Archive for July, 2013

Using Trusts to Own Real Estate – Part 2


There are numerous possibilities for the name given to a trust. Such names are often chosen to reflect the primary function of the trust: Education Trust; Wealth Replacement Trust; Charitable Remainder Trust; Spendthrift Dynasty Trust, etc.

Since names are assigned to trusts the public can get the wrong impression. It is often assumed that a named trust is like any other consumer good, such as the name ‘car’ or ‘truck’. A person wants to buy, say, a car but not a truck. They want a Spendthrift, but not an Education Trust. Actually all trusts are just trusts. The primary thing that differentiates them are clauses written into the trusts. For example, a single clause will turn an education trust into a spendthrift education trust.

The point is not to let names become confusing. The fundamentals of trusts are simple to comprehend. First, all trusts are either inter vivos or Testamentary. Inter vivos trusts are set up while the grantor is alive and are often referred to as a ‘living trust’. The testamentary trust, on the other hand, is set up after the person’s death by authority written in the deceased’s will. All trusts will be either an inter vivos or a testamentary trust.


Inter vivos trusts are either revocable or irrevocable. Revocable means the grantor can either revoke the trust or else maintain some significant power to maintain control of the trustee or use of the trust assets. Irrevocable means the grantor totally gives up rights and powers and walks away entrusting to the trustee all of the assets in the trust, referred to as the ‘corpus’.

The government treats most inter vivos revocable trusts as grantor trusts. As previously mentioned, grantor trusts are reported on the grantor’s tax return. Irrevocable trusts have more complex tax returns. in a nut shell, they are either a simple trust or a complex trust for tax reporting purposes. These returns are best prepared by professionals.

Most investors will be dealing with inter vivos or living trusts. Trusts used to hold operational real estate will generally be revocable, grantor trusts. These trusts are more for operational purposes than estate tax planning purposes. In general irrevocable trusts will be used to deal with estate tax planning.

Depending on the client’s objective, the attorney will draft a base trust to emphasize certain objectives, such as children’s education , or a land trust. Examples would be an education trust that is an irrevocable inter vivos trust and the land trust that is a revocable inter vivos trust.


Some common characteristics of the living trust are:

Assignment - In certain cases trusts can be assigned to third parties without changing the public records. Though we do not recommend it, some real estate investors have used this feature in dealing with due on sale clauses of mortgage contracts.

Assurance – The trust may provide greater assurance that the grantor’s wishes will be met. Wills are more easily contested by disgruntled heirs and “want to be” heirs.

Avoids Guardianship of the Assets - Using a Trust the grantor/beneficiary has greater assurance that his assets will be managed in a manner prescribed by him and will be spent as he instructs in the trust document. If a trust does not exist and a guardian is appointed by the courts, then the courts and guardian make these decisions with no input from the incapacitated party. A guardianship is more expensive to administer than a trust since the Court usually requires a periodic accounting by the guardian.

Incapacitation of Trustee – If the owner of the property becomes incapacitated, managing assets can become a problem. A trust allows for an alternate trustee to step into the shoes of an incapacitated trustee without affecting management of the property.

Limited Liability – There is no significant liability protection. At best, the trust provides greater privacy as to who is the beneficiary. In most states living trusts are treated as the alter ego of the grantor. As such, liability may be attributed to the grantor.

Privacy At Death – Ownership transferred upon the death of the grantor/beneficiary of a trust is private when contingent beneficiaries are listed. Unlike a will, which is probated, a trust document does not become public record. Land trusts typically do not have contingent beneficiaries and, therefore, any property held in the trust would simply be included in the deceased’s probated estate.

Privacy While Living – Some real estate investors wisely seek privacy regarding the ownership of their real estate. They do not want their name as the owner of the public property records which would allow anyone to know how much wealth they owned in real estate and where that real estate is located. It can also cause a serious operational problem. For example, a judgment against the investor even for a small amount would give the judgment holder immense leverage diminishing the investor’s opportunity to negotiate a lower settlement on the judgment. The judgment attaches to all of the investor’s real estate. This would prohibit the investor from selling any real estate without first paying the judgment in full.

