Updated August 6th, 2019
Trusts aren't just for the uber-wealthy. Anyone with financial or physical assets may consider setting up one to make life a little bit easier for those you leave behind when you die.
When you establish a trust, you determine how you would like your assets divided to your beneficiaries and under what terms. You then designate someone to manage the trust — whether it's yourself, another family member, or a third party. But, there are lots more intricate details in creating a trust.
We can't stress this enough — always enlist the help of a team of professionals to help you navigate the complexities of taxes and trusts.
In the meantime, here are some reasons you may decide to put your home in a trust and how to do so.
Why would you put your house in a trust?
One of the main reasons you may place your home in a trust is so your family can avoid a lengthy and expensive probate process after you die. Without a trust, divvying up your assets could take a few months to a year at an estimated cost of 3% to 7% of the estate value. When your family is mourning your death, the last thing they want to deal with is any unnecessary financial or legal hurdles.
How do you put your house in a trust?
To put your home in a trust, consult an attorney or financial planner, as they'll do most of the heavy lifting. But, to get the trust in place, determine who the beneficiaries will be (those who will receive some or all of your assets), how your assets will be divided among them and when, and who will be the trustee (the person responsible for carrying out your wishes).
If you assign yourself as the trustee — as is common with revocable trusts — you may also appoint a successor trustee who will step in after you die or are no longer able to manage the trust.
Who owns the property in a trust?
Technically, legal ownership of a property is transferred to the trustee when it is placed in a trust. But, this doesn't mean the trustee can do as they wish. They manage the property for the benefit of the beneficiary based on the wishes of the grantor (you!). If your home is placed in a revocable trust — which we will get to later — you may list yourself as the trustee and retain ownership of your home.
What are the benefits of putting your house in a trust?
The biggest benefit is that your family can avoid probate, which can be lengthy and expensive. You may also wish to use a trust is you're worried about a certain family member blowing through all their inheritance. A trust allows you to divvy up the amount of your estate as you wish — you can designate assets be directed for a specific purpose, or over a set period of time.
Speaking of tricky family stuff, trusts can also protect your assets from beneficiaries' creditors or loss from divorce settlements. You can direct where you want any remaining assets to go after a beneficiary's death — this may be helpful for families with multiple marriages or blended families and it may differ from what the courts would decide if the estate would have gone to probate.
What are the drawbacks of putting your house in a trust?
Putting your home in a trust creates a bit of work and financial burden initially. You'll need to work with a professional (and pay them) to complete and file the proper paperwork. Plus, you may wish to add other assets to the trust as you acquire them. Otherwise, these assets will still be subject to probate. Also, depending on your situation, there could be an added expense after your death, as trusts must file tax returns.
What is a trust sale?
A trust sale is a public auction for a property placed within a trust. Typically the trustee sets up some criteria for purchase offers and the highest bidder within those criteria can purchase the home.
If a home is not in a trust, it will likely be sold at a probate sale, similar to a trust sale. The main difference is that the court will usually review all offers. This process can vary state-to-state, but the process usually takes much longer than a trust sale, which delays when beneficiaries receives their portion of the estate value.
Can you sell a house in a trust?
While you're living, how you sell a home in your own trust depends on how you set it up initially. If it sits in a revocable trust, you can buy at sell at your will. However, you can expect to pay estate and capital gains taxes on any gains. If the home is in an irrevocable trust, your trustee will need to sell the home for you, since you have signed it over to their control.
The process works similarly if you are the beneficiary of a home within a trust and wish to sell it. The trustee appointed for the trust handles the sale of the home. Alternatively, if there are no provisions in the trust language preventing you from doing so, you may be able to have the trustee transfer the home to you and you can sell it yourself.
What are the tax implications of a trust sale?
Tax implications depend greatly on the type of trust and whether the creator of the trust (in this case, you!) is still living. So, it's always important to work with a trusted advisor when you're deciding which trust to use, and for your family to do so after you pass.
If you are selling your home in your revocable trust, the sale of the home is treated just as any other — you can sell as you wish and the proceeds are subject to capital gains tax on your personal tax return. Your federal capital gains exclusion of $250,000 ($500,000 if you're married) may help out with this.
If the home is in an irrevocable trust and sold through a trust sale, either before or after your death, you would not report gains on your tax return since you have transferred all ownership of the property. Since the cost basis is stepped up to the value at your death, it is unlikely that any capital gains will be realized. If, for some reason, the home is not sold immediately and there are gains, the trust would have to pay capital gains tax on the proceeds of the sale.
