You want to make sure that all your assets are protected — especially your biggest asset, your home. Learn why you may want to place your home in an irrevocable trust and if you decide to sell, know what it means for you when you put a home in an irrevocable trust on the market.
As you, or perhaps your parents get older, you’re looking ahead at your possible future and start asking yourself some important questions.
Will I have enough money after retirement? Will I have to downsize my home? Will I eventually be living in an assisted living facility? Who should I leave my assets to?
While it’s not exactly as fun as planning for a future vacation, these are all important questions to ask and even more importantly, these are the questions you should begin to answer and put into action.
And as you begin to start planning for your future, it’s usually at this point when many start to look into irrevocable trusts.
What Is An Irrevocable Trust?
An irrevocable trust is a trust that usually cannot be altered, changed, or retracted. And using this type of trust can help you protect your greatest asset — your home.
While the phrase “cannot be altered or retracted” may make you hesitant to agree to something so ironclad, with this type of trust you still can exercise quite a bit of control, and down the line, there are a few instances when it is in your best interest to have this kind of security.
One of the most common scenarios where you would use an irrevocable trust for your home is when you or your parents start nearing retirement age or your mid-70s and are concerned you might eventually need to move into a nursing home or assisted living facility.
In the case that you would need long term care, you would need to qualify for the Medicaid program which is the primary financer of nursing care facilities. And in order to qualify, you must meet certain income and asset requirements.
You can meet these requirements by placing your home in an irrevocable trust while at the same time, you’ll be protected from losing your home due to any costs of long term care as well as from general creditors.
You Still Have Some Freedom With An Irrevocable Trust
With your home in an irrevocable trust, you do give up ownership of your home, however, you as the grantor still have some freedom and choices in setting up the trust and what ultimately happens to your home.
For instance, you can decide who will be in charge of your trust — you choose the trustees, you can add or remove beneficiaries as well as add or remove property from the trust.
So what happens when you’re at that point in your life when you want to downsize or need to move into a long term care facility?
When you do decide to sell your home, you will need to turn to your trustee to sell the home for you.
Your chosen trustee holds the power to sell or buy real estate. Additionally, in the case that you want to break the trust, only your beneficiaries have the ability to terminate the contract. To break the trust, all beneficiaries must agree and then the assets will return to you, the grantor.
But for the moment, if you’ve decided to keep the trust intact and would like to sell your home, you should note that your tax situation will be different than if you sell your home normally.
Tax Advantages When You Sell a Home in an Irrevocable Trust
With an irrevocable trust, there are actually a few estate and tax benefits. Firstly, a home in an irrevocable trust is not subject to estate tax as you technically no longer own the home. And when the home is passed on to your beneficiaries, they also escape any estate tax.
Secondly, you have an advantage when it comes to capital gains tax.
With a traditional sale outside of a trust, the home is subject to a capital gains tax. This means that for instance, if you originally bought your home for $250,000 and then sold it for $850,000 you would have a gain of $600,000.
And with a tax exclusion of $500,000 for married couples, you would be left with $100,000 subject to the capital gains tax. However, with an irrevocable trust, you will avoid the capital gains tax when you sell your home.
Because no matter the amount gained from selling the house, remember, the trust owns your home — the trust is responsible for paying any capital gains tax, not you.
So even though you technically lose ownership of your home with an irrevocable trust, there are plenty of advantages in having one.
And when you decide to sell, whether it’s simply to move into another home or because you’ll be in a long term care facility, with an irrevocable trust, you know both your assets as well as your beneficiaries will be safe and protected from creditors and extra taxation.
Trusts can get complicated quickly and you want to make sure that you’re putting your biggest assets in a trust that most benefits both you and your beneficiaries.
This is why you should always work with an experienced real estate agent and/or real estate law professional who will help guide you through the entire process of selling a home in a trust.