – When the Beneficial Interest is sold, and the buyer (the new Beneficiary) defaults, the Beneficial Interest is simply transferred back to the original Beneficiary. This is due to the Beneficial Interest being ‘Personal Property’ and not ‘Real Property’.  This might seem a little more esoteric, but it’s absolutely a great way to do a ‘land-contract’ type sale strategy, with MUCH less risk of a protracted foreclosure process.

So you’re ready to jump in? Great! Here are a few resources I promised:

A last question for you: What’s YOUR favorite tool as a Real Estate InvestorFeel free to leave your comments below…