The Realty Trust Trap

Nominee Trusts, also referred to as Realty Trusts, are commonly used to hold real estate while maintaining the owner’s privacy. The trust accomplishes this goal by having a third party (preferably someone with a different last name) act as trustee. That way, when you look through public records, it will not show the owner's name on the search index, but instead will only show the name of the trust and the trustee (assuming you did not previously own the property in your name individually).

So what’s the difference between a nominee (realty) trust and a standard revocable living trust?

A nominee trust is more akin to an agency relationship. This means the trustee doesn’t have the same discretionary control that a trustee would have over the standard revocable living trust. In other words, when dealing with a nominee or realty trust, it’s actually the beneficiary that tells the trustee what to do. Whereas in a standard revocable living trust, the trustee can act without requiring the consent or direction of the underlying beneficiaries so long as the trustee’s actions are in line with the instructions provided in the document.

Why were nominee / realty trusts so popular in the past?

Prior to 2003, if you wanted to place real estate in trust in Massachusetts, then you would have had to record the trust in its entirety on the public registry. As you can imagine, people don’t like telling the world their personal estate plan and to record their revocable living trust in its entirety would have meant disclosing a lot of personal information to the public. The nominee trust provided the solution by allowing you to record a generic trust that didn’t actually state anything other than the name of the then serving trustee (and some boilerplate legalese). The beneficiaries were then listed on a separate document (commonly called the “schedule of beneficial interests'') that did not need to be recorded and therefore kept your estate plan private. 

Since the nominee / realty trust provided a workaround that met the recording standards at the registry without needing to provide any other information, it was an ideal estate planning privacy tool for those that owned multiple properties. 

So what changed?

In 2003 M.G.L. C. 184 §35 came into play to allow trustee certificates to be recorded with the registry in lieu of the trust agreement. This meant that instead of recording your trust agreement, you could now provide a standard one-page document that simply recited a few facts to verify the trust is in existence and list the current trustees.

Now that recording the trust was no longer required, the original reason for the traditional nominee / realty trust was no longer relevant and you could simply place your real estate in your revocable living trust and file a trustee certificate accordingly with the registry.

What’s the downside of using a nominee / realty trust? What’s the trap?

The biggest problem with nominee trusts is that people often lose their schedule of beneficial interests. It’s not uncommon to lose documents created decades ago - especially if there were created before cloud storage was an option. If you don’t know who the owners are (or have no way of verifying the owners) then you have a real problem.

The other major concern is that even if you have the schedule of beneficial interests, you may not realize that the nominee / realty trust doesn’t usually cover what happens to a person’s ownership interest after they die. In other words, if the schedule of beneficial interests shows that you individually are the 100% beneficiary then what happens to your interest after you die? What if you are 50/50 owners with your sibling? Don’t assume you automatically inherit the other half. What is more likely is a probate nightmare.

There is also a common myth that nominee / realty trusts protect your assets. They do not. If you are the beneficiary of a property held in your realty trust then you may still be on the hook.

Not sure what type of trust you have or how it works? Give me a call at 781 202 6368 or email me at jlento@perennialtrust.com to schedule your free personal consultation.

I’m always happy to help,

Joseph M Lento, J.D.

Your local estate planning attorney 

Perennial Estate Planning

477 Main Street

Stoneham, MA 02180