What is the difference between a trust and a life estate? And is it easier to sell a home that’s held in a trust or in a life estate? How do I find out if I am listed on a trust?
Q: Not really a question as much as a comment on your story about selling a property inside a trust and what is the difference between a trust and a life estate. As a Realtor for 34 years I’m not a fan of trusts, so I’m disappointed in your recent response to a question about selling a property inside a trust.
A home held in a trust is not that easy to sell or for heirs to cash the check after a closing or settlement. A life estate deed is by far the easiest way to go. The property is controlled by the owners during their life. They can sell or do whatever they choose.
Immediately after their passing, the property automatically goes to the person or persons listed in the life estate deed. A deed also trumps a will (I know this from personal experience).
I don’t claim to be an attorney or give legal advice, but I just know with my experience as both an heir and a Realtor I’d much prefer the life estate deed anytime!
Is a Life Estate Better Than a Trust?
A: We’re sorry to disappoint you. We’ve never found any issues or problems with sellers using trusts to sell their homes. Once the property is in a trust, most settlement agents and title companies only need to verify that the person signing on behalf of the trust is authorized to sign.
Most frequently, the person signing is the person that set up the trust in the first place. He or she will have a copy of the trust and as the trustee and beneficiary under the trust, he or she shouldn’t have any problems conveying ownership to a buyer.
Now if the trustee/beneficiary has died, the trust document should name a successor trustee. If the successor trustee has a copy of the trust, there shouldn’t be any issues selling the property to a subsequent buyer.
We’re not sure what problems you’ve seen. But who gets the proceeds from the sale could cause an issue at times.
Potential Drawbacks of Selling a Home in a Trust
With the number of real estate transaction fraud growing, title companies and settlement agents generally prefer to issue the proceeds check from the sale of a property directly to the owner. In the case of a trust, the owner is the trust and the title company or settlement agent may request that the proceeds check be made payable in the name of the trust.
Some settlement agents and title companies will allow the trustee to direct them to issue proceeds checks to a different person or persons. In circumstances where the check is made payable to the trust, we can understand how that could cause a problem for the seller.
With advance planning, and working with the settlement agent or title company, you can solve that issue without causing problems at settlement or closing. Most likely, you’ll need to deliver direction to the settlement agent well in advance of the settlement, letting them know the name of the person that should be on the proceeds check from the sale. Usually, the proceeds check is made out to the successor trustee or successor beneficiary. With a copy of the trust agreement and other documentation for the closing, the settlement agent should respect the direction to disburse funds to the successor trustee or beneficiary, as may be requested.
What Is the Difference Between a Trust and a Life Estate?
All that said, we understand that you think a life estate is better and easier. We can respect that choice. However, once the owner of the property conveys her interest to someone and keeps a life estate, she loses the flexibility to sell the property or make any changes later on. You mentioned that the life estate owner can still sell the property, but that is incorrect. She would only be able to sell if the fee owner agreed to the sale, as she only has a life estate that gives her the right to the use of the home during the rest of her lifetime, but is not the actual owner of the property.
We’ve seen things change due to circumstances beyond anyone’s control. The wishes a person has on day one may differ a year later and if the owner decides they want or need money from the property, they no longer can use the property as they only have a life estate and the true owner is someone else. If the owner marries and wants the spouse to live in the property after her death, that may occur with a life estate as her interest ends when she dies.
Trusts are just one way of dealing with properties and if you prefer the life estate method, you’re free to tell people to use it. But we would have to advise them of the many pitfalls that may come up when using a life estate.
You should also know that the terms of the trust are not controlled by the last will and testament of that person. In fact, one of the primary reasons to use a trust is to avoid probate and issues relating to a will. Thanks for your comment.
How do I find out if I am listed on a trust?
You will need to ask the trustee or the beneficiary if you are actually listed on a trust. They may not want to tell you, in which case you would not discover this until there is an event (such as a death). At that point in time, if you are listed as a beneficiary, the trustee or successor trustee should let you know.