If the home is transferred to your beneficiary after your death and they decide to sell it, they would be personally responsible for capital gains tax, using the value of the property at the time of your death as the cost basis. This is likely to be much less than what would be paid in taxes if sold prior to your death, since in that case, the cost basis is what you initially paid for the home when you bought it.
Can you put your house in a trust if you have a mortgage?
Yes, you can put a house with a mortgage into a trust — in fact, it's common to do so, especially with a revocable trust. But, this doesn't mean you can stop paying your monthly mortgage payment.
Some transfers of property can trigger a “due on sale” clause that allows your lender to demand that you pay the loan in full immediately. Thankfully, in the 1980s, they outlawed this in the case of transferring the property to a trust. So, you're save to do so.
What is a living trust?
A living, or revocable trust still allows you total legal control and ownership over your assets until you die. You can change anything about it at any time, or get rid of it altogether. But, with this flexibility comes no protection against creditors who may come after your assets after you die. Your estate will also still pay estate taxes upon your passing.
An irrevocable trust, on the other hand, passes legal ownership of everything within the trust to the trustee. Once you finalize the trust, it can never be changed, added to, or dissolved. But, since the property is no longer under your ownership and removed from your estate's value, you'll save money in taxes after you die and the home is safe from creditors.
How can you best navigate the trust process?
There are an incredible amount of nuances and situation-specific considerations when determining whether to put your home in a trust. For example, you'll need to check with your title and homeowner's insurance to make sure both will still be valid. And you need to make sure your county won't reassess property taxes if they consider the home no longer your primary residence.
Plus, laws and your financial situation may change and you'll want to review your plan every few years. Since every situation is different and has its own complexities, it's important to work with a great team, including an estate attorney, a financial advisor, and to find a trusted real estate agent. They can ensure everything runs smoothly now, and after you die. And, your family members and beneficiaries will likely work closely with them when dealing with the estate after your passing, or selling your home.
Aside from helping you or your beneficiaries through the process, Clever Partner Agents also help sellers get a significant discount on commissions. Clever Partner Agents are top-rated real estate agents from major brands — like Keller Williams or Century 21 — who are experts in their local markets. If you're selling your home, Partner Agents offer the same full service as other agents; the only difference is that they have agreed to work for aflat fee of $3,000, or 1% if your home sells for more than $350,000. This keeps more money in your trust, and in the hands of those you love.
Top FAQs About Putting Your Home in a Trust
Should you get your family involved in the process of setting up a trust?
The answer entirely depends on your relationship with your family and the personalities of everyone involved. Generally, it is best to designate a third party to act as the trustee — someone who has no vested interest or emotional involvement in the estate after you die. You'll relieve your loved ones of the burden and the risk of any family feuds over perceived favoritism in the distribution of the assets in the trust.
However, you don't want your family members to be surprised by how much of your estate they receive (or don't receive!) when you pass. Consider discussing the specifics of the trust with each family member involved.
While keeping things a secret until your death may seem like the easy way to go, you may leave a bad legacy. Your relatives may be hurt if they are surprised to learn of your wishes through an attorney, rather than when you are living. And, this could cause animosity between family members long after you are gone.
How much does it cost to put a house in a trust?
While filing the actual paperwork won't take much out of your pocket, attorney's fees account for the bulk of the cost associated with creating a trust. Expect to pay $1,000 for a simple trust, up to several thousand dollars.
You may incur additional costs after the trust has been established if you transfer property in and out or otherwise move things around. However, the bulk of the cost will be setting it up initially. While it may be tempting to find a simple trust template online and do it yourself, this can often create more problems and future expenses than if nothing were done at all.
What is the purpose of a trust?
A trust can have several purposes, depending on the goals of the grantor. The trust can own assets and divvy out income from those assets to family members at a regular interval. It may be a way to avoid lengthy and costly probate to divide assets after the grantor dies. Or, it may be a way to protect assets and inheritance from a beneficiary's debtors, unsound financial choices, or future divorce.
Certain trusts may also be used to take advantage of the capital gains exemptions, create a succession plan for a family business or to keep one's financial situation private — specifics of a trust are not made public.
Why put your house in an irrevocable trust?
Putting your home in an irrevocable trust means you sign it over to the trust and it is removed from your estate. Once you finalize the trust, it can never be changed, added to, or dissolved. However, you may do this to keep it safe from creditors and avoid the estate tax. While you no longer own the property, you may remain living in it and must continue to pay any mortgage payments due.