If you’re concerned about your legacy and generational wealth as a homeowner, buying a house with a trust can be one way to avoid probate and control the distribution of your property when the time comes to pass it along to your heirs. A revocable trust can buy a house.
However, trusts are not a silver bullet and won’t help you magically protect your estate from property taxes and creditors. When used intelligently, a revocable trust can have several benefits for your estate and heirs.
Here is a quick decision guide for readers thinking about utilizing a trust for their home:
- Do use a trust if you want to protect a property from probate or want to control how beneficiaries use assets.
- Skip using a trust if your estate is simple, you have no minor children, and you don’t want to pay the maintenance costs of a trust.
- Talk to a real estate attorney if you have a complex estate, a large family, or want to update your existing plan.
How putting your house in a trust works
A trust is a type of financial arrangement in which a third party, or trustee, holds and manages assets on behalf of a beneficiary. The grantor, or person who creates the trust, transfers assets to the trustee entity, who manages the assets according to instructions the grantor gives.
When you put a house in a trust, the property title transfers to the trustee, who then manages it for the beneficiary. Using a trust this way removes the property from the grantor’s estate, which can keep the asset out of probate and make it easier to pass on to heirs.
There are two main types of trusts. With a revocable trust, the grantor still retains some level of control over the assets and can modify the trust arrangement.
With an irrevocable trust, the grantor gives up control and can’t make changes. Because the owner relinquishes more control, irrevocable trusts can provide more asset protection.
| Revocable Trust | Irrevocable Trust | |
|---|---|---|
| Level of control | Owner can make changes | Owner relinquishes control |
| Probate avoidance? | Avoids probate | Avoids probate |
| Asset protection | Assets are still available to creditors | Assets are protected from creditors |
| Tax treatment | Included in taxable estate | Excluded from taxable estate |
Keep in mind that specific rules about trusts vary depending on the state. You need to check with a real estate professional or a lawyer for state-specific laws that could impact using a trust.
Can a trust buy a house?
Yes, it is possible for a trust to buy a house. When a trust buys a house, it means that the trust is the legal owner.
Buying a house in trust is more complicated than buying a house as an individual, but it carries some advantages. You can be the trustee of the house and maintain significant control over the property and what happens when you pass away.
The simplest way is for a trust to buy the house outright with cash. As long as the trust entity has sufficient liquid funds, it can purchase the house. The trustee acts as the buyer, and the property title lists the trustee as the owner (e.g., John Smith of the John Smith Family Trust).
A trust may also be able to buy a home by securing a mortgage. In this case, the borrower would be the trust itself, and the trustee would sign for the loans. Typically, lenders have stricter requirements to lend to trusts and will require a certificate of trust to prove its existence and authority to act.
Lender policy on granting mortgages to trusts varies heavily based on the institution and type of trust. Revocable trusts typically have an easier time securing loans because they are still under the control of the grantor. However, irrevocable trusts may require specialized lenders to deal with the additional risk.
Reasons to put your house in a trust
These are some of the main advantages of putting a house into a trust.
1. Avoid probate
The main reason to put a home in a trust is to avoid probate. A house that’s not in a trust will have to go through state-mediated probate after you die before passing to heirs.
“The process can be lengthy and costly and involves a great deal of publicity,” says Evan Farr, certified elder law attorney and retirement planner at Farr Law Firm, P.C.
“If you place your primary residence into a revocable living trust prior to death, your property will not go through probate. This can save time, cost and public exposure and is especially important in states that have longer and/or more costly probate systems.”
2. Privacy
Trust documents and contents are private, so assets placed into a trust are removed from the public eye, granting a level of privacy.
Unlike a will, which becomes public record after being filed with a probate court, details on trusts are not publicly available.
3. Incapacity planning
A trust is also a powerful tool for incapacity planning. If you are rendered incapacitated, your trust and trustee entity have clear guidance on managing the property to avoid disputes between beneficiaries.
4. Multi-state property
If you own property in multiple states, putting them in a revocable trust can simplify the administration for probate proceedings.
Drawbacks of using a trust
As with any financial instrument, trusts have their downsides. You should always talk to a financial and legal expert before making any significant decisions with your assets.
1. Upfront costs
Trusts carry several upfront costs, which can total anywhere between $1,000 and $5,000, depending on the type of trust, the value of the assets, and the attorney you choose.[1]
These costs are split between several fees:
- Attorney fees
- Retitling fees
- Updating house deeds
- Notary fees
- Transfer taxes (if applicable)
In addition to the upfront costs of starting a trust, ongoing maintenance costs can range over $1,000 a year for a moderate trust. These include expenses for trustee fees, legal fees, and tax preparation fees.
2. False expectations
Many people have false beliefs about what trusts are and what they can do. Despite what some might think, they don’t automatically shield you from property taxes, and it won’t necessarily protect your assets from creditors.
If you plan to use Medicaid, then you must follow extremely specific rules about placing your house in a trust before you apply.[2]
3. Potential hiccups
Trusts are complicated financial instruments, so they can run into several potential hiccups. One of the most common is not updating title designations. This can cause major problems when transferring the property to heirs.
