How to Move Property In and Out of a Trust

A living trust is an effective estate planning tool. It ensures that your assets are well-managed, and your wishes are followed, during significant life events such as the birth of a new child, a home purchase, unexpected incapacity, or death. This article will help you understand how a living trust works and how to transfer property into or out of a living trust.

What you will learn in the article:

What Is A Living Trust?
Types of Trusts
How to Transfer Property Into a Living Trust
How to Transfer Property Out of a Living Trust Before Death
How To Transfer Property Out of a Living Trust After Death
How To Transfer Property From a Living Trust to an LLC
Who Owns the Property in a Living Trust
If a Property Is In a Living Trust, Can It Be Sold

What Is A Living Trust?

A living trust, also known as a revocable living trust, is a private contract that is created for the management and distribution of assets. It is usually created as part of an estate plan. Here are some key features of a living trust:

Privacy. The terms of a living trust, including details about asset distribution and beneficiaries, are typically private. Unlike a will, which becomes a public document during the probate process, a living trust can remain confidential. This confidentiality can be important for those who wish to keep their financial affairs and family arrangements private.
Revocability. The person who creates the trust, known as the “grantor” or “settlor”, is typically able to modify or revoke the trust during their lifetime.
Asset Management. The grantor transfers ownership of their assets to the trust, and a trustee is appointed to manage those assets on behalf of the beneficiaries.
Probate Avoidance. One of the main advantages of a living trust is that it can help avoid probate, which can be a lengthy and costly process. Assets held in a trust can pass directly to the beneficiaries without court supervision.
Incapacity Planning. The trust may include provisions for the management of the grantor’s assets in the event of their incapacity, providing continuity of asset management.

Who’s Who in a Living Trust?

There are three parties involved in a living trust: the grantor, trustee and beneficiary, as further described below:

Grantor. The grantor, also known as the “settlor” or “trustor”, is the person who creates the trust agreement. The grantor sets the terms of the trust, appoints trustees, and designates beneficiaries.
Trustee. The trustee is an individual or entity appointed by the grantor to manage and administer the trust in accordance with the terms of the trust agreement. The trustee is legally obligated to act in the best interests of the beneficiaries.
Beneficiary. The beneficiary can be a person, charity or organization, and can include any number or combination of them. The beneficiaries are those who actually receive the benefits of the trust.

All of the above can be summarized as follows: The grantor appoints a trustee to manage the trust assets, for the benefit of the beneficiaries.

Types of Trusts

Although there are many different types of trusts, such as the revocable living trust (RLT), qualified personal residence trust (QPRT), or irrevocable life insurance trust (ILIT), there are essentially two basic types of trusts: Revocable Trusts and Irrevocable Trusts. In other words, all trusts can be highly customized for specific situations, but will always either be revocable or irrevocable.

Revocable Living Trust

A revocable living trust makes sense for everyone, whether you have $50,000 in total assets or $50M in total assets. The living trust will generally involve the same persons acting as the grantor, trustee, and beneficiary, however, as life events occur (e.g., incapacity or death), the trustee or beneficiary may change. The main purpose and benefit of making a living trust is to plan for incapacity, avoid probate, and to have a clear plan in place for the eventual distribution of property out of the living trust.

Irrevocable Trusts

Irrevocable trusts are not revocable, which means that after property is transferred to an irrevocable trust, the grantor has made a completed gift for tax and ownership purposes. This is important and beneficial for many reasons, including asset protection and lowering a potential estate tax burden, however, these trusts require the grantor to give up ownership and control of assets. Irrevocable trusts also follow many formalities similar to running a company.

While irrevocable trusts can be useful in many situations, they are not appropriate for most situations, as they are more costly and burdensome to set up and maintain. Irrevocable trusts should thus only be used in specific instances where advanced estate planning is required.

How to Transfer Property Into a Living Trust

The method of transferring property into a trust is essentially the same for any type of trust. While there are different implications and consequences for transferring property into a revocable living trust versus an irrevocable trust, all trusts can only control and manage those assets that are transferred into the trust. Thus, it is crucial to understand how to transfer property into a trust. Since the revocable living trust is the most common type of trust, we will focus on that.