Probate – Where a trust has contingent beneficiaries listed, costs associated with probate are avoided since the trust is not probated at death.

Taxes (Income) – There is no tax benefit. The tax information is reported on the grantor’s personal tax return.

Taxes (Estate) – The Irrevocable trust, Insurance trust, Bypass trust and Marital Deduction trust are the most common trusts used to save estate taxes. Note that an irrevocable trust is a book trust and can be used for many purposes, such as the trust names indicate, Charitable Remainder Trust and Spendthrift Dynasty Trust. The revocable land trust saves no estate taxes.

Dyches BoddifordDyches Boddiford is a full time investor who speaks from experience in a variety of real estate areas. His seminars and conferences are intended for the serious real estate investor, though entrepreneurs in other businesses or investments will find his training helpful as well.

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Got QuickBooks Questions? We’ve Got Answers!

It is the goal of this column to answer questions about QuickBooks and how it is used in the REI arena. Know how to record transactions in the proper way and have your set of books in good shape when it comes time for taxes. Submit your questions to and we will do our best to get them answered here in this column.

Q: I just started to use QuickBooks and when I look at my chart of accounts I found an account called “Opening Balance Equity”. I did not create this account. How did it get there and what is it used for?

A: The account “Opening Balance Equity” is not a General Accounting Practice account; it is an account that is generated by QuickBooks specifically for setting up specific accounts that will have a beginning balance. For instance: bank accounts, credit card accounts, mortgages and several other types of accounts. QuickBooks “assumes” that the brand new user may not know where to put the off-setting entry when setting up a bank account or other type of account with an existing beginning balance. It allows the user to get their accounts set up and begin using QuickBooks. Later, your CPA will come along and re-class those amounts to their proper place in your books. This account should always have a zero balance.  You should never post anything directly to this account.

Q: I use “classes” to identify the different properties I have and also to separate Residential from Commercial properties.  I know how to generate an Income Statement by class.  I would also like to generate my Balance Sheet by class but I don’t see where in the list of reports that I can do that. Where do I go to generate that report?

A: If you are using QuickBooks Pro you can run the Income statement by “class” but you cannot run a Balance Sheet by “class”.  If this is something that is very important to you and your business to see on a Balance Sheet you may want to upgrade to a Premier version of QuickBooks – the Premier version and above are the only ones that can run the Balance Sheet by “class”.

Q: I have a father and son team working for me who have the same name but the son does not go by “junior” and does not want it on his pay checks. How can I make the “same name” different and still produce a legal check for the son?

A: You can append the word “SON” in curly brackets (“{}”) after the name of the “junior” payee name.  When you set him up in the file you will see a place in the set up window that says: “Print As” and has a window for you to type in the name how you want it to print on the check.

Of course the father may want to go with the designation of “Sr.” after his name and that will also solve the issue.

Q: I have a sixteen year old part-time employee who has just applied for his Social Security card. He has been told he will receive the card in about 8 or more weeks.  I will have provided him with several pay checks by that time and am worried that when it is time to run W-2’s I still won’t have it for the file.  How do I handle this at that time?

A: When you set up the employee who has no Social Security number at that time you can enter 000-00-000 in the space where you would put the number – then the employee record will display “Applied For” as the social security number on the W-2 if it comes to that time.  If you receive the number prior to running the W-2’s then edit the employee’s record prior to printing.

Karen BershadKaren Bershad is The Small Business Advisor. Most small business owners have a challenge handling all the different areas of running a business. The accounting can be a challenge, particularly if the software seems overwhelming. The Small Business Advisor is what you may need to get you to the next level of your business. We work at your office or provide off site assistance in getting things under control by providing a wide variety of services that are specifically for the small business.

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