Once you become a homeowner, estate planning needs to include what will happen to your house after you pass away.
If you don’t put those intentions in writing, your intended recipient may have to spend a lot of time and money in order for that to happen, or they could even end up losing it altogether.
This is why you may want to put your home in a trust.
What Is A Property Trust?
A property trust is a legal arrangement where a person (the grantor) transfers property ownership to a trust managed by a trustee. There are two main types of property trusts: revocable trusts and irrevocable trusts. A revocable trust allows the grantor to retain control and make changes to the trust, while an irrevocable trust is more restrictive and cannot be altered once it's established.
What Does It Mean to Put Your House in a Trust?
Putting your home in a trust means you’re providing instructions about who can become the owner of your house – or houses – upon your passing.
In effect, you transfer over legal ownership of the home to the trust. You can act as the trustee of that trust – and, thus, its assets – while you’re alive. Then, after you pass, ownership of the trust will transfer to your intended heir.
"But I Already Have a Will"
There’s no requirement that you put your home in a trust but using a will to transfer ownership isn’t the same thing.
By putting your home in a will, it will be subject to the court’s asset-distribution process, also known as “probate.” This process can easily take a year and comes with a number of costs, too.
A trust, on the other hand, comes with instructions about how asset distribution – including your house – should be carried out. This means the courts don’t have to be involved. These instructions and their execution can be kept completely private, too, which isn’t necessarily the case with a will.
Why Do People Put Homes in a Trust
There are several reasons why people choose to put their house into a trust. One of the primary motivations is to avoid probate court, a lengthy and costly legal process that occurs when a person dies. By placing a home in a trust, the property can bypass probate court process, saving time and legal fees.
Additionally, trusts can provide asset protection, shielding the property from creditors or personal loan claims. This can be especially important if the grantor has a high net worth or wants to protect assets for their heirs.
Pros and Cons of Putting Your Home in a Trust
While it might seem like putting your home in a trust would be nothing but advantageous, that may not necessarily be the case.
Due to your unique financial situation and goals, it’s important that you understand the pros and cons of this decision.
Pro: Avoiding the Probate Process
Again, trusts are designed to avoid probate and the burdensome costs that often go along with it. While it’s true that some states have come a long way in terms of streamlining those kinds of costs, avoiding probate remains one of the main priorities for people pursuing a living trust. Homeowners who are interested in putting their house in trusts want to make sure their heirs can take over ownership of the home with as little time and money spent on the process as possible.
Similarly, a trust can be used to transfer other properties, too, even if they’re located in other states. By using a trust for those other properties, you’ll avoid probate costs for them, as well.
Pro: Defending Against Future Health Problems
No one likes thinking about a time when they may be unable to manage their own affairs because of illness, but it’s an important topic to confront as we get older. After all, while not common, that sort of thing certainly does happen.
Putting your home in a trust is an effective way to protect against something like a stroke getting in the way of how the property is managed and, eventually, transferred.
Instead, a new trustee will be able to fulfill the provisions of your trust, including what you intended for your house and any other properties.
Make your spouse your co-trustee, and this becomes even easier. They can remain as your trustee while also managing your home (or homes) because it’s protected by the trust.
Pro: Possible Reduction of Estate Taxes
Putting your home in a trust won’t actually grant you any sort of favorable tax advantage. That’s a common misconception. As a living trust is revocable, it can also be modified or even dissolved altogether, which would make it a formidable weapon against proper tax collection if the IRS offered special terms to grantors.
However, you might be able to reduce your estate-tax obligation if your estate is designed with this purpose in mind. This is why you should take some time to work with an experienced estate planner. Put things in order first, and then put your home in a trust to save on taxes.
Con: Complexity and Resulting Costs
With all that being said, many homeowners look at the costs and complexity involved with designing a trust and decide it would make much more sense to opt for a simple will.
Furthermore, things can get even more complicated as time goes on. If you think you’ll be buying or selling properties in the future, you’ll need to be very diligent about how you move them in and out of your trust.
Of course, those kinds of transfers will come with more costs, as well, which is one more reason many owners decide they’ll use a will instead.
How Does it Work to Put a Home in a Trust
To transfer property to a trust, you'll need the assistance of an estate planning attorney or a law firm specializing in trusts and estates. They can help you set up either a revocable living trust or an irrevocable trust, depending on your financial goals and needs. The attorney will draft a trust agreement that outlines the terms and conditions, as well as designating a successor trustee to manage the trust after the grantor's death.
Once the trust is established, the property's title is transferred to the trust, and the trust becomes the legal owner. Other assets, such as bank accounts and investments, can also be placed in the trust for streamlined estate management.
How Does a Trust Affect Buying or Selling a Home?
As you can see, while putting homes in trusts is important, it might not always be the best choice.
If you’re thinking about buying or selling a house in the near future, you should know that most lenders won’t let you do either in the name of a trust.
Instead, you’ll most likely need to remove the property from the trust before selling or add it in only after purchasing.
Also, we highly recommend you speak to an attorney about your unique estate-planning needs. The information in this article is only meant to provide general information about putting your home in a trust. This post should not be misconstrued as personalized legal or tax advice.
Before deciding to put your home in a trust, it's essential to consult with a financial advisor or financial planner to determine if it's the right move for your specific circumstances. They can help you weigh the benefits and drawbacks of using a trust for asset protection and probate avoidance. Additionally, an estate attorney can guide you through the legal process and ensure that your trust is set up correctly, providing peace of mind for you and your loved ones.
What we can help you with is connecting you with an experienced real estate agent if you decide it makes sense to move forward with buying or selling. Contact us today and we’ll explain how we can help you find the perfect agent and even save money in the process.
Conclusion
Concluding the intricate journey of personal finance and the decision to place your most valuable asset - your home - in a trust requires careful consideration. Living trusts, both revocable and irrevocable, offer benefits that extend beyond keeping separate income tax records.
Not only does an effective estate plan empower both the grantor and beneficiaries by safeguarding vital assets, but it also bypasses certain legal expenses, keeps personal tax returns out of the public record, and can even affect eligibility for government benefits. By minimizing executor fees, county taxes, and inventory fees, putting your house in a trust stands as a strategic move for many homeowners.
Yet, as with all pivotal decisions, it's essential to weigh the pros and cons, understanding that what suits one homeowner might not be the perfect fit for another. The balance between protecting your assets and ensuring your personal finance management aligns with your future goals is crucial in making this important choice.
