What is a Trust in Real Estate?

As a thought leader in commercial real estate, I often encounter questions about the best ownership structures for investment properties. One of the most common and versatile tools is the trust. But what exactly is a trust in real estate, and is it the right choice for your commercial real estate investment strategy?

Understanding the Basics of a Real Estate Trust

At its core, a trust is a legal arrangement where one party (the trustee) holds assets (in this case, commercial real estate property) for the benefit of another party (the beneficiary). The terms of this arrangement are defined in a legally binding document called the trust agreement. The person who creates the trust is known as the grantor or settlor.

Think of it this way: Imagine you're entrusting a valuable piece of art to a museum (the trustee) to display and protect for your children (the beneficiaries). The trust agreement outlines how the museum should manage the artwork and eventually pass it on to your children.

Types of Trusts Used in Commercial Real Estate

While there are many types of trusts, a few are particularly relevant to commercial real estate investing:

Living Trust (Revocable or Irrevocable): This type of trust is created during the grantor's lifetime. A revocable living trust can be modified or terminated by the grantor, offering flexibility. An irrevocable living trust, on the other hand, generally cannot be changed after it's established, offering potential tax advantages and asset protection.
Land Trust: A land trust is a specific type of revocable trust designed to hold real estate. It offers privacy of ownership, as the beneficiary's name isn't typically recorded in public records.
Real Estate Investment Trust (REIT): While not a trust in the traditional sense, a REIT is a company that owns or finances income-producing real estate. REITs allow investors to buy shares in a portfolio of commercial real estate, providing diversification and potential income. (e.g. Blackstone Real Estate Income Trust, Starwood Real Estate Income Trust, Pennsylvania Real Estate Investment Trust)
Delaware Statutory Trust (DST): A DST is a legal entity created under Delaware law that allows multiple investors to pool their money to purchase larger commercial real estate assets.

Advantages of Holding Commercial Real Estate in a Trust

Using a trust to hold commercial real estate offers several potential benefits:

Estate Planning: Trusts are powerful tools for estate planning. They allow you to transfer commercial real estate assets to your beneficiaries outside of probate, which can save time and money.
Asset Protection: An irrevocable trust can shield your commercial real estate investments from creditors and lawsuits.
Privacy: Land trusts, in particular, can provide anonymity of ownership, keeping your name out of public records.
Continuity of Management: A trust ensures that your commercial real estate assets are managed according to your wishes, even if you become incapacitated. The trustee can step in and handle the day-to-day operations of the property, ensuring a smooth transition.
Tax Planning: Depending on the type of trust, you may be able to minimize estate taxes or income taxes. It's essential to consult with a tax advisor to determine the best strategy for your specific situation.
Facilitates 1031 Exchanges: Trusts can be structured to facilitate 1031 exchanges, allowing you to defer capital gains taxes when selling one commercial real estate property and reinvesting the proceeds into another.

Disadvantages of Holding Commercial Real Estate in a Trust

While trusts offer numerous advantages, it's important to be aware of the potential drawbacks:

Complexity and Cost: Establishing and maintaining a trust can be complex and may involve legal and accounting fees.
Administrative Burden: The trustee has a fiduciary duty to manage the trust assets prudently, which can involve significant administrative responsibilities.
Difficulty Obtaining Financing: Some lenders may be hesitant to lend to trusts, as the ownership structure can be more complex. However, this is becoming less common as trusts become more widely used.
Irrevocability: Irrevocable trusts cannot be easily changed, which can be a disadvantage if your circumstances change.

How to Put Real Estate into a Trust

The process of transferring commercial real estate into a trust typically involves the following steps:

Consult with an Attorney: An experienced real estate attorney can help you determine the best type of trust for your needs and draft the trust agreement.
Draft the Trust Agreement: The trust agreement outlines the terms of the trust, including the trustee's powers and responsibilities, the beneficiaries, and how the assets will be distributed.
Execute the Trust Agreement: The grantor must sign the trust agreement in front of a notary public.
Transfer Ownership: A deed must be prepared and recorded transferring ownership of the commercial real estate from the grantor to the trust.
Notify Relevant Parties: Inform your insurance company, property manager, and other relevant parties about the change in ownership.

How to Dispose of Real Estate in a Trust

The method for disposing of commercial real estate held in a trust depends on the terms of the trust agreement. Generally, the trustee has the authority to sell, lease, or otherwise transfer the property. The proceeds from the sale are then distributed to the beneficiaries according to the trust agreement.

Is a Trust Right for You?

Deciding whether to hold commercial real estate in a trust is a complex decision that depends on your individual circumstances, financial goals, and risk tolerance. Consider these keywords when evaluating: commercial real estate investment, commercial real estate loans, commercial real estate financing, commercial real estate market, commercial real estate companies.

Navigating the world of commercial real estate trusts can be challenging. If you're considering using a trust for your commercial real estate investments, it's crucial to seek expert guidance. Contact our team today for a consultation. We can help you assess your needs, explore your options, and develop a tailored strategy to achieve your commercial real estate goals. We have commercial real estate agents and commercial real estate brokers that can help you find the best solutions for your situation. Let us help you navigate the complexities of commercial real estate and secure your financial future.

What is a Trust in Real Estate?