If you already have a revocable living trust, then you have taken the first of two steps, which is creating your trust. But you still need to make sure that the second step is completed, which is funding your trust.

Funding your trust is the process of transferring ownership of your property from you personally to the name of the trust. For example, if your name is Sally Smith and the name of your trust is The Sally Smith 2008 Revocable Living Trust, then you would need to make sure that the title to your assets are in the name of The Sally Smith 2008 Revocable Living Trust.

Once a property transfer is complete, Sally no longer owns the asset as an individual. Rather, her living trust owns the asset. What is important to note here is that Sally will still have complete control of the asset, since in most situations, the grantor is also the initial trustee. It is also common for the grantor to be the initial beneficiary.

In the case of a revocable living trust, if you are the grantor, trustee and beneficiary, then you will still control and benefit from the trust assets, and nothing will change from a practical perspective. In fact, with a revocable living trust, the IRS will disregard the trust completely and you would continue to use your social security number for tax purposes. Apart from the IRS and other tax agencies, “beneficial ownership” will change from you personally to the trust, thereby avoiding probate, among other things.

The following is a summary of the funding process for common asset types. Please note that there are a number of asset types and what follows is not an exhaustive list:

1. Real Property.

If you already own real estate, preparation of a document called a “trust transfer deed” is required to transfer the property into your trust. This document allows for a simple transfer of title from your personal name to the trust name. It is essential that a complete estate plan includes a trust transfer deed for every property you own. The trust transfer deed must be signed, notarized and recorded with the county within which the property is situated. Once the deed is recorded with the county, the property will be “funded” in the name of the trust. If you acquire additional properties in the future, please instruct the title company to title the property in the name of the trust at the close of escrow (i.e., the grant deed you receive lists your trust as the grantee, and not you personally).

2. Closely Held Corporations, LLCs, and Partnerships.

The shares, units or interests of any company should be transferred to a revocable living trust by preparing a document called an “Assignment” (e.g., Assignment of Stock or Assignment of Interest). Once executed, this document will transfer your shares of a company to your trust. We suggest that you provide a copy of the Assignment to the Secretary of the company. If you form (or acquire interest in) any LLCs, corporations or partnerships in the future, you should hold title to your shares, units or partnership interests in the name of your trust. For example, for an LLC, the “Member” should be your trust; for a corporation, the shareholder should be your trust; for partnerships, the partner should be your trust.

3. Bank Accounts.

Bank accounts should be re-titled in the name of your trust. This is accomplished by completing a form provided by the bank to change account ownership to the trust.

4. Taxable Brokerage Accounts.

Like bank accounts, taxable brokerage accounts should be re-titled in the name of your trust. This is accomplished by completing a form provided by the brokerage to change account ownership to the trust.

5. Retirement Accounts.

In simple situations, where you have minimal assets in an IRA, 401k or other Qualified Retirement Account, we suggest designating a spouse or child as the primary beneficiary and the trust as the contingent. However, if your retirement account has significant assets, we may suggest creating a retirement trust, which is a different type of trust, for funding purposes.

6. Life Insurance.

We suggest designating a spouse or child as the primary beneficiary and the trust as the contingent. However, if the life insurance is significant or if there are estate tax concerns, you may instead consider creating an irrevocable life insurance trust (ILIT).

7. Cars.

While you can re-title vehicles in the name of a trust by completing a change of ownership form with your local Department of Motor Vehicles (DMV), this is ultimately not necessary for probate avoidance, since the DMV has an easy way to handle this after you pass.

transfer a property out of a trust before death

How to Transfer Property Out of a Living Trust Before Death

There are situations where property may need to be transferred out of a trust during the lifetime of the grantor, such as required or voluntary distributions to beneficiaries, refinancing, or for business purposes.

