Irrevocable trusts protect assets from creditors and lower the taxable net worth of an individual by removing assets from their name in their lifetime. A trust is called "irrevocable" when it can’t be amended, modified, or dissolved by the person who created it.
Houses placed in an irrevocable trust can usually be sold, but the terms of your trust agreement determine how you sell and what happens to the profits.
The trust agreement is a document that the settlor (the creator of the trust) drafts with the help of an estate planning attorney. Think of it as a blueprint for your trust.
Even though irrevocable trusts come with many limitations, in estate planning attorney Wayne Patton’s words, "If you’re creating your trust, you can get specific with the rules that you want to incorporate."
What is an irrevocable trust?
In simple terms, a trust is a legal entity that gives a third party, called the trustee, authority to manage assets on behalf of a beneficiary. An irrevocable trust can't be changed. It can become irrevocable from the start or upon the settlor's death (the person who established the trust).[1]
Irrevocable trusts aren’t entirely unchangeable, but there are extra hoops to jump through — generally, you need the permission of the beneficiaries to make changes. In exchange for giving up control of assets, the settlor can gain a few benefits: reduced estate taxes, protection from creditors and lawsuits, and potential access to government assistance programs (like disability benefits) by reducing assets.[2]
Selling a house in an irrevocable trust
You can sell a house in an irrevocable trust — although the sale and distribution of any proceeds must adhere strictly to the terms outlined in the trust agreement.
Generally, the trustee must sell the property in the trust since they're responsible for managing the assets. However, who decides that the house will be sold is another matter.
Some irrevocable trust agreements require the consent of the trustee and all beneficiaries — or at least the beneficiaries' consent. In other cases, the settlor may specify that the house should be sold upon their passing and the funds distributed to the beneficiaries in a certain way.
As attorney Wayne Patton notes, "It will completely depend on the language in the trust." Reviewing your trust agreement with your attorney to see what's allowed is important.
Once sold, the property will be subject to taxes, which will either be paid by the trust or the individual beneficiaries — depending on whether the proceeds are reinvested back into the trust or paid out to the beneficiaries.
Parties involved in an irrevocable trust
There are three key parties in an irrevocable trust:
- Settlor/grantor: The individual who establishes the trust and places their assets within it. Upon creating the irrevocable trust, the settlor gives up any direct claim to ownership that they once had over the assets.
- Beneficiary or beneficiaries: The individual or group whom the settlor has chosen to receive the assets placed in trust. There can be one or more beneficiaries.
- Trustee: The individual or corporation appointed to manage the trust. The trustee’s mandate is to act in the best interest of the beneficiaries.
In some trusts, a trust protector is also appointed. The role of a trust protector is to hold the trustee accountable.
A trust protector isn't legally required, but sometimes, they're included in an irrevocable trust because they can limit the trustee’s powers and even terminate the trustee if necessary.
Types of irrevocable trusts
Trusts that are irrevocable upon death
A revocable trust can be set up to become irrevocable at the time of the settlor’s death — this is the case for most trusts.
"The main purpose of setting up a trust that way is to avoid probate court," says Patton.
By letting a revocable trust become irrevocable, the settlor can maintain control of the trust until they die. At this point, their assets are protected from creditors and can quickly be distributed to beneficiaries.
This arrangement sidesteps the lengthy and costly process of getting a will through probate court.
Living irrevocable trusts
The other option is to establish a "living irrevocable trust."
As the name suggests, a living trust is irrevocable while its settlor is alive and after they pass. Upon the settlor’s death, the trustee settles all debts in the trust and distributes the assets to the beneficiaries as instructed.
To create an irrevocable trust, the settlor must freely give up their "incidents of ownership" (any personal claim to ownership over assets in the trust). In return, they can dramatically lower the value of their assets and access several tax benefits.
In either case, the trust will have its own tax identification number, and it's the trustee's responsibility to pay taxes, manage assets, and keep records.
Using a real estate agent for your sale
You don’t necessarily need a real estate agent to sell a home in an irrevocable trust. Unless the trust states that you must use an agent, the trustee can sell privately.
That said, there are some very good reasons to use a real estate agent when selling a home in a trust:
- Trustees have many other details to take care of when a trust is dissolved, so leaving the property sale to an expert gives them one less thing to worry about.
- Properties in irrevocable trusts can sometimes (though not always) be larger and more expensive than average, so finding the right buyer could require help from a connected professional.
- Trustees are usually obligated to manage the trust's assets most effectively, including maximizing profits from the home sale. A real estate professional will likely be better at this than the average person and almost certainly has more time to devote to it.
