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Why should I set up a Revocable Trust?

Our law firm frequently encounters clients who have either previously set up a revocable trust or are interested in establishing a revocable trust.   A revocable trust, otherwise known as a “living trust,” is a legal document established to hold ownership of assets during the lifetime of the person who creates it.  The party who establishes the trust is referred to as the “Settlor” (also referred to as “Trustor” or “Grantor”), and the person authorized to act for the Trust is the “Trustee.”  While the Settlor is living, they remain in full control of the Trust and its assets, including the ability to modify its terms.

There are numerous benefits of establishing a revocable trust — it can be changed relatively easily and allows for control over property left to the Settlor’s intended beneficiaries. However, the primary advantage of using a revocable trust is to avoid a probate administration and court oversight when transferring assets after the Settlor’s death.

A revocable trust also provides a vehicle for Settlors who wish to have assets retained and managed in a trust after death for the benefit of minor or disabled beneficiaries, or for any other beneficiaries who would benefit from a third-party Trustee managing assets on their behalf.

Why do I need to deed my property into my Revocable Trust?

In Colorado, one of the primary advantages of a revocable trust is that it allows for the streamlined transfer of real estate and other trust assets to intended beneficiaries following the Settlor’s death.  To recognize this efficiency, the Settlor must transfer property into their revocable trust and stipulate in the trust agreement where that property should pass upon their death.  When the Settlor dies, the Trustee is then directed to transfer trust property to the Settlor’s intended recipients. Those intended recipients receive marketable title to the distributed assets, allowing beneficiaries to sell the inherited property immediately after receipt, if they wish.

One of the issues that typically arises for our clients is that real estate and other assets are either not transferred into their revocable trust or are improperly transferred to the trust.  It is important to ensure the proper type of deed is used, the proper language is drafted into the deed, and the procedures for both preparing and recording the deed are met.  Without all of the necessary steps being adhered to, the transfer of property into the trust can fail and the benefit of using the trust to transfer the property is lost.

Additional Considerations for Transferring Property to a Revocable Trust

Another related consideration for transferring real estate to a revocable trust is to ensure that homeowners insurance coverage reflects the trust as the legal owner of the property upon the transfer. When ownership of real estate is transferred to a revocable trust, the trust then should be listed as an “additionally insured” party on the homeowners insurance policy so there are no issues with coverage.

Finally, an additional question that comes up for clients relates to transferring real estate with existing mortgages to a living trust.  In some cases, transferring a property with an existing mortgage to another party or entity can trigger the due-on-sale clause, meaning the lender could call the loan due and payable in full upon learning of the transfer. However, under the federal Garn-St. Germain Act, transferring a property to a revocable trust where the underlying ownership does not change is an exempt transfer, meaning the lender is not permitted to call the loan due.

A revocable trust is a valuable estate planning tool – it can offer an efficient process for transferring property upon an owner’s death.  However, real estate and other assets must be properly transferred to the trust during the Settlor’s lifetime to realize the benefit of using a revocable trust.

For more information regarding establishing a revocable trust or to prepare documents to transfer your real property into an existing revocable trust, please contact me.

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