If you need to transfer real property out of a trust, preparation of a Trust Transfer Deed is required. This document should include essential information such as the legal description of the property, the name of the grantor (the person or entity transferring the property), and the name of the grantee (the person or entity who will hold the property in the trust). The trustee will need to sign the deed, get it notarized, and record it with the county within which the property is situated. Recording the deed officially transfers ownership from the trust to the new owner.

The transfer of other types of property, such as bank or investment accounts, out of a trust can typically be done by completing a form provided by the relevant institution. For example, to transfer a bank account out of a trust, the trustee will need to complete a form provided by the financial institution. Similarly, to transfer an investment account out of a trust, a form provided by the brokerage will need to be completed by the trustee.

How to Transfer Property Out of a Living Trust After Death

Before initiating any transfers, it is important to thoroughly understand the terms of the trust. The trust needs to be reviewed to identify the designated successor trustee, beneficiaries, and any specific instructions regarding the distribution of assets.

Below are steps to transfer real property out of a trust:

Obtain the Death Certificate. To begin the administrative tasks associated with the deceased grantor’s estate, obtain multiple certified copies of the death certificate. These documents will be required for various legal and financial transactions, including the property transfer.
Appraise the Property. Work with a real estate appraiser to determine the current market value of the real property. This is essential for tax purposes and to ensure an accurate distribution of assets among the beneficiaries.
Prepare an Affidavit of Death. An Affidavit of Death is a legal document that serves as a sworn statement confirming the death of an individual. It is typically used to notify relevant parties and update official records after someone has passed away. When a deceased person owned real estate, an Affidavit of Death may be required to facilitate the transfer of ownership to heirs or beneficiaries. This document helps update property records and ensures a clear legal transfer.
Notify the County Assessor. The County Assessor must be notified of the death of a real property owner in the county within which the property is situated, as required by law. This is done through the preparation of a “Change in Ownership Statement – Death of Real Property Owner” form that is submitted to the County Assessor’s Office.
Prepare a Trustee’s Grant Deed. A Trustee’s Grant Deed is a legal document that transfers the property from the trust to the designated beneficiaries. This deed will be recorded with the county within which the property is situated. Recording the deed officially transfers ownership and establishes the beneficiaries as the new legal owners of the property.
Address Outstanding Liabilities. Ensure that any outstanding debts or liabilities associated with the property, such as mortgages or property taxes, are addressed and settled appropriately during the transfer process.
Notify Relevant Parties. Inform relevant parties, such as local government offices, utility companies, and homeowner’s associations, about the change in property ownership. This helps prevent any complications or misunderstandings in the future.

How to Transfer Property From a Living Trust to an LLC

Real estate investors and property owners often consider transferring properties from a trust to a Limited Liability Company (LLC) for various reasons, including liability protection and strategic business planning. The following are some considerations for transferring property from a trust to an LLC.

1. Understand the Reasons for Transfer.

Before initiating the transfer, it is essential to identify the reasons for moving the property from a trust to an LLC. Common motivations include asset protection, limiting personal liability, and creating a more structured and scalable business entity.

2. Review Trust Documents.

Examine the trust documents carefully to ensure that the transfer aligns with the terms and conditions outlined in the trust. Some trusts may have specific provisions or restrictions on property transfers.

3. Establish an LLC.

Choose a Name. Select a name for the LLC that complies with state regulations and aligns with your business objectives. Check the availability of your desired business name in the state where you plan to register. Most states have online databases where you can search for existing business names.
Select a Registered Agent. A registered agent is an individual or entity designated to receive legal documents and official correspondence on behalf of the LLC. This can be an individual within the company or a professional registered agent service. Ensure your chosen registered agent meets the state’s requirements. Some states have specific rules regarding the qualifications and physical presence of the registered agent.
File Articles of Organization and Statement of Information. Prepare and submit the Articles of Organization and initial Statement of Information to the appropriate state agency, often the Secretary of State’s office. This can usually be done online or by mail, accompanied by the required filing fee.
Draft an Operating Agreement. An operating agreement is an internal document that outlines how your LLC will be run. It helps define the roles, responsibilities, and ownership structure.
Obtain an Employer Identification Number (EIN). Obtain an EIN, also known as a Federal Tax Identification Number, from the IRS. This unique identifier is essential for tax purposes and opening business bank accounts.
Open a Bank Account for the LLC. Once all necessary documents are signed and the EIN is obtained, open a separate bank account for the LLC. This helps maintain clear separation between personal and business finances, which is important for liability protection.