“The executor or trustee has the say, they’re in control, but they also must follow the terms of the will, the terms of the law, and a fiduciary duty to act in the best interest of the beneficiaries,” says attorney Travis Christiansen. Fulfilling that duty may mean hiring a qualified real estate agent to manage the sale.
How to sell a house in an irrevocable trust
While each trust is set up differently, selling a house in one will follow a relatively consistent sequence of events. We’ll break these down into an eight-step process.
1. Review the trust agreement with an attorney
The first thing you’ll want to do when selling a house in an irrevocable trust is sit down with an attorney and review the trust agreement itself. There are several things you’ll want to verify and discuss with the attorney to ensure a seamless sale process:
- Make sure you have the authority to sell the house. This shouldn’t generally be an issue if you’re the trustee, but the trust's specific terms could complicate things.
- Tax liabilities for the sale. Significant taxes can be on these types of home sales, including possible capital gains taxes, so talking to a professional is highly recommended.
- Possible exemptions or other ways to minimize the tax burden. There may be things you can do to help reduce what you owe, and an attorney (or tax professional) is the best person to help identify these opportunities.
2. Hire a real estate agent
You’ll almost certainly want to find a real estate agent to handle selling the house rather than trying to do it yourself. Aside from getting fair market value for the home — which may be required to fulfill the terms of the trust — they can also help navigate a difficult time.
“This can be a sensitive time - choose a real estate agent that hasn't only done this before but who has proven results of working multiple probate sales successfully, “ says real estate advisor Stephen Michalakos.
“Additionally, if you haven't had a positive relationship with those who may share your inheritance, inform your agents and attorneys so that they may take the emotional burden of communication off your plate," he says. "This is a difficult time, and you need people that can do something ‘extra’ to help.”
Hiring a real estate agent will cost money, but it’s possible to negotiate realtor fees, or use a discount real estate broker that charges half the typical cost of using an agent. Besides, the added peace of mind during a tough time is worth it.
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3. Gather the necessary documents
Now’s a good time to gather all the documents and paperwork you’ll need to sell the home, including:
- Death certificate of the settlor
- The deed to the house
- Mortgage and tax documents
- A seller’s disclosure
- A recent appraisal
Your attorney and real estate agent can advise you on the necessary documents.
4. List the home and secure a buyer
At this point, you can list and sell your inherited home. This part of the process will be like selling any other home: once it’s listed, the real estate agent will show the home to prospective buyers, help negotiate and finalize a deal, and work with you through closing.
How complicated this part of the process depends on whether you’re selling the home as-is or making repairs to help boost the price. If you need to do a ton of work, that will likely prolong the sale process. If you’re in a hurry, consider selling to a company that buys houses for cash.
5. File necessary paperwork with the courts
Once the home has been sold, the trustee will need to file paperwork with the court to verify the sale and confirm that all the proceeds from the sale have been moved into the trust.
6. Distribute the proceeds according to the trust agreement
At this point, the trustee fulfills their commitment by ensuring that the proceeds from the home sale are distributed according to the terms outlined in the trust agreement. In some cases, this may mean payouts to the beneficiaries.
In other situations, the money must be held until the beneficiaries reach a certain age. For example, some funds may be distributed to children at age 25 and the remainder at age 30.
7. Pay the appropriate taxes
Now comes the (potentially) complicated part. Someone must pay the home's sale taxes — either the trust itself or the beneficiaries. If the trustee reinvests the profits back into the trust, the taxes are charged to the trust. However, if the beneficiaries are paid, they’re responsible for the taxes.
It’s also worth noting that the amount of the tax liability depends on whether the trust was set up as irrevocable from the start or if it became irrevocable upon the death of the settlor:
- In the former case, capital gains tax is based on the sale price minus the original value of the home when it was purchased by the settlor.
- In the latter case, you get a “step up in basis,” where the capital gains tax is based on the sale price minus the home's value when it was inherited. This can allow for huge savings on capital gains taxes.
8. File a Form 1041 with the IRS
Lastly, the trustee will need to file Form 1041 with the IRS. This form reports income and other relevant financials for the trust. The trustee must present the home sale details and related tax liability. Again, we recommend working with a tax professional to ensure everything is covered here.
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How to avoid common mistakes
Hire the right team
Selling a house in an irrevocable trust can be much more complicated than a typical home sale for several reasons:
- The terms in the trust have to be followed, and they can be convoluted.
- There can be significant tax implications, again determined by the terms of the trust.
- The beneficiary may have ideas that conflict with the trustee's duties, and that have to be navigated. This can be further complicated if there are multiple beneficiaries.
- You may be grieving, which makes everything harder.
For all these reasons, it’s vital that you have a strong team in place to help guide you through the process. This should include a reputable estate attorney, a CPA, and a realtor experienced in selling a house in probate (even if you’re avoiding probate via the trust, they can help navigate other potential pitfalls).
