Should you use a trust to hold your income producing real estate?

There are different types of trusts, but this article will only be about putting Income Producing Real Estate (IPRE) into an Irrevocable Trust.

An Irrevocable Trust is a trust that can’t be modified or terminated without the permission of the beneficiary. The grantor, having transferred assets into the trust, effectively removes all of his or her rights of ownership to the assets and the trust.

Irrevocable Trusts are great tools for estate planning. A trustee, other than the grantor or beneficiary, is appointed to manage the affairs of the trust. It gives the grantor the ability to make stipulations on when and how the beneficiary uses the income and assets even after the grantor has passed away. It also allows the grantor the ability to use their lifetime gift tax exemption.

For 2013 that is $5,250,000 and if you are married each spouse can put in the $5,250,000 or a total of $10,500,000. If a married couple has assets over $10,500,000 then they need to make sure they use the entire amount.

If a husband passes away he can give an unlimited amount to his wife, but when the wife passes away she will only have $5,250,000 to use, so if the estate is $10,500,000 then $5,250,000 will be hit with the estate tax which is 40% or $2,100,000.

Wouldn’t you prefer your children, beneficiaries, or a charity to have that $2,100,000 instead of the federal government? Another benefit is the income generated inside the trust is passed to the beneficiary’s income tax rate if the income is actually paid out to the beneficiaries.

The draw backs of an Irrevocable Trust are if the income inside the trust is not paid out to the beneficiary the income tax rates are very high. For 2013 all taxable income over $11,950 is taxed at 39.6%. The irrevocable gift is just that, irrevocable, so the grantor can’t take back the assets without the beneficiary’s permission.

Once the grantor passes away the beneficiary does not get a step up in basis, because the Trust owns the property and not the grantor or the beneficiary. There are several articles claiming that 1031 Exchanges can’t be done inside of a trust.

In the opinion of Lifestyles Unlimited® an individual should not put their IPRE inside of an Irrevocable Trust. The tax benefits of IPRE far outweigh the benefits of the Irrevocable Trust. Put municipal bonds, stocks, bonds, and other liquid assets into an Irrevocable Trust, but not IPRE.

You should consult your Estate Planning Lawyer and CPA to see what it right for your situation and your particular Jurisdiction.

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