One way to protect your real estate assets is to place them into a trust. Depending on your chosen arrangement, that trust can provide possible tax advantages, protect assets from creditors, and allow your heirs to avoid probate when you die.
One issue to consider is how a marriage can impact the effectiveness of a trust. Understanding that impact can help you avoid surprises regarding marriage or divorce.
What Are Trusts?
A trust is a legal entity that you (the grantor) set up to outline your wishes about how your assets (including real estate) should be distributed if you’re incapacitated or you pass away. You select a trustee to manage those assets.
There are generally two types of trusts:
- Revocable trust: Through a revocable trust, you manage your assets while alive and set parameters for distributions when you die. A revocable trust gives you flexibility, privacy, and control.
- Irrevocable trust: This arrangement removes assets from your control. Your trustee has control of the assets, and the trust can only be modified or amended by court order. It protects assets from excess taxes, creditors, or the Medicaid estate recovery program.
Marriage and Trusts
Trusts are complex and governed by different setups, state laws, and other considerations. However, some general rules can apply to marriages and trusts.
Premarital Trusts
If you place your real estate in a trust before you marry, that property is generally regarded as yours alone. However, if marital funds enhance or repair the property, the spouse could claim ownership rights in the event of a divorce.
Trusts and Community Property
If you reside in a community property state and acquire real estate during your marriage, those assets will likely be considered community property, even if placed in a trust. In this case, your spouse could claim 50% of that property in the event of a divorce.
Revocable and Irrevocable Trusts
The trust’s formation can also determine spousal rights to the property in the event of a divorce or death. For example:
A revocable trust could be considered part of marital property that would be liquidated in the event of a divorce.
An irrevocable trust is far less flexible, as you (the grantor) no longer own the assets in question. In this case, your spouse also doesn’t have property ownership rights.
Prenuptial Agreements
A prenuptial or postnuptial agreement could better define the difference between investment properties held by a trust and jointly owned marital properties. In addition to the legal prenuptial/postnuptial agreement, steps to take might include:
- Establishing an irrevocable trust
- Separating finances used for the property
- Using the services of an estate lawyer
Understanding Marriage Laws and Trusts
Trusting your spouse is essential for a strong marriage. At the same time, you want to protect your real estate assets so they grow in value and can be passed to your designated heirs and beneficiaries. This is where a legal trust comes into play.
Check with a qualified state attorney to avoid potential complications when setting up trusts. Doing so can help safeguard your assets during a marriage or in the case of a divorce.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