Keep good records
Start preparing before you decide to sell the house. Maintain clean, clear, and well-organized records of accounts, usernames, passwords, legal documents, receipts, and instructions for asset distribution—anything that might be relevant. This helps avoid delays and disagreements, making the entire process smoother and less stressful.
Estate planning and elder law attorney Rebecca Goldfarb emphasizes: “Before someone dies, the executor or successor trustee must have a comprehensive understanding of all the assets. It's critically important to organize and know logins, passwords, insurance policy details, and contact information for beneficiaries. To be truly prepared, these documents should be organized and reviewed before any significant event occurs.”
Make sure you understand the terms of the trust
The trustee must understand what’s expected of them and follow through. Failing to do so can result in major delays and complications — potentially even legal action.
For example, beneficiaries can petition to have the trustee removed from the trust. In the case of a home sale, the trust may specify a timeline for the sale or provide instructions on asset distribution.[3]
Communicate clearly and proactively with the beneficiaries
During the sale process, it's crucial to maintain clear and consistent communication with beneficiaries. The trustee manages the home sale and other assets in the trust for the beneficiaries, who might be unfamiliar with legal processes and could be surprised by a large packet from a law firm.
Rebecca Goldfarb advises, “I ask each trustee and client, ‘Do you want me to reach out to the beneficiaries before we mail this notice?’ Receiving a large package from a law firm can make beneficiaries feel lost, scared, and nervous if they aren’t familiar with legal matters, which can hinder their ability to make good decisions.”
Follow the proper legal procedures
Lastly, make sure you follow proper procedures. For example, you may need permission from the court to sell a deceased estate property, and you likely need to notify beneficiaries and creditors of your intent.
You’ll also need to ensure taxes are filed properly and that funds go into the proper accounts. Finally, you may need to sell the home within a certain time frame. Again, this is why having a reliable team of professionals helping you through the process is so important.
Pros and cons of selling a house in an irrevocable trust
Pros
- Protect assets from creditors
- Skip the probate process
- Reduce tax liability for settlor and beneficiaries
Cons
- Capital gains passed to beneficiaries if profits are paid out
- Complications can arise with multiple beneficiaries
- Loss of asset control once in trust
Benefits of selling a house in an irrevocable trust
Protect settlor’s assets from creditors and estate taxes
Protecting assets is one of the main advantages of an irrevocable trust. Once assets are placed in the trust, they're no longer owned by the settlor but by the trust itself. This means creditors can't use them to satisfy the settlor's debts, and the assets are protected from lawsuits.[4]
A “spendthrift clause” can also safeguard the trust from the beneficiary’s creditors. This clause prevents a beneficiary from transferring their interest in the trust to others, protecting the trust’s assets in situations like divorce.[5] For example, if a beneficiary goes through a divorce and their spouse is entitled to half of their assets, the assets in the irrevocable trust would remain untouchable due to the spendthrift clause.
Regarding estate taxes, placing large assets in an irrevocable trust can reduce a person's total estate value below the estate tax threshold. The estate tax applies when an individual dies, and their total estate value exceeds a certain amount, currently set by the IRS at $13.61 million.[6]
The federal estate tax threshold has risen from $1.5 million in 2004 to its current level. Because the threshold is much higher now, using irrevocable trusts to avoid estate tax is less common and more relevant for high-net-worth individuals. Nonetheless, it’s a strategy worth considering for those with significant assets.
Skip the probate process
Distributing assets from an irrevocable trust is typically faster and more cost-effective than going through probate court.
When you die, your will must go through probate to be reviewed and processed by the executor, a procedure that can be lengthy and expensive. The probate process can take anywhere from six weeks to several months, depending on your state's specific requirements, the complexity of the will, and any disputes that may arise.
However, if all your assets are in an irrevocable trust, the trustee can quickly distribute them to the beneficiaries. This is done by either transferring ownership directly or liquidating the assets and passing on the proceeds, thus avoiding the delays and costs associated with probate.
Reduce capital gains liability
Putting assets into an irrevocable trust can help protect beneficiaries from capital gains tax in several ways. Capital gains tax is paid on the profits made from the sale of an asset, such as a home, and is calculated as the difference between the initial purchase price and the sale price.
If the proceeds from the home sale are reinvested and kept within the trust, the trust itself pays the capital gains tax, rather than the beneficiaries. However, if the proceeds are paid directly to the beneficiaries, they're responsible for the capital gains tax. This liability can be reduced through a "step-up in basis," which applies if the trust becomes irrevocable due to the settlor's death.
