What You Need to Know About Putting a House in a Trust
Trusts have become an integral part of estate planning, offering a way to manage and protect assets. One of the most significant assets people often consider when setting up a trust is their home. But why is putting a house in a trust important? This article delves into the intricacies of trusts, the process of putting a house in a trust, and the benefits and drawbacks of doing so.
A trust is a legal arrangement where one party, known as the trustor, gives another party, the trustee, the right to hold and manage assets for the benefit of a third party, the beneficiary. There are two main types of trusts: revocable and irrevocable. A revocable trust can be altered or canceled by the trustor during their lifetime, while an irrevocable trust cannot be changed once it’s established without the consent of the beneficiary.
The Process of Putting a House in a Trust
Putting a house in a trust involves several steps. First, you need to decide on the type of trust you want to create. Then, you’ll need to hire a lawyer to draft the trust document, which outlines the terms of the trust. The house’s title is then transferred from your name to the trust’s name. It’s crucial to understand the legal requirements of this process, as mistakes can lead to complications down the line.
We summarize the process in the following six steps below:
- Decide on the Type of Trust: The first step is to decide on the type of trust you want to create. The two main types are revocable and irrevocable trusts. A revocable trust allows you to maintain control over the property and make changes to the trust during your lifetime. An irrevocable trust, on the other hand, transfers control to the trustee and cannot be easily changed or revoked.
- Hire a Lawyer: While it’s possible to create a trust on your own, it’s generally recommended to hire a lawyer. This is because the process can be complex, and mistakes can lead to significant issues down the line. An experienced estate planning attorney can guide you through the process and help ensure everything is done correctly.
- Draft the Trust Document: The trust document is a legal document that outlines the terms of the trust. It includes details such as who the trustee and beneficiaries are, what property is included in the trust, and how the property should be managed and distributed.
- Transfer the Title: Once the trust document is complete, the next step is to transfer the title of the house from your name to the trust’s name. This is usually done through a deed. It’s important to note that the house is now owned by the trust, not by you personally.
- Fund the Trust: Transferring the title effectively “funds” the trust with your house. However, if you want to include other assets in the trust, you’ll need to transfer those as well. This could include things like bank accounts, investment accounts, and other real estate.
- Manage the Trust: If you’ve set up a revocable trust, you’ll typically act as the trustee and maintain control over the property during your lifetime. You can sell the property, move out, or make other changes as you see fit. If the trust is irrevocable, the trustee you’ve appointed will have control over the property.
- Successor Trustee: In the trust document, you’ll name a successor trustee who will take over management of the trust after your death or if you become incapacitated. The successor trustee has a fiduciary duty to manage the trust in the best interest of the beneficiaries.
Benefits of Putting a House in a Trust
There are several benefits to putting a house in a trust. One of the main advantages is avoiding probate – the legal process of validating a will. This can save your beneficiaries time and money. Trusts also offer potential tax benefits and provide a level of control over the property even after your death. Furthermore, trusts can offer protection from legal issues such as lawsuits or creditors.
Here’s a more detailed look at the benefits of putting a house in a trust:
- Avoiding Probate: One of the main advantages of a trust is that it allows your estate to avoid probate. Probate is a legal process where a court oversees the distribution of your assets after your death. It can be a lengthy and costly process, and it’s public, meaning your estate details become a matter of public record. By placing your house in a trust, you can ensure that it passes directly to your beneficiaries without going through probate, saving time, money, and maintaining privacy.
- Potential Tax Benefits: Depending on the type of trust you establish, there may be potential tax benefits. For example, an irrevocable trust can remove the property from your taxable estate, which could reduce estate taxes upon your death. However, tax laws are complex and vary by location, so it’s essential to consult with a tax advisor to understand the potential tax benefits fully.
- Control Over the Property: A trust allows you to specify in detail how you want your property to be handled after your death. For example, you could stipulate that your house should not be sold, or that it should only be sold under certain conditions. You can also specify how the proceeds from the sale of the house should be distributed among your beneficiaries.
- Protection from Legal Issues: A properly structured trust can provide some protection against creditors or legal judgments. If you’re sued, and you lose the lawsuit, your personal assets could be used to satisfy the judgment. However, assets in certain types of trusts may be protected from such claims.
- Planning for Incapacity: If you become incapacitated due to illness or injury, having your house in a trust can make it easier for your chosen representative to manage your property on your behalf. Without a trust, your family may have to go through a court process to get the legal authority to handle your property.
- Ease of Transition: Upon your death, the trustee or successor trustee you’ve appointed will manage the distribution of your assets according to the terms you’ve set in the trust. This can make the transition smoother and faster for your beneficiaries, as they won’t have to go through the probate process.
Remember, while there are many benefits to putting a house in a trust, it’s not the right choice for everyone. It’s important to consult with an estate planning attorney to understand the potential benefits and drawbacks based on your specific situation.
Drawbacks of Putting a House in a Trust
Despite the benefits, there are also drawbacks to consider. The process can be costly and time-consuming. Setting up a trust can be expensive. You’ll likely need to hire an attorney to ensure the trust is set up correctly, and legal fees can be substantial. Additionally, there may be costs associated with transferring the title of your house into the trust. It involves a lot of paperwork and legal formalities. If you’re considering setting up a trust, be prepared for the process to take some time.
There can also be potential complications, especially if the trust is not set up correctly. This could lead to disputes and potential legal issues after your death.
If you set up an irrevocable trust, you’re essentially giving up control of your house. Once the house is in the trust, you can’t easily change your mind or remove it. This lack of control can be a significant drawback for some people.
