“I’m the trustee for my late brother’s living trust. His residence is valuable and steadily appreciating. Can I hold on to it and distribute the rent to the beneficiaries? What are the pros and cons?”
When deciding whether to sell a house that is owned by a trust, or rent the house to a tenant, it is a good idea to ask the following questions.
1. What Does the Trust Say?
What does the trust document say about the house after the grantor dies? The grantor is the person who created the trust and the trust is an expression of his or her wishes about their property after their death. Did your late brother want the house to be distributed to his beneficiaries outright after his death, or did he wish for his property to be held in trust and managed by the trustee. If the trust is confusing or hard to understand, it is a good idea to consult with an attorney. You want to make sure the trust gives you the authority to keep the house and rent it out.
2. Who Are the Trust Beneficiaries?
In most cases the beneficiaries of a trust are easy to identify. It may be your brother’s children, who are all living and adults. But if the trust says that the beneficiaries are your brother’s siblings, it may not be clear if this includes step-siblings or half siblings. In most states, a trustee has the duty to provide a copy of the trust and a statement of the trust assets to the beneficiaries. As trustee, make sure you know the laws of your state and comply with those laws.
3. Is Keeping the House a Prudent Investment? Document Your Decision.
A trustee is responsible for managing the assets of a trust prudently. Typically, a trustee will make diversified investments that take into account the income needs and risk tolerance of the beneficiaries. Develop an understanding of the beneficiaries’ financial needs and whether there are any potential conflicts between the beneficiaries. If keeping the house will create conflict among the beneficiaries, it may not be a good idea.
You may wish to pay for a professional appraisal and a rent analysis so that you understand the value of the house and how much you should charge for the rent. If a trustee sells a property for less than its worth, or rents it for less than the market rent, it may be a breach of the trustee’s duties.
A trustee should also consider the risks of actively managing a home. Is there enough cash to pay the taxes, insurance and maintenance if the home is vacant, or the tenant damages the property? If there is a long-term lease on the property, and the real estate market changes or the needs of the beneficiaries change, the trustee may not be able to quickly sell the property to halt a decline in value or raise cash for the beneficiaries’ needs.
On the flip side, if the property is quickly appreciating in value and generating a lot of income, the risks may be worth it. The key for any trustee is to think through these questions and document the facts and circumstances that led to the decision. If your decision is ever called into question, documenting your decision can help show that you acted prudently.