4. Prepare a Grant Deed.

The Grant Deed transfers ownership from the trust to the LLC. It must be signed by the trustee, notarized, and recorded in the county within which the property is situated. Recording the deed officially transfers ownership and establishes the LLC as the new legal owner of the property.

5. Comply with Ongoing Requirements.

Stay informed about any ongoing requirements, such as filing annual reports or renewing licenses, to maintain your LLC’s good standing.

Who Owns the Property In a Living Trust?

In a trust, the legal ownership of the property is vested in the trust itself. The property is transferred from the grantor to the trust, creating a separation between legal and beneficial ownership. This means that while the trustee manages the property, the trust legally owns it.

The ownership of property is split into legal and beneficial ownership. The legal ownership of the property in a trust is held by the trustee or trustees. Trustees are responsible for managing the trust assets in accordance with the terms of the trust for the benefit of the beneficiaries. The beneficiaries, on the other hand, hold the beneficial interest in the trust property. This means they have the right to enjoy the benefits of the property, such as receiving income from the trust assets or ultimately receiving the assets themselves, depending on the terms of the trust.

Here’s a breakdown:

Trustee(s): Hold legal title to the property in the trust. They manage and control the assets in the trust according to the trust document’s instructions and in the beneficiaries’ best interests.
Beneficiaries: Hold equitable or beneficial title to the trust property. They are the ones who benefit from the assets in the trust, according to the terms set out in the trust agreement.

The trust itself is a legal arrangement and does not “own” property in the way an individual or a corporation does. Instead, it serves as a mechanism through which the trustees hold and manage the property for the benefit of the beneficiaries.

If a Property Is In a Living Trust, Can It Be Sold?

Yes, property held in a trust can be sold. The process of selling a property that is held in a trust involves coordination between the trustee, who has the authority to manage the trust assets, and the beneficiaries. Here are the key steps involved in selling a property held in a trust:

Review the Trust Document. Examine the trust document to understand the specific provisions related to selling trust property. The trust agreement may include instructions on the sale of assets, and it’s important to ensure compliance with these terms.
Determine Trustee Authority. Confirm that the trustee has the authority to sell trust property. The trust document typically outlines the powers granted to the trustee, and the ability to sell assets may be explicitly mentioned.
Beneficiary Notification. Depending on the terms of the trust, beneficiaries may need to be notified of the intent to sell the property. In some cases, their consent may be required. Open communication with beneficiaries is essential to address any concerns.
Appraise the Property. Obtain a current appraisal of the property to determine its fair market value. An appraisal provides an objective assessment of the property’s worth, which is needed for setting a sale price.
List the Property for Sale. The trustee or a designated agent can list the property for sale. This involves engaging a real estate professional, marketing the property, and showing it to potential buyers.
Distribution of Sale Proceeds. After the sale is complete, the trustee is responsible for distributing the sale proceeds. The distribution is made in accordance with the terms of the trust document, which may specify how the proceeds should be allocated among beneficiaries.

Summary

When creating an estate plan, you can choose between a will-based estate plan or a trust-based estate plan. For most, a living trust-based estate plan is the most effective planning tool that they can provide for themselves and their heirs. A will-based estate plan is simply a set of probate instructions for a probate court judge, whereas a trust-based estate plan is effective immediately, is private, and allows you to bypass probate.

For effective planning, it is crucial to fund your living trust once it is created. Funding your trust is the process of transferring property you own from your personal name to the name of your trust. Since the grantor is typically the initial trustee and beneficiary of the trust, the grantor controls and benefits from the trust assets during their lifetime.

An experienced attorney can provide you with personalized guidance for your estate plan. If you have any questions or concerns, or would like assistance with creating a comprehensive plan for you and your loved ones, please feel free to contact us.