ASSET PROTECTION: Homestead v Trust

By: William Rosa | Partner
Massachusetts-Homested-Trust-Real-Estate I had previously blogged relative to the Massachusetts Homestead Exemption and the importance of having one in place in order to protect the equity which you may have in your primary residence.  The alternative to the Homestead could be the use of a Trust.

In its simplest terms, a Trust separates the legal title holder of real estate (the “Trustee”) from the true owner of the real estate (the “Beneficiary”).  A Declaration of Trust and a Schedule of Beneficiaries is executed, and a copy of the Declaration of Trust, or, in the alternative, a Notice of Trust, is recorded with the Registry of Deeds where the property lies.  The Schedule of Beneficiaries is not recorded with the trust document and, therefore, the “true owner” of the real estate is not known to the general public.

A Trust, as opposed to a Homestead, can be used for both a personal residence and any investment or other property that you may own.  Once the trust instrument is executed and recorded, the only information available to creditors at the Registry of Deeds as to the ownership of the property is the name and address of the Trustee.   The trust instrument sets forth the obligations of the Trustee as relates to the property.  The Trustee holds the property for the benefit of the Beneficiaries.

Massachusetts has a unique type of Trust called a Nominee Realty Trust and is one of the few, if only, states that recognizes this type of Trust.  Under a Nominee Realty Trust, the Trustee, while holding legal title, has no authority to deal with the Trust property unless he or she is directed to do so by the Beneficiaries.  In other words, events such as the sale of the property, mortgaging of the property, granting easements over or accepting easements on behalf of the property, and the like would only be allowed once the Trustee has been empowered to do so by the Beneficiaries.

The primary benefit of using a Trust, as opposed to a Homestead, is that the true owner of the property is not known to the world at large.  Should a Beneficiary become involved in a lawsuit, it would be difficult, if not impossible to ascertain whether or not the person owns an interest in the property.  Unfortunately, many family nominee trusts name one or more of the members of the family as Trustee. This practice gives the world some indication that the family may have an interest in the real estate.  Typically, in this scenario, the husband or wife serves as the Trustee and the Beneficiaries are the husband and wife or adult their children.  The use of an independent Trustee (as opposed to a family member) is helpful in avoiding liability; however, it does then involve a third party who may wish to be compensated for his or her involvement as Trustee.

In order to reap the benefits of this type of ownership, the Trust must observe certain formalities relative to trust assets; including, but not limited to, the use of a Trust bank account.  If an individual Beneficiary pays the taxes, mortgage payments, etc., through their private account, then much of the benefit of the Trust is lost since a plausible argument can be made that it is not a Trust, merely a device to avoid liability.  If it is a residence of the Beneficiaries, the customary way to deal with this issue is to have the Beneficiaries issue a check to the Trust for “rent” and that money would then be used to pay the bills associated with the property as set forth above.  This simple distinction goes a long way in protecting the property from attachment.

From a tax perspective, the most customary treatment for the property is that the income, deductions and any tax consequences are passed along to the Beneficiaries’ personal tax returns, by an attached schedule, in proportion to their ownership interest.  It is not necessary for the Trust to file a separate tax return as would be the case for an LLC or corporation.  It is also not necessary to obtain a tax ID number for the Trust, although many accountants do recommend it for ease of record keeping.

While more expensive than a Homestead, and requiring additional bookkeeping, a Trust is a very good device to protect properties other than one’s primary residence.  A Trust is also not subject to some of the exemptions of the Homestead Act.  For a person who is engaged in activities which may subject them to liability, it is an excellent device to shield liability and it does not carry with it the continuing expense of an LLC or corporation in terms of annual filing fees, minimum tax due, and the like.  It is certainly a devise that property owners should inquire about, especially for investment type properties where lawsuits may come from tenants or other third parties.

Like a Homestead, a Trust is not a substitute for homeowner’s insurance and liability limits should be discussed with your insurance professional. If you have any questions or would like assistance in filing a homestead or trust, please call the attorneys at Wynn & Wynn, P.C. at 1.800.852.5211 or request a free consultation.