Normally, the "basis" is the home's value at the time of the original purchase. However, if the home is in a trust and the settlor dies, its basis is "stepped up" to its value at the time of the settlor's death.
For example, if the settlor bought the house for $150,000 and it was worth $200,000 at their death, and the beneficiaries sold it for $220,000, the capital gain would only be $20,000, not $70,000. This "step-up in basis" can significantly reduce beneficiaries' capital gains tax liability.
Downsides of selling a house in an irrevocable trust
Complications can arise with multiple beneficiaries
When dealing with a trust, the trustee has control and, ultimately, the final say. However, that doesn’t stop the beneficiaries from offering their opinions, and things can get complicated when there are major differences — particularly when dealing with something as potentially sentimental and valuable as a home.
It can be pretty overwhelming when three or four beneficiaries are voicing complaints about how things are being handled. Fortunately, the trust structure and instructions can help minimize the drama you might see when no documents exist.
It’s also worth noting that some trusts may have language that allows the beneficiaries to replace or remove the trustee. Usually, a majority vote is required in these cases, but it’s certainly possible.
Beneficiaries will be subject to capital gains
If the profits from the home sale are reinvested into the trust, the trust itself is responsible for paying the capital gains tax. However, if the proceeds are paid to the beneficiaries, they'll be responsible for the tax bill.
The tax rate on capital gains varies depending on income level and the asset's length. The range can be anywhere from 0% to 37%. While a stepped-up basis can reduce the liability here, there’s no way to avoid paying capital gains tax.
These taxes can get complicated, so we highly recommend consulting a tax professional, CPA, or attorney to help determine the best way to handle them.
Loss of control over assets once transferred to a trust
The biggest downside of putting your property in an irrevocable trust is that you effectively relinquish all control over the assets.
You can’t shut the trust down, change the trustee, modify the beneficiaries, or change how the assets are distributed. Therefore, it's important to:
- Pick a trustee you have a good relationship with
- Be clear about how you would like the assets handled and distributed by the trustee — and write those stipulations into the trust agreement.
- Make sure you won't need those assets in your lifetime should your financial circumstances change
What are the tax implications of selling a house in an irrevocable trust?
Navigating the tax implications of selling a house in an irrevocable trust can involve several potential taxes. It's highly recommended to consult a tax professional for guidance.
The primary tax concern is capital gains tax. Depending on the trust's specifics, this tax can be significant, so it's essential to be prepared.
Estate and inheritance taxes may also apply. Generally, assets in an irrevocable trust aren't subject to estate taxes since they're removed from the deceased’s estate. However, this can vary. Inheritance taxes depend on the state and are charged to beneficiaries where applicable.
Additionally, if you keep the house, you must reapply for homestead exemptions. These exemptions don't automatically transfer upon inheritance, and failing to reapply can significantly increase your property taxes.
FAQ
Should I put my house in an irrevocable trust?
It depends on your situation and goals. Irrevocable trusts can offer tax advantages and help protect your assets, but they require you to relinquish control of those assets, so they shouldn’t be entered into lightly.
If you’re considering an irrevocable trust, talk to a qualified estate planning attorney who can help you weigh the pros and cons of placing your house in a trust.
Who can create an irrevocable trust?
Anyone can set up an irrevocable trust, provided they have the mental capacity to understand the consequences of their actions.
The standard typically employed for trusts is "contractual capacity."
"Contractual capacity" means that an individual has the wherewithal to enter into a contract and understands the implications of doing so.
People who can’t meet the standard of contractual capacity include:
- Minors
- Mentally challenged persons
- Persons under the influence of drugs/alcohol
- Incarcerated persons
Using contractual capacity as a standard when establishing a trust is to protect vulnerable people from being coerced into signing away their assets.
Who can be the trustee in an irrevocable trust?
The trustee can be an individual or a corporation. A corporate trustee is a professional trust service that charges a fee.
The trustee should be someone you trust because they’ll have significant access to your assets.
Generally, a good trustee will be financially responsible and able to manage investments prudently.
Friends and family members can be appointed as trustees, but it can get pretty messy having cousin Bob in such a powerful position.
A friend or family member may have relationships with the beneficiaries or a personal dispute with you, the settlor, which could easily cloud their judgment.
Who pays the property tax in an irrevocable trust?
Who pays property taxes in an irrevocable trust depends on the terms laid out in the trust agreement — tax treatment in an irrevocable trust can be customized.
For example, the settlor can pay tax on income in the trust, which is called a "grantor’s trust." Alternatively, these taxes can be passed to the beneficiaries. Whichever party pays the property taxes can claim a property tax deduction on their tax return, but the deduction can't be claimed by both parties.
Schedule K-1 can pass property taxes to a beneficiary, so they can claim property tax deductions on their tax return.
