As a trustee, you may be required to distribute real property from a trust to a named beneficiary. These types of distributions often come with unique issues requiring certain considerations be made before that real property is actually distributed. We are here to discuss how a trustee should handle real property properly.
What do the beneficiaries want to do with the property?
Before a trustee can determine how to handle the real estate, they must first figure out what the beneficiaries want to do with the property. A beneficiary may want to live on the land, but it is just as common for a beneficiary to want to sell the property or rent the space. Once this is determined, the trustee will need to answer a few other questions. For example, if there are more than one beneficiaries entitled to a portion of the property, then the trustee needs to find out whether all of the beneficiaries live in the same state
Can the beneficiaries afford the real property?
Another issue that must be considered is whether the intended beneficiaries will be able to afford to own the property. In other words, real estate ownership requires payment of property taxes, and the trustee must determine whether the new owner can afford those taxes. Depending on the nature of the property, there may be other fees or expenses.
For example, if you are dealing with a family cabin, there will likely be utilities and maintenance fees associated with the property. Although provisions may be made for these expenses in the trust, that is not always the case. A trustee must be prepared to find an acceptable solution depending on the beneficiary’s specific situation. In most cases, it is wise for a trustee handling real property distributions to consult with one of our trust attorneys.
Creating a Limited Liability Company may be useful
Another situation that can arise is how to handle inherited rental property. Especially when there are several beneficiaries being given an interest in the property, the use of a limited liability company (LLC) may be a good choice. In fact, a limited liability company can also be very helpful in administering a trust as well as an estate. That particular business entity is useful because of its flexibility in allowing a trustee to invest and manage the real property assets and protect the value of the property.
Handling real estate that produces income
Certain types of real property, such as rental property or farms, can produce income. In that situation, it is a good idea to create a limited liability company which will actually own the property. Doing it this way is better because you can avoid many of the problems that come with owning property as tenants in common.
If the rental property is owned by an LLC, the beneficiaries will instead have a membership interest in the LLC. As such, the owner/beneficiary’s rights and obligations are controlled by a formal written agreement. That agreement can include provisions regarding the distribution of rental income and how an individual beneficiary’s membership interest in the LLC can be sold.
Make sure you are fulfilling your fiduciary duties as trustee
One of the basic requirements of any trustee is to always manage the trust and its assets in a way that serves the interests of the trust beneficiaries. Trustees are also required to comply with the regulations set out by the Uniform Prudent Investor Act, which is a law that protects beneficiaries from the improper investment choices of trustees.
This particular law makes it so that trustees can be held liable for any investment losses, missed opportunities, or lost profits that beneficiaries could have received had the trustee been more prudent with investment choices. So, be sure that you fulfill your fiduciary duties. If you have any questions or concerns, contact one of our trust attorneys for advice.
Ask for professional assistance if you are unsure about what to do
In light of the significant responsibility of a trustee, it is important to seek advice or assistance from the right professional if you need to, particularly when it comes to investments. In fact, management of investments is one of the most highly litigated legal issues related to trust administration.
In cases where trust beneficiaries disagree with how a trust was administered and then file a lawsuit, dealing with that issue can be costly and time-consuming. Consequently, trust assets may be wasted on legal fees in defense of that suit.
Download our FREE estate planning checklist today! If you have questions regarding real estate trust property, or any other trust administration issues, contact us at the Northern California Center for Estate Planning and Elder Law for a consultation, either online or by calling us at (916) 437-3500.