While trusts can offer potential tax benefits, they can also have tax drawbacks. For example, if you transfer your house into an irrevocable trust, it could be subject to gift tax. Additionally, while the house is in the trust, it may not be eligible for certain tax benefits, like the homestead exemption or the capital gains tax exclusion for the sale of a primary residence. Please consult a CPA for the ramifications of having a trust.
Comparing Trusts and Wills
Trusts and wills are both estate planning tools, but they serve different purposes and have different benefits. While a will goes into effect after you die, a living trust can start working while you’re still alive. Understanding when to choose a trust over a will or vice versa is crucial. For a more detailed comparison, consider reading this guide by Rocket Mortgage.
To better understand the process and implications of putting a house in a trust, it can be helpful to look at real-life examples. These can range from successful trust creation to situations where complications arose, offering a comprehensive view of what to expect. Here are two hypothetical case studies that illustrate the process, benefits, and potential complications of putting a house in a trust:
Case Study 1: Successful Trust Creation
Let’s consider the case of Jane, a widow in her late 60s with two adult children. Jane owns a house that’s fully paid off and has a substantial amount of savings and investments. She decides to put her house in a revocable living trust to avoid probate and ensure a smooth transition of her assets upon her death.
With the help of an experienced estate planning attorney, Jane creates a trust document that names her as the trustee and her two children as the beneficiaries. She transfers the title of her house into the trust and also moves some of her savings and investments into the trust.
Upon Jane’s death, the successor trustee she appointed – her eldest son – is able to quickly and efficiently distribute the assets according to Jane’s wishes. The house and other assets in the trust bypass probate, saving her children time and legal fees. This case illustrates the benefits of a well-planned and properly executed trust.
Case Study 2: Complications in Trust Creation
Now, let’s consider the case of Robert, a retired businessman with three children from two marriages. Robert decides to put his house in a trust without seeking legal advice. He downloads a generic trust document online and fills it out himself, naming his second wife as the trustee and his children as the beneficiaries.
However, Robert makes a mistake in the paperwork and fails to properly transfer the title of his house into the trust. Upon his death, it’s discovered that the house was not legally part of the trust. This leads to disputes among his children and his second wife, resulting in costly and time-consuming legal proceedings.
This case illustrates the potential complications that can arise from not properly setting up a trust. It underscores the importance of seeking legal advice and ensuring all paperwork is correctly completed.
Common questions about putting a house in a trust include:
- Can I put my house in a trust if I still have a mortgage?
Yes, you can put a house with a mortgage into a trust. However, it’s important to note that your lender might have a ‘due on sale’ or ‘due on transfer’ clause, which states that if the property is transferred to a trust, the full loan amount could become due. However, under the Garn-St. Germain Depository Institutions Act of 1982, lenders are generally prohibited from calling loans due when transferring to a revocable trust if the borrower is a beneficiary. It’s always best to check with your lender before transferring a mortgaged property into a trust.
- What happens to a house in a trust after the owner’s death?
When the owner of a house in a trust dies, the property is managed or distributed according to the terms of the trust. If it’s a revocable living trust, the trust becomes irrevocable upon the owner’s death, and the named successor trustee steps in to administer the trust. This typically involves distributing the property to the named beneficiaries or continuing to hold it in trust, depending on the trust’s terms.
- Can a house in a trust be sold?
Yes, a house in a trust can be sold, but the process is different from a traditional sale. If the trust is revocable, the trustee (who is often also the trustor) can sell the property as if it were their own. If the trust is irrevocable, or the trustor has passed away, the successor trustee can sell the property, but they must act in the best interest of the beneficiaries. The proceeds from the sale remain part of the trust and are distributed according to the trust’s terms.
- What is the difference between a trust and a will?
A trust is a legal arrangement where one person (the trustor) gives another person (the trustee) the right to manage certain assets for the benefit of a third party (the beneficiary). Trusts can be set up to operate while the trustor is alive (living trusts) or to take effect upon their death (testamentary trusts).
A will, or last will and testament, is a legal document that outlines how you want your property and assets distributed after your death. It also allows you to name a guardian for your minor children.
In summary, while there is some overlap, trusts and wills serve different purposes and offer different benefits. Depending on your circumstances and goals, you might choose to have one or the other, or both. It’s important to consult with an estate planning attorney to understand which is the best option for you.
- What are the pros and cons of a trust and a will?
The table below shows the Pros and Cons of a trust and a will.
|Control Over Assets
|During life and after death
|Only after death
|Planning for Incapacity
|Covers Multiple Jurisdictions
|Simplicity and Cost
|More complex and costly
|Simpler and less costly
|Guardianship for Minor Children
|Cost and Complexity
|More complex and costly
|Simpler and less costly
|Need for a Will
|May still need a will for assets not included in the trust
|Must go through probate
|Planning for Incapacity
|Control After Death
- What are the tax implications of putting a house in a trust?
The tax implications of putting a house in a trust depend on the type of trust. For revocable trusts, there are typically no immediate tax implications because the trustor retains control of the assets. The property in the trust is still considered part of the taxable estate, so estate taxes may apply upon the trustor’s death. For irrevocable trusts, transferring property into the trust constitutes a gift, which may have gift tax implications. However, once inside an irrevocable trust, the property is generally not part of the taxable estate. It’s always best to consult with a tax advisor to understand the potential tax implications fully.
Putting a house in a trust is a significant decision that can have far-reaching implications. It’s not a process to be taken lightly, and it’s crucial to understand all the aspects involved. While trusts offer many benefits, they also come with potential drawbacks. Therefore, it’s essential to consult with a legal professional before making any decisions. For more information on trusts and wills, consider reading this article by Nolo and this piece by AARP.
Remember, the right estate planning strategy depends on your individual circumstances and goals. By understanding the role of trusts and their benefits and drawbacks, you can make an informed decision that best suits your needs.