It’s legal too. While there are different ways to confer title in real estate, there’s also more than one way to administer it. Welcome to the world of Trusts, something that people often think only applies to massive corporations given a “Get Out of Jail Free” card that allows them to gobble up homes and livelihoods like a rampaging Godzilla.
Nothing can be further from the truth. No Trust is above the law, nor is anyone above the law who administers them. Trusts often fall under the heading of “Estate Planning” but one need not study for finals in his present incarnation to make it happen. It’s available to most any homeowner and provides an extra layer of legal protection. In fact, there are some benefits realized in setting up a Trust:
- ATrust may avoid Probate, cutting out the time and expense of the process.
- By avoiding Probate, personal finances and assets remain private.
- You can maintain control through the terms of theTrust, how assets are used even after passing away.
- By this form of advance planning, you can prevent certain kinds of legal challenges.
- By planning in advance, you may be able to prevent an Order of Conservatorship.
- Some tax advantages may be realized, depending on other factors.
HOW IT WORKS
These provisions, of course, vary by circumstance and application so they need to be addressed through an Attorney. But that extra layer of protection can extend beyond just an issue of probate.
Consider the case of one who set up a Trust after purchasing a home with the intention of providing a place for a close relative to live after a prison sentence. The fact of the home being deeded to the Trust prevents the home from being attached to cover debts the relative may have incurred from his incarceration. Since the Trust is administered by a designated line of Trustees, the relative doesn’t own the property, even if he may receive personal property as an heir. Because the conditions agreed to by the prisoner are included in the Trust documents, any Trustee has guidelines to follow in case the prisoner may have breached that agreement through recidivism, regardless of whether the Grantor may be alive or not.
You can see how a Trust offers clear advantages, despite the heavy paperwork and need for help from an Attorney to set it up properly. Setting up a Trust can be an act of prudence. But for lay people, even this much of an explanation may seem like legal gobbledygook more fitting for the Congressional Budget Office than Joe Citizen. It’s actually simpler than words may make it appear.
UNDERSTANDING THE JARGON
Here’s an explanation of some of the terms:
Trust: An entity characterized by a fiduciary relationship, created in the form of a corporation. In a Trust, one party grants the title of a property and/or other assets to another party for the benefit of a 3rd party.
Fiduciary: A natural person endowed with a legally sacred duty to fulfill financial obligations to guard and preserve the assets of another person entrusted to him.
Agency: A relationship in which an Agent acts on behalf of another to affect a transaction. In real estate transactions, an Agent is also a fiduciary.
Trustor: The one who grants property to the Trust and designates a fiduciary as Trustee.
Trustee: The fiduciary to whom the Trustor commits the Trust. In a Living Trust, the homeowner setting up a Trust typically acts as the initial Trustee with other individuals designated to follow in succession.
Beneficiary: The 3rd party benefitted by a Trust. In the above example, the Beneficiary is the prisoner in order to give him the possibility to have a second chance at life. In real estate purchases leading to Trusts, Beneficiaries are a bit different. In those cases, the Beneficiary of a purchase is the Selling Broker’s client who later becomes a Trustor.
Assignment: Designation of property committed to the Trust.
Corporation: A legally recognized group of people authorized to act as a single entity. This entity stands as a separate legal (not natural) person.
Certification of Trust: A legal document summarizing and affirming the fact that a Trust has been created. The Trustee presents this document to financial institutions in order to set up bank accounts for the Trust. The Trustee also presents this to other professionals who may act on behalf of the Trust in investments, tax, accounting, or legal services. Upon the death of the initial Trustee, this document, along with the Death Certificate and proper identification of the succeeding Trustee, allows that succeeding Trustee to act as a signatory on any Trust account.
Will: A written legal directive ordering dispensation of property upon death of the Trustor, included in the Trust documents. It may be labeled, “Last Will and Testament” or “Pour Over Will” as part of the Trust documents.
Power of Attorney: A document included in the Trust documents that designates whom the Trustor authorizes as an Agent to make decisions affecting the Trust when the Trustor is incapacitated. Separate powers are bestowed for financial decisions, for healthcare, and for disposition of remains after death. A Power of Attorney for healthcare also informs a provider that he, as Agent, is entitled to receive medical information about the Trustor consistent with the Health Information Portability and Accountability Act (HIPAA). California differentiates between Specific Powers of Attorney for one specific issue while a General Power of Attorney encompasses all issues. In many cases, a Specific Power of Attorney is required.
Advance Directives for Health Care: A document included in Trust documents directing how medical professionals may treat the Trustor as a patient in case he’s irreversibly incapacitated. Advance directives may impact such things as authorizing or not authorizing intubation, hydration/nutrition during coma, resuscitation, and organ donation. It may also include provisions in case of mental illness.
Deed: As concerns Trusts, this is a document, filed with the County Recorder, that transfers real property from the Trustor to the Trust. The Trustor no longer owns the property, but as Trustee, is endowed with the fiduciary duties to preserve the Trust for the good of the Beneficiary.
