Purchase Money Trust Laws

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 What is a Purchase Money Trust?

In trusts and estates law, a purchase money trust is a type of trust that is created when someone buys a piece of property but instructs the seller to transfer the title to the property to a different person. It is also known as a purchase of money resulting in trust. Thus, to form this kind of trust requires two actions: first, that a person uses their own money to purchase the property, and second, that they do not take legal title to the property that they purchased.

Under this trust arrangement, at some point in the future, the trustee will eventually transfer the title back to the buyer after a certain amount of time has passed or a specific condition has occurred.

The trust can be created on purpose if the two individuals set up a trust in that way. It can also be created accidentally any time someone makes a purchase but gives ownership to someone else. Example: A parent pays for a car, and it is titled in their child’s name. They did not intend to create trust – neither had even heard of such a thing – but they did.

In cases where a transaction results in forming a purchase money trust between two spouses or between a parent and a child, it will be presumed that a gift was intended. This means the recipient is not expected to give the buyer anything in return for title to the property (e.g., money). This matters for estate tax purposes – property given as a gift to a family member is not considered part of the decedent’s estate and, thus, is not subject to the estate tax.

In contrast, a third-party trustee may need to give the buyer something in return unless the buyer expressly states that the purchase was intended as a loan or a gift or declares that they did not intend to create a trust.

Be aware that the laws governing purchase money trusts vary widely from state to state. For instance, some states have completely abolished the use of purchase money trusts in favor of more modern trust arrangements, while others have placed restrictions on when and how a purchase money trust can be created. Thus, you may want to review your state’s laws before forming a purchase money trust. Given the complexity of the law, it is best to talk to a trust lawyer about it.

Why Would a Purchase Money Trust be Used?

Although it may seem odd for a buyer to purchase a property only to give the title away to someone else, there are a few good reasons why a buyer may want to create a purchase money trust.

One common reason a purchase money trust may be used is inheritance rights. For example, couples in a domestic partnership may choose to create a purchase money trust. The trust makes it so that if the partner who holds title to the property dies, both the title and that property will automatically transfer back to the surviving partner since that is the person who originally paid for the property.

While some states have enacted laws that recognize domestic partnerships and grant couples the right of survivorship or inheritance, not every state offers such rights. Thus, in states that do not have statutes providing that domestic partners inherit all of their partner’s property except for that given specifically to someone else in a will, domestic partners can form a purchase money trust as a way to ensure that their partner receives ownership rights in the property upon the other partner’s death.

Another reason a party would want to use purchase money resulting in trust is to gain certain tax incentives from the property. For instance, a buyer may reduce the value of their estate by keeping their name off the title, which, in turn, may result in fewer estate taxes during the probate process.

Lastly, purchase money resulting trust may also be intentionally formed to issue a loan to an individual not eligible to receive a traditional mortgage loan from a lender like a bank.

What if There are Some Legal Disputes Over a Purchase Money Trust?

One issue that frequently arises in connection with a purchase money trust is that sometimes, they are created automatically because of how a sale transaction occurred. This means that no formal document was used to create the trust, but rather, the trust “resulted” as a matter of course and per state laws.

Not all property transactions, however, will give rise to the formation of a purchase money trust. For example, in states that have abolished the use of purchase money trusts, a trust will not be created. Also, if the purchase and intended use of the property were made to satisfy an illegal objective, then a purchase money trust will not automatically arise. A purchase money trust will also not arise where the party who paid for the property expressly states that they do not intend to form a trust.

Some other legal disputes that may occur over a purchase money resulting trust include:

  • When the parties argue over who owns the trust property
  • Whether the trust was meant to be a gift or rather was meant as a loan
  • Whether fraud, misrepresentation of fact, or some other wrongdoing was committed in forming the trust
  • If the buyer were under duress or was coerced to follow through with the sales transaction, that would create a trust.

As previously mentioned, the laws concerning trusts vary by state. Thus, what may be grounds for a lawsuit in one state may not be a valid reason to file a lawsuit in a different state. Therefore, those involved in a legal dispute over a purchase money trust should strongly consider hiring a lawyer to represent them if they are sued or would like to sue the other party.

Do I Need a Lawyer for Help With a Purchase Money Trust?

Trust and estate matters are notoriously difficult to handle without the help of a lawyer. Purchase money trusts can be particularly challenging because the buyer may not always know when a trust has been formed solely because of the nature of their transaction and because not every state recognizes purchase money resulting trusts. Therefore, if you have any issues or concerns involving a purchase money trust, it may be best to speak to a local trust lawyer for further guidance.

An experienced trust lawyer will be able to answer your questions about any kind of trust, explain what rights you have under the relevant state laws, and determine whether or not a particular sales transaction establishes a purchase money trust.

If you are involved in a dispute over the creation of a trust or its contents, your lawyer will be able to assist you in filing a claim with the appropriate court. They can ensure you understand your options for legal recourse and the potential remedies available. They can also provide representation in court if necessary.

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