“Many people think just creating the trust is enough, but they miss a crucial step in their planning, making sure the title to their stuff is updated!” says Rebecca Second, real estate attorney at Your Home Legal APC.
“This includes not just the home, but bank accounts, investment accounts, and possibly beneficiary designations on insurance policies and retirement accounts.”
How to put your house in a trust (step-by-step checklist)
Below is a quick step-by-step guide on how to put your home into a trust. Make sure that you work with a qualified professional to avoid common mistakes.
1. Choose the right trust
The first step is deciding between a revocable and an irrevocable trust. Revocable trusts provide more control and less protection, while irrevocable trusts trade the control for more protection. Factors like the size and complexity of your estate should inform your decision as well.
2. Create/execute the trust document
Creating a trust is a matter of drafting the legal document, notarizing it, and signing it before witnesses. The trust document identifies the relevant parties and denotes instructions for the management of assets.
3. Transfer the deed to the trust
The next step is arguably the most crucial — transferring the property title to the trust. You can create a trust, but you must then take the further step of transferring the title of your home into the trustee’s name.
Normally, you can do this through a quitclaim deed or a grant deed. After switching the deed, you must record it at your local county office.
4. Notify your mortgage servicer and verify due-on-sale treatment
If your home is still mortgaged, you need to notify your loan servicer. Mortgage agreements generally have a clause allowing the lender to force payment when the property title is transferred.
However, there are exceptions to this rule for homes in certain types of trusts (more on this below).
5. Update insurance + escrow + utilities + HOA
You must also remember to update all house-related documents and accounts that were in your name to be under the trust’s name.
For instance, many homeowners forget to update their homeowner’s insurance, so the policy lists the trusts as an insured entity. This can cause major problems if the home is damaged and needs repairs.
6. Revisit after refinance, move, divorce, or death
Trusts require maintenance, and some situations may call for changes. A common one is refinancing the property. To refinance a property in trust, you must typically transfer it out of the trust temporarily and refinance under your name.
Death and divorce are two other situations where the trust and beneficiaries may need to change.
Putting a mortgaged house in a trust
Generally, mortgage agreements have a due-on-sale clause that allows the lender to force repayment when the house title changes. However, there is a specific federal law that exempts transferring a title to a trust from triggering the sale.
The Gam-St. Germain Act prohibits forcing sales from trust transfers if:
- The borrower is the beneficiary in the trust, and
- The borrower still lives in the house as their primary residence.[3]
When transferring a mortgage property, make sure you get confirmation in writing from your lender and keep a close eye on your records to make sure payments don’t change.
Taxes and costs to budget for
The typical cost to set up a trust ranges anywhere between $400 to $4,000 for a moderate-sized estate.[4] Setup costs for a larger trust will likely cost more, and costs vary significantly.
Other fees to budget for are recording fees and deed prep. These fees vary depending on the state or county, but usually come in at between $50 and $200 per title.[5]
One benefit of a revocable trust is that you can still qualify for the capital gains exclusion if you sell the property in a trust. The current capital gains exclusion is $500,000 for married couples filing jointly.[6]
Similarly, homeowners can still maintain a homestead exemption on a primary residence in a trust so their property taxes don’t change.
What happens when you sell or when the owner dies?
Selling a house in a revocable trust is largely the same as selling a home normally. The trustee signs closing documents with the permission of the beneficiary. The proceeds then get put into the trust, where the trustee can use them according to the terms of the arrangement.
When you die, the title of the house transfers from the trust directly to the beneficiaries and heirs named in the trust. Because the assets in the trust are removed from your estate, the house won’t have to go through probate before your heirs inherit it.
How an agent can help
Establishing and moving assets into a trust can be a complicated process with several things that can go awry. A real estate agent can help with the minutiae of making a trust, including coordinating title transfers, finding a real estate attorney, and looking for red flags in the process.
You can search for top local agents using Clever. Through Clever agents, you can get low commissions and may qualify for cash back on closing as a buyer.
FAQ
Can I refinance if my house is in a trust?
Yes, you can refinance a house in a trust, but it takes more steps than normal. If you want to refinance a house in trust, you typically must first temporarily transfer the title out of the trust and complete the refinancing under your name. Then you can move the newly refinanced property back into the trust.
Does putting my house in a trust protect it from nursing home costs/Medicaid?
Putting a house in a revocable trust will not protect it from Medicaid and nursing home costs since the property is still under your control. However, an irrevocable trust can protect your estate from nursing home and Medicaid costs because the property completely transfers ownership.
Does a trust change homeowner’s insurance or property taxes?
A revocable trust doesn’t substantially change property taxes, but the owner will have to change insurance to include the trust as an insured entity. However, an irrevocable trust can affect both homeowner’s insurance and taxes as the trustor is no longer the property’s legal owner.
Can I still get the primary residence capital gains exclusion if my house is in a trust?
Yes, you can still be eligible for the primary resident capital gains exclusion if you sell a house in a revocable trust. But, you must have lived in the house for at least two out of the previous five years before selling it. Irrevocable trusts typically don’t qualify for the capital gains exemption because the trust is a separate legal entity.