Use of Nominee Trusts in Estate Planning
A nominee trust is a "straw" trust that is used to own real estate. With a nominee trust, the trustee is the "record" or legal owner of the property, and the true owners are the beneficiaries (who are listed on a separate schedule which is not recorded with the Registry of Deeds). The trustee of a nominee trust typically does not have the authority to act independently, and instead acts only with the direction and consent of the beneficiaries.
A nominee trust has several estate planning uses. If properly structured, a nominee trust allows for a decedent to pass real estate to beneficiaries without the necessity of probate. It may also serve to facilitate gifts of interests in real estate. The nominee trust also allows for the beneficial ownership of the real estate to remain private. Finally, a nominee trust provides for ease of title transferability and avoidance of recording fees (but not the avoidance of the transfer tax or deed stamps).
Asset Protection Considerations in Use of Nominee Trust
The use of a nominee trust has advantages but there are certain limitations. A nominee trust by itself does not provide asset protection other than not disclosing the identity of the "true" or equitable owner. If you wish to insulate the true owner of a nominee trust from liability, then a limited liability entity such as a limited partnership or a limited liability company should be designated as the beneficiary of the nominee trust (or as the direct owner of the property).
Additionally, a trustee of a nominee trust cannot declare a Homestead estate. A Homestead declaration allows a homeowner (or the spouse) in Massachusetts to protect a principal residence up to $500,000 against subsequent attachment or levy by creditors.1As such, a homeowner must choose between the protection provided by the homestead election and the advantages of a nominee trust. If asset protection or preserving the homestead election is an important objective, the use of a nominee trust is not advisable. There is pending legislation in Massachusetts that would amend the homestead statute to allow the Homestead election by a trustee of a nominee trust.
Non-Massachusetts Residents and the Massachusetts Estate Tax
Many out-of-state residents who own homes in Massachusetts use nominee trusts to help avoid ancillary probate in Massachusetts. The use of the nominee trust in this context is sufficient provided that the beneficial ownership is not held in the decedent's individual name. However, a nominee trust by itself does not help avoid the Massachusetts estate tax for non-residents.
Massachusetts assesses an estate tax on all Massachusetts real property interests held by non-resident decedents. An interest in a nominee trust held by a decedent (or his or her revocable trust) is considered to be an interest in real property for Massachusetts estate tax purposes. In order to avoid triggering the Massachusetts estate tax, a non-resident should consider transforming the real estate interest into an "intangible" property interest (which is not subject to the Massachusetts estate tax) through the use of a limited liability entity. That is, if the owner of the real estate (or the owner of the beneficial interest in the nominee trust) is a limited liability company or a limited partnership, there would be no Massachusetts estate tax for the non-resident. However, if there were no legitimate business purpose for the new entity, the entity might not be recognized for Massachusetts estate tax purposes.
1Individuals 62 years of age or older, or disabled individuals, regardless of age, shall be protected to the extent of $500,000 each.
