A trust is a legal instrument in which the person setting up the trust gives another party, known as the trustee, the right to hold title to property or assets for the benefit of a third party. Some trusts are set in stone as soon as the ink on the signatures dries, but a grantor can back out of a revocable trust at any time before their death.
Many states, including New York, allow revocable trusts, also called revocable living trusts. These are utilized so frequently as the center of a person's estate plan that they are sometimes referred to as "will-substitutes." It is entirely possible to transfer real estate or almost any other asset into a revocable living trust in New York.
What Is a Trust?
Some people associate trusts with the idle rich and "trust fund babies." But these legal instruments are actually very versatile and can be used for a variety of purposes, including protecting assets and directing them into the right hands in the present and in the future.
A trust creates a fiduciary relationship in which an individual – termed the grantor or trustor – assigns the right to hold title to some of their property or assets to another party, known as the trustee. The trust assets are held for the benefit of one or more named beneficiaries.
Types of Trusts
There are six broad categories of trusts, and one type of trust will generally fall into more than one category.
- Funded or unfunded.
- Living or testamentary.
- Revocable or irrevocable.
A trust is little more than a legal document while it remains unfunded. Unfunded means that the grantor created the trust, but did not transfer any assets into it. When assets are transferred, the trust becomes funded.
A living trust is one that goes into effect during the grantor's lifetime, while a testamentary trust goes into effect at their death. Testamentary trusts are always irrevocable, and all trusts are irrevocable after the grantor dies. A living trust, on the other hand, can be either irrevocable or revocable.
New York State Living Trusts
As described above, a living trust goes into effect during the lifetime of the person creating the trust. In New York, living trusts are often used to avoid the probate process, a court-supervised distribution of estate assets after a person's death. Probate can be both time-consuming and expensive.
Many New York state residents use living trusts to provide for themselves while they are alive, then transfer property ownership when they die. The grantor can name anyone – themselves, a family member or a stranger – as a beneficiary.
These are examples of two common ways living trusts are used:
- An individual sets up a trust funded with income-producing assets naming themselves as beneficiary during their lifetime, then having the income go to a family member when they die.
- An individual has an illness that is likely to disable them and sets up a living trust, naming themselves as both trustee and beneficiary while they remain competent, then name someone to replace them as trustee when they are too ill to continue managing the assets.
After the grantor's death, in both examples, use of the property or income from the trust passes to their beneficiaries without the need for probate.
Irrevocable vs. Revocable Living Trusts
When a grantor creates a New York living trust, the trust must be funded to be immediately effective. That means that the grantor places assets into the trust while they are alive. If a piece of real estate is to be a trust asset, the grantor must transfer it to trust ownership. In New York this means executing a new deed so that the property is held by the trust.
If the grantor of a living trust wants to make the trust irrevocable, they must include a statement in the trust document that it cannot be altered, amended or revoked. Note that New York law does allow amendment or revocation of this type of trust, but only under specific and very limited circumstances. A statement that the trust can be modified or revoked makes the living trust revocable and easy to change.
Advantages of a Revocable Living Trust
A revocable living trust is used generally to keep assets out of a probate estate. Trust assets pass under the terms of the trust document, not under the terms of a will. That means that they will not be held up in a lengthy probate procedure. The beneficiaries listed in the trust will immediately be able to access the trust income or assets, depending on the trust terms.
This type of trust is also useful as an asset management tool in the event of incapacity of the grantor. The trustee can maintain the grantor's assets, pay their bills and manage their affairs without the need for a guardianship proceeding.
In addition and perhaps most important, a revocable living trust offers a grantor the most control over their assets. The option to change or revoke a trust is very appealing to many.
Disadvantages of Revocable Living Trusts
A revocable living trust in New York has the great advantage of allowing the grantor to change their mind about the trust or its terms during their lifetime. It's also important to understand some of the disadvantages of a revocable trust. The primary disadvantage is that a revocable trust will not shield the grantor from estate or income taxes.
Estate tax rates in New York range from some 3 percent to 16 percent, but the threshold is quite high, at over $6 million in 2022. Anyone in that category will want to know that assets placed in a revocable living trust are considered part of the grantor's estate when they die. Assets placed in an irrevocable trust are not.
This is also true for income tax purposes. The grantor of a revocable living trust is treated as the owner of the trust for income tax purposes. They are required to report all trust income on their personal return. Irrevocable trust income is reported on a trust tax return, not the grantor's tax return.
