Why put your house in a trust? There is one main reason: to avoid the probate process. There can sometimes be confusion that a living trust offers asset protection from creditors, or may remove the home from the taxable estate. Although a living trust can be an effective estate planning technique, it is important to understand the benefits it can – and cannot – provide. Everything you need to know about putting your home in trust.
Why would you put your house in a trust?
What are the benefits of putting a home in a living trust? The main reason for the trust to own a house is probate avoidance.
What is a revocable trust?
As the name implies, the revocable (or living) trust can be modified, dissolved, rescinded, and so on. If a home is placed in a living trust, the grantor (or co-grantors) may remove the home from the trust, sell the property, refinance, and so on, without any special permission. Basic trust terminology is included at the end of this article.
Should I put my house in a revocable living trust?
The main reason individuals put their home in a living trust is to avoid the costly and lengthy probate process at death. Leaving real estate assets to a spouse or children in a will causes those assets to pass through probate. The process can take a few months or even a year and some estimates place the costs of probate at 3% – 7% of the value of the estate. This becomes especially important if you own real estate in multiple states. Each state will have its own probate proceedings which can be costly, time-consuming, and also completely avoidable.
Again, recall that the primary benefit of putting your home in a revocable trust is to remove the asset from your probate estate. Since you can access the assets in the trust at any time, a revocable trust does not provide asset protection from creditors or remove the home from your taxable estate at death. Working with an attorney is an important part of the estate planning process. A detailed discussion of your goals can help an attorney to identify what solutions may fit your needs.
How to put your home in a trust
If you decide to put your home in a trust, you’ll need to transfer the deed. The easiest way to transfer the ownership of the home to your trust is to work with a local attorney. They can fill out the deed and make sure everything is properly titled. Transferring the ownership is called ‘funding your trust.’ The attorney can also file the deed with your local registry of deeds.
Related:
Why Put Assets in a Revocable Living Trust?
Joint vs Separate Trusts for Couples
3 Things You Should Know About Your Parents’ Estate Plan
8 Common Misconceptions About Trusts
Can a trust buy a house? What about refinancing or selling a house in a living trust?
From a practical standpoint, most lenders will not allow you to buy or sell a home in the name of a trust. The house may need to be removed from the trust before the sale or retitled in the name of the trust after the property is bought. This may also delay the process when refinancing your mortgage or taking equity out of the home. If you don’t have a mortgage or plan to buy with cash, there are generally fewer limitations.
Can you put your house in a living trust if you have a mortgage?
Yes, people transfer homes with mortgages to trusts every day. Not a lot changes when you put a mortgaged home in trust. You are still responsible for paying the mortgage when your trust owns the home. If you don’t pay, the lender can still take the home.
Are there tax benefits of owning a home in trust?
Putting the property in a revocable trust will not impact the personal residence home sale exclusion or mortgage interest deduction. Also ensure that placing the property in trust won’t trigger a reassessment of property taxes if a state or county no longer considers this a primary residence for tax purposes.
Inheriting a house in a trust
Revocable trusts can offer beneficiaries a step-up basis at death. This is a significant benefit compared to gifts made during your lifetime. Step-up basis means the beneficiary’s tax basis in the inherited property will be the market value at the date of the grantor’s death. This can be significant for appreciated assets.
If the beneficiary subsequently sells the property, they may owe little to no capital gains tax. Lifetime gifts do not receive step-up basis, instead (for appreciated property) the donor’s cost basis is transferred to the recipient.
If you inherit a home in a trust, you’ll need to work with the executor of the estate to find out the details. A trust gives people the ability to control their assets after they die, so you might not own the home free-and-clear.
Generally, if the home was owned in a living trust when the owner passed away, the tax treatment will be the same as explained above. However, if the home was inherited in an irrevocable trust, you probably won’t be eligible for a step-up in basis. Further, the estate may have to pay the tax due at the highest rates.
If you inherited a house in a trust, work with the attorney who is settling the estate and your financial advisor to understand your options. What to do after inheriting a house.
Homeowners and title insurance
The transfer of real estate into trust can also create issues with title insurance and homeowners insurance. You will need to ensure that your title insurance will still cover you as trustee of your living trust.. This is important because not only do lenders require you to have title insurance, but it protects you from a number of events like someone claiming an ownership interest, liens, encroachments, easements, and so forth. Also check with your insurance company to determine whether the trust will change your policy.
Trust terminology
Basic trust terminology for reference:
- Grantor: A grantor(s) is the person setting up and funding the trust with their own assets.
- Beneficiary: A beneficiary is the individual(s) who will receive all or a portion of the assets in the trust.
- Trustee: The trustee(s) is responsible for managing the assets in the trust and following the terms from the trust document. When the grantor is also the trustee, successor trustees are named to step in after death or incapacitation.
It is important to note that it is not uncommon for a grantor to serve these roles simultaneously in certain types of trusts. Although no one will ever replace the grantor, it is also not uncommon for subsequent beneficiaries to also serve as trustee.
Final considerations before putting real estate in trust
Every situation is different and has its own complexities. That’s why it is important to work with your attorney to understand your options and whether a trust is the right solution for you. And keep in mind, laws change and your life and financial situation will too. What may be the best strategy for you today may no longer be appropriate several years from now. Periodically review your plan with your estate planning attorney and financial advisor so the whole team is on the same page.
This article is for general information only as to some of the financial planning considerations of putting a home in trust. It should not be misconstrued as personal legal or tax advice. Consult an attorney to discuss your personal situation and estate planning needs.
Last reviewed February 2024
