How to put property in a trust: Key steps and pros & cons

Smart CRE investors don’t just buy and sell property—they protect it. And one of the most effective ways to do that is through a trust. A trust helps minimize how much money the government can take from your estate and heirs when you pass away. Depending on the size of your property portfolio, that could be a large sum.

What is a property trust?

A property trust is a legal entity to which you can transfer ownership of real estate assets. A trustee then manages the trust on behalf of beneficiaries, following the instructions laid out when the trust was created.

As a real estate investor, creating an irrevocable or revocable trust—and transferring property into it—can be a great way to protect assets against liabilities, minimize estate taxes, and manage multi-property portfolios. 

Did you know? Properly funded trusts can bypass probate entirely, shaving 4-6 months off your heirs’ timeline to receive their inheritance and keeping your transaction details out of public court records. 

Property trust vs. family trust

A family trust is a trust used to manage family assets, which may or may not include real estate. In contrast, property trusts exclusively hold real estate and may have purposes beyond preserving family wealth, such as structuring ownership for co-investors. 

Property trust vs. direct inheritance

A direct inheritance is when assets transfer directly from a deceased’s estate to heirs without an intermediary. This is often faster but less flexible and private than setting up a property trust, which can bypass the probate process and disburse funds gradually according to set criteria.

Property trust vs. will

A will (aka a last will and testament) is a legal document outlining how you want your assets to be distributed after you pass away. This can include real estate, but it only goes into effect after you die, while a trust is effective immediately upon signing and funding it.

Steps for putting property in a trust

With the right legal help, you can put a property in a trust by following these steps:

Step 1: Choose a trustee

First, choose a trustee. This is the person or entity responsible for managing the trust according to the instructions set out in the trust deed. They could be a trusted individual, a third-party organization such as a bank, or an arm of your business (though this may limit any tax benefits). 

Name a backup trustee or outline a process for appointing one in case the original trustee can no longer fulfill its duty. Of course, you must first get the consent of any trustee you appoint.

Step 2: Choose beneficiaries

Next, choose the trust’s beneficiaries. Who will benefit from the equity and financial returns generated by the property held in trust? These could be individual or institutional investors, other businesses, or even your own CRE company (though this may limit any tax benefits).  

Step 3: Create a trust deed

Hire an estate planning attorney to draft a trust deed outlining the trust’s appointed trustees, beneficiaries, and terms. This includes how and when funds will be distributed. Be sure to get your estate planning attorney’s advice on how to structure the trust to maximize tax benefits and asset protections and minimize liabilities. 

Step 4: Transfer the property and pay legal fees

To officially transfer the property to the trust, sign a deed transferring ownership from your business to the trust. Then, file the signed deed with the county recorder where the property is located. You’ll need to pay a recording fee, which varies by county, on top of any other legal and transaction-related costs: title insurance, property insurance, attorney fees, and potentially a commercial property appraisal to assess the asset’s fair market value before transfer.

Pro Tip: Save days of follow-up and sidestep lender headaches by coordinating title, insurance, and loan consents in one go: 

• Secure a CLTA “gap coverage” policy that back‑dates to your deed recording date—this protects you for any defects during the title vending process.
• Negotiate a Non‑Grantor Trust Rider with your mortgage lender before you sign the deed to avoid triggering the due‑on‑sale clause.
• Coordinate your hazard insurance endorsement and declarations page update to take effect the same day the deed records, ensuring no lapse in coverage.
• Bundle your county recording fees and any transfer tax filings into a single electronic package to reduce per‑transaction costs and administrative friction.

Step 5: Ensure the trust is properly administered

Once the trust is funded, ensure the trustee administers it properly. This involves maintaining transparency and legal compliance, keeping detailed records, and regularly communicating with beneficiaries and other stakeholders. 