Creating a Living Trust in New York
Trusts are creatures of state law, and the rules and formalities required to create a revocable trust differ among states. In New York, there are two, alternative ways to execute a revocable trust:
- The trust can be signed by the grantor (and, if applicable, the other trustee or trustees) in the presence of two witnesses, or
- The trust can be signed by the grantor in front of a notary public, the favored method of execution when the trust is expected to hold real property.
New York law also requires formalities for the effective transfer of property to a revocable trust. While some states permit assets to be transferred by a simple mention in the trust document, New York is not one of them.
Treatment of Assets if Formalities not Met
If the grantor intended for assets to be transferred to the New York trust, but proper formalities were not observed, the assets will be treated as part of the probate estate when the grantor dies. This means that they will pass under the grantor’s will or go to their intestate heirs if they left no will, rather than pass to the trust beneficiaries named in the trust.
In New York, an effective transfer requires actual property transfer. For example:
- Securities only are transferred by re-registering them in the name of the trust.
- Real property must be transferred by executing a deed to the trust.
- Personal property must be transferred by executing a separate assignment that adequately identifies the property being transferred.
Note that, in New York City, some apartment cooperatives do not permit a transfer of shares to a revocable trust. Others may require specific change of ownership agreements, trust terms or other procedures to effectively register the cooperative stock and lease in the name of the trust.
Legal Advice Recommended
Given all of the requisite formalities required to set up a trust in New York, and the regulations regarding how property must be transferred to a trust, it is a good idea to consider getting legal assistance in preparing a revocable trust document. On the other hand, an individual with a legal background or trust experience can find forms online to use to create their own trust.
Selecting a Trustee
Many individuals who create a New York revocable trust name themselves as both the trustee and the beneficiary. That means that they can both manage the trust assets (as trustee) and benefit from them (as beneficiary) during their lifetime. Some, however, prefer to name another party to be trustee and manage the assets. In this case, it is critical to understand the importance of the trustee’s role.
In New York, a trustee's legal duties include:
- Managing the assets of the revocable trust during the life of the grantor and after the death of the grantor, as long as the trust exists. This is no small matter, depending on the contents of the trust. It can involve making long-term property management and investment decisions.
- Manage the trust bank account.
- Maintain accurate and up-to-date records for the trust.
- Review and pay trust bills.
- Distribute the trust assets as specified in the trust, that is, at the time indicated for their distribution and to the beneficiaries listed.
Transferring Real Property to a New York Trust
Several steps must be taken to transfer real property to a New York revocable trust. The initial step is to create the trust by working with an attorney and drafting the trust document. Recall that the trust must be signed by the grantor and, if a different person, the trustee, and witnessed appropriately in order to become a legal revocable trust.
The next steps generally are:
- Obtain warranty deed transfer forms from the county land use or land recording office where the real property is located, and the real property transfer form from the New York Department of Taxation and Finance.
- If there is a mortgage, contact the mortgage lender to obtain the lender’s consent to transfer the real estate title to a trust. Failure to do this can result in the lender accelerating the loan and demanding full payment.
- Fill out the deed transfer form. Be sure that the new title includes the name of the revocable trust for a proper transfer. The grantor should include their full legal name and sign the deed before a notary.
- Submit the deed transfer forms (signed by the grantor and the trustee) with copies of the signed revocable trust, mortgage lender’s consent documentation and filing fees with the county recorder's office in New York state.
- Investopedia: Trust
- New York City BAR: Living Trusts—Revocable & Irrevocable
- New York State Bar Association: The Purpose, Perils and Pitfalls of Revocable Trusts
- Smart Asset: New York Estate Tax
- Ortiz & Ortiz: New York Revocable Living Trust
- Zacks: How to Transfer Real Estate to a Revocable Trust in New York State
Teo Spengler earned a J.D. from U.C. Berkeley's Boalt Hall. As an Assistant Attorney General in Juneau, she practiced before the Alaska Supreme Court and the U.S. Supreme Court before opening a plaintiff's personal injury practice in San Francisco. She holds both an M.A. and an M.F.A in creative writing and enjoys writing legal blogs and articles. Her work has appeared in numerous online publications including USA Today, Legal Zoom, eHow Business, Livestrong, SF Gate, Go Banking Rates, Arizona Central, Houston Chronicle, Navy Federal Credit Union, Pearson, Quicken.com, TurboTax.com, and numerous attorney websites. Spengler splits her time between the French Basque Country and Northern California.