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Trusts as Real Estate Holding Entities in Estate Planning Can Yield Benefits During a Lifetime By John R. Blake, Jr., Esq

Friday, May 30, 2003 - By: John R. Blake, Jr.

John R. Blake, Jr., Esq.

When property owners turn their attention to estate planning, a review of their real estate holdings and the manner in which title to their properties is held can yield beneficial results not only in terms of avoiding probate or succession planning, but also in terms of a present benefit from changing the manner in which title is held to a more advantageous form.

In some cases, a review of a person's real estate holdings may reveal an undesirable situation, such as where investment rental properties are held in an individual's name, thereby exposing the property owner to personal liability. In such a case, estate planning provides an opportunity to change the form of ownership into a more protective structure.

Inter vivos estate planning trusts, either revocable or irrevocable, are a common vehicle for purposes of removing assets from probate. If the real property is to be transferred to an estate planning trust, the transfer is accomplished by a deed to the trustees of the trust, not the trust itself. However, there are some title considerations that must be taken into account when using an estate planning trust as a real estate holding entity.

All of the New England states permit the use of an inter vivos estate planning trust as a grantee of real estate, but the required level of disclosure of the nature and terms of the trust relationship varies amongst those states. New Hampshire, for instance, allows the identification of the trust relationship to be recited in the grantee section of the deed into the trustee(s). This is convenient for those who want to keep the terms of the inter vivos trust, which may contain personal or family details that are best kept private, confidential rather than part of the public record. When the property is conveyed out of the trust, either in the administration of the trust, or in connection with its dissolution, the trustee can certify, either in the deed or in a separate instrument, as to his authority to do so, and the grantee is entitled to rely on such statement, pursuant to the Uniform Trustees Powers Act contained on NH RSA 564-A. Connecticut follows a similar scheme in Ct. G.L. c. 821, §47-20, as does Maine.

Massachusetts had taken a somewhat different approach. Until recently, Massachusetts required that a declaration of trust be recorded prior to or at the time of the recording of the deed into the trustee. Failure to record the declaration of trust would result in a failure of the intended arrangement, with the named grantee taking title individually rather than as trustee.

One method Massachusetts practitioners use to avoid the recording of the estate planning trust is to record a nominee trust to be the record title holder to the property, with the estate planning trust owning 100 percent of the beneficial interest of the nominee trust. A nominee trust, being a pure principal/agent relationship rather than a true trust,  typically does not contain any sensitive terms, and is therefore preferable for recording. However, under Massachusetts case law, a trustee of a nominee trust can be held personally liable in tort for injuries suffered by a third-party while on the trust's property (see First Eastern Bank, N.A. v. Jones, 413 Mass. 654, 602 N.E.2d 211 (1992))  Trustees of a true trust, on the other hand, have the liability protections afforded them under M.G.L. c. 203, §14A.

With the addition of M.G.L. c. 18, §35, Massachusetts now permits the recording of an affidavit by the trustee setting forth the provisions of the estate planning trust relevant to the trustee's power to deal with real estate owned by the trust, in lieu of recording the entire declaration of trust. The affidavit is binding upon the trustee in favor of third parties dealing with the trustee, such as a bona fide purchase for value in a real estate transaction. Another benefit of utilizing the affidavit rather than a nominee trust is the benefit of M.G.L. c.203, §14A, as referenced above.

The recent Massachusetts statute tracks a similar statute in Rhode Island, R.I.G.L. §34-4-27, which also permits the recording of an affidavit, or memorandum of the trust's terms rather than the declaration itself.

Vermont, like New Hampshire, does not require that a declaration of trust be recorded, but the trustee customarily does provide a trustee's certification as to the provisions of the trust governing the trustee's authority to deal with real estate owned by the trust.

One potential trap to avoid in conveying real property in conjunction with estate planning is to overlook the existence of an owner's title insurance policy insuring the owner's interest in the property. As stated in the jacket to the standard ALTA policy, coverage ceases upon a change in ownership of the property. A conveyance in conjunction with estate planning may inadvertently void coverage, especially where the property owner has an insurable, but not marketable, title to his or her property. If a property owner undertakes the effort and expense to have an estate plan prepared, the owner should also take the extra step of obtaining, at the time of the transfer to the trust, an endorsement to his or her  existing owner's policy reflecting the change in ownership to ensure the policy's benefits continue.