As you can see, this manner of holding real property calls for all those documents you really should have had written anyway, whether or not you elect to set up a Trust. But it does more. Your estate becomes a legal entity unto itself with successive Trustees administering it without requiring dissolution when the Trustor passes.
SETTING UP A TRUST
Hiring an Attorney to set up a Trust consistent with state law costs maybe a few thousand dollars but is far less than the cost of Probate. Once legal documents for a Trust are signed and notarized at the Attorney’s office, Copies are made from the original; the original stored in a safe location. Real property is deeded to the Trust, and a copy of this needs to be retained by the Trustee.
The Trust must also be funded. Using the Certification of Trust and identification, accounts for this can be set up at your bank. If the Trustee receives payment personally, payments can be deposited to a personal account and a personal check written transferring money to Trust.
Why would one do it this way instead of just telling a teller to transfer such and such an amount?
Simply this: a Trust acts as a corporation. All transfers of funds require a paper trail. Any Trustee, as a fiduciary, must be accountable for any funds in and out of any of these accounts. These checks also need to be recorded on a ledger and presented to a Certified Public Accountant for tax preparation, whether taxes are identified by the Trustor’s Social Security Number or a separate Taxpayer Identification Number (TIN) such as larger businesses use.
TRUST FUNDS
Real estate Brokers also have a fiduciary duty to their clients whenever they list a property for sale, or whether a Buyer hires him or any Salesperson working under him under contract to negotiate the purchase of real property. This fiduciary relationship is part of agency and that relationship is automatically disclosed to all parties in a real estate transaction through the Agency Disclosure Statement that accompanies every Purchase Offer that comes or goes through a Broker’s fax machine.
In real estate transactions, anything of value applicable to that transaction that a Broker receives is a “trust fund” and is delivered to a designated Escrow service without hesitation. That includes all deposits of earnest money being forwarded. A Broker doesn’t just hand money over. He also records when such funds are received and the disposition of those funds affected within 3 business days of receipt. The same is true if an item consists of silver dollars, pesos, jewelry, or even a tablet in cuneiform describing a torrid love affair among ancient rulers. All of them must be recorded, and those records must remain ready for any auditor. Brokers typically keep a safe for valuables but prefer to forward them to Escrow as soon as possible.
BROKER TRUSTS AND PROPERTY MANAGEMENT
Matters become more complex when a real estate Broker does property management. It isn’t unusual for a Broker to negotiate the purchase of a property for a client and then the client, as a Beneficiary, commits a property just vacated to the Broker to manage as a rental unit. This provides the Beneficiary with supplemental income. The Broker draws up a written Property Management Agreement, by which for a monthly fee (usually between $100-200), the Broker receives rents from tenants and deposits moneys to the Beneficiary’s bank account after deducting the monthly fee. The Broker, as Property Manager, provides routine maintenance for the rental unit and enforces rent collection, draws up Lease Agreements, delivers a 3-Day Notice to Pay Rent or Quit where applicable, and engages Unlawful Detainer actions when evictions become necessary. Often, a Broker/Property Manager receives money from the Beneficiary to provide maintenance like landscaping, repairs, painting, pool service, etc. It isn’t unusual to see amounts of $500 to $2,000 provided to a trust fund for this purpose with either residential or commercial properties.
Such money goes into a special Broker Trust fund set up at a bank. Moneys deposited to this Broker Trust do not belong to the Broker. He cannot use these funds for any purpose of his own. Additionally, the Broker must give a monthly accounting to the Beneficiary as to the status and disposition of those funds. His only contribution may consist of ordering checks for the account, nothing more.
Reconciliation of a Broker Trust account becomes part of the recordkeeping a Broker must maintain for Beneficiaries and for any audit. If trust funds represent more than one account, the monies therein must be recorded as separate and distinct sub-accounts. In no case is a Broker allowed to take money from one sub-account to pay for the expenses of another. During reconciliation, not only must funds in the Broker Trust be reconciled like one reconciles one’s own checkbook, but all sub-accounts must be cross-reconciled against one another to assure that funds remain separate and distinct as required by law.
GET HELP AND PLAN WELL
The issue of Trusts opens up opportunities to empower you. Trustors can more safely conduct larger transactions for Beneficiaries, whether or not the Beneficiary is also the Trustor. Some may require help from an Attorney. Others can be done through a real estate Broker.
Mariella Agrusa of iRealty Shop has the capacity to assist on multiple levels.
As a former real estate Broker member of the Orange County BAR Association, she can refer you to Attorneys whom she knows have excellent track records for handling Trusts.
As an experienced licensed real estate Broker, she also provides services as a Property Manager. If you find yourself in a position to buy a home and rent your former residence to supplement your income, Mariella is an excellent choice. She knows what it takes to not only make your purchase run smoothly, but can also administer your newly-created rental unit as Property Manager.
Call Mariella , get on the path to greater peace of mind, and step up to a brighter future.