4 most common types of trusts

In real estate, there are four main types of trusts: 

• Living trust: A living trust is one created while you’re alive. It can be a revocable trust (meaning you can change or revoke the trust after it is created) or an irrevocable trust (meaning you can’t change or revoke the trust once created). 
• Testamentary trust: A testamentary trust is a trust created through a will and is only activated after you pass away. It’s a great way to ensure your estate is distributed according to your wishes. 
• Land trust: A land trust is a type of living trust designed specifically to hold real estate. Many land trusts are used for conservation or development purposes. 
• Real Estate Investment Trust (REIT): A real estate investment trust or REIT is a legal structure that lets you pool capital from multiple investors to own, operate, and finance a portfolio of income-producing real estate. If publicly listed, REIT shares can be traded on a stock exchange, giving you access to broader capital markets and offering investors liquidity similar to stocks.

Pros and cons of putting your property in a trust

Of course, putting your property in a trust has its benefits and drawbacks:

Pros

• Estate planning: The right trust can ensure the smooth transfer of real estate to your heirs when you pass away, often while avoiding a lengthy and costly probate process.
• Asset protection: Some trusts can shield your property from creditors or legal judgments, which can be useful for business owners at a higher risk of facing litigation.
• Tax savings: A trust can help you minimize potential capital gains, inheritance, and estate taxes.
• Continuity of ownership: A trust enables your real estate portfolio to safely trade hands between owners without disrupting its management or income. 

Cons

• Legal fees: The legal costs to set up and maintain a trust can be significant, especially for complex trust structures. 
• Loss of control: With irrevocable trusts, you generally can’t change their terms or revoke funds once they are set up. In other words, they are permanent. 
• Lender restrictions: Some lenders may view trust-held properties differently and may require additional documentation or guarantees.

Challenges of managing a property trust

Now that you understand the pros and cons of putting your property in a trust, here are some challenges to watch out for: 

Best practices for managing a property trust effectively

To get the most out of a property trust, here are some best practices to follow:

• Choose the right trust type: Depending on your needs and goals, you may want a living trust, testamentary trust, or land trust. Consult a lawyer to learn more.
• Ensure legal compliance: Keep up with timely tax filings, proper accounting, and other legal requirements for your property trust.
• Review and update the trust periodically: As your financial situation, laws, and family dynamics change, you may need to adjust the terms of revocable trusts.

Tax implications of placing your property in a trust

Placing a property in a trust can have a few different tax implications.

First, it could trigger a capital gains tax if the property has appreciated. Using recognized real estate valuation methods can help you determine the property’s fair market value at the time of transfer. However, you may be able to minimize this tax by opting for an irrevocable trust.

Second, transferring property to an irrevocable trust may also trigger a gift tax. 

Lastly, any income that the trust-held property generates is taxed. In a revocable trust, this tax falls on the grantor. In an irrevocable trust, the trust itself is often responsible for the tax.

Impact of recent legislative changes on property trusts

Commercial real estate regulations and laws related to property trusts can change. Here are some to be aware of:

Per Rev. Rul. 2023-2, a step-up in basis for assets in irrevocable trusts only occurs if the assets are included in the taxable estate of the original owner or grantor. This means that some trust-held assets may be subject to higher estate taxes than before. 

Furthermore, the Internal Revenue Service (IRS) regularly adjusts tax-related thresholds for inflation. Consult a tax or legal professional and use an estate planning tool to know how these could impact your property trust.

For real estate investment trusts (REITs), the U.S. Treasury Department increased the look-through threshold, which determines whether a REIT is domestically controlled, from 25% to 50% and granted a 10-year exemption for certain existing REIT structures.

Conclusion

Ultimately, putting your property in a trust is a strategic move. It can safeguard your assets, minimize your estate taxes, and streamline estate planning. However, be mindful of the upfront costs to transfer ownership and consult a legal professional to ensure you structure the trust in a way that meets your real estate investing needs and goals. 

While you’re at it, invest in a robust investment management platform to oversee your trust-held real estate from a central online dashboard.