A trust can simplify the transfer of what is often a person’s most valuable asset: their real estate. It can keep a home out of the probate process and allow it to become the property of loved ones or a charity upon your death.
For many households, home equity represents their largest financial asset, and it has burgeoned. U.S. homeowners with mortgages saw their equity increase by $1 trillion at the end of 2022 compared with a year before, according to CoreLogic, a provider of property insights.
Here, a closer look at protecting one’s assets by putting a house into a trust.
Why Put a House in a Trust?
There are two main reasons: avoiding the probate process and protecting your property if you become incapacitated.
Put simply, probate is a court review of a deceased person’s will and assets. This involves resolving any claims against the estate, paying remaining debts, and distributing the decedent’s assets to their designated heirs.
Probate can be a lengthy and costly process. In the absence of a will, the probate court divides the estate according to the state’s succession laws. These proceedings often require hearings and a variety of legal and court fees, which can significantly chip away at the estate before it reaches the heirs.
Even with a will in place, probate is often necessary for your heirs to have the right to carry out your will. Things can become further complicated if the estate includes property in multiple states or the will is contested.
Putting property in trust can avoid probate altogether. A trust designates a successor trustee to manage the estate, as well as beneficiaries to receive assets, after your death. The trust can include clear instructions and conditions for allocating assets. This can help reduce the time and cost to pass your home to your heirs.
It’s also worth noting that trusts can safeguard assets if you become incapacitated and are unable to care for yourself. A trust can be created to take effect in this situation, thus allowing a family member or loved one to manage your estate and assets in your best interests. If you recover, you can resume the role of trustee for the estate.
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Do You Need a Trust If You Have a Will?
Only one in three U.S. adults has a will, according to one recent report. And even if you have created one, you may wonder whether you are handling your assets properly. For instance, you may ask yourself, “Should I put my house in a trust?” The answer will depend on your own financial goals and the needs of your heirs.
Who you intend to inherit your house is an important factor to consider. Federal estate and gift tax law permits the transfer of a house and other wealth to a spouse without tax liabilities. However, passing on a house to children or relatives of a subsequent generation can be more complex.
A trust goes into effect once you sign it and is generally more difficult to challenge than to contest a will. Placing a house in a trust also avoids the probate process — it’s not uncommon for the courts to take months or a year to settle a will, especially for larger estates.
Wills and trusts can be complementary tools for estate planning. For instance, a will can take care of smaller assets like family heirlooms that aren’t covered by the trust. Also, wills can be structured to move assets into a trust when you die.
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Types of Trusts for Estate Planning
There are multiple options available for putting your house in a trust. It’s important to consider financial goals, your beneficiaries’ needs, and creditor concerns when creating a trust.
Here’s an overview of common types of trusts, including how they work for passing on a house or other property. The basic kinds are revocable and irrevocable and they are typically part of an estate planning checklist.
Revocable Trust
Also known as a living trust, a revocable trust gives grantors more control in the management of their assets while alive. They’re still responsible for tax payments and reporting on investment returns.
If desired, a grantor can make changes or dissolve a revocable trust after it’s created. Getting remarried or buying a home could be possible reasons for altering a revocable trust.
Usually, the grantor (establisher) serves as the trustee (manager for beneficiaries), and a named successor only takes control if that person dies or becomes incapacitated.
A revocable trust becomes irrevocable upon the grantor’s death. A revocable trust does not protect a house and other assets from creditors while the grantor is alive.
Irrevocable Trust
An irrevocable trust differs in that it can’t be modified by the grantor without the approval of all beneficiaries. You effectively give up control and ownership of any assets placed in an irrevocable trust.
So why put your house in a trust with such rigid conditions? Irrevocable trusts can offer greater security for beneficiaries and render assets untouchable to creditors. Plus, you’re not subject to estate taxes because the assets are no longer yours.
Before permanently forfeiting assets to an irrevocable trust, it could be beneficial to consult a lawyer or find a financial planner.
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Other Types of Trusts
Aside from the two broad categories of trusts, there are more specialized options to address specific needs. Here are some additional types of trusts to consider.
• Charitable Trust: This type of trust transfers assets to a designated nonprofit organization or charity upon the grantor’s death. A charitable trust can be housed within a standard trust to allocate a portion of assets to a nonprofit while leaving the rest for family members or other heirs.
• Testamentary Trust: A trust can be created within a will, often for minors, with defined terms that take effect after your death. This is a type of revocable trust, as changes can be made up until death. It’s worth noting that a testamentary trust does not avoid probate court. The executor will probate the will and then create the trust.
• Generation-Skipping Trust: Instead of passing on a house to your children, you can use a generation-skipping trust to transfer assets to your grandchildren. This is more common for estates that exceed the federal estate tax threshold ($12.92 million in 2023) to avoid some estate tax payments down the line.
• Spendthrift Trust: If you’re concerned about how your beneficiaries will manage their inheritance, you can use a spendthrift trust to set stricter terms. For example, you could define a date or age when beneficiaries gain access to certain assets.
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Should I Put My House in a Trust?
It’s important to understand the implications of having a house in trust before making a binding decision. Here, the main advantages and drawbacks.
Benefits of a Trust
Bypassing the hassle, delays, and costs associated with probate is a leading reason for using a trust.
Probate expenses can vary by location and the size of the estate but traditionally include legal fees, executor fees, appraisal fees, and other administrative costs. While probate costs will vary depending on the size of the estate and the state you live in, they can often be 4% to 7% of the estate or more.
You may also want to avoid probate to keep the details of your estate private. Probate is a public process that can reveal your estate’s worth and chosen beneficiaries.
Trusts are also useful tools for providing a financial safety net for children in the unexpected event that both parents die. A trustee manages the assets on behalf of any minor beneficiaries. Terms can be set to transfer control of assets held in the trust to children when they reach a certain age.
Putting certain assets in a trust could help some seniors qualify for Medicaid. If you’re 65 or older, your home and furnishings are usually exempt from the asset limit to qualify, but the threshold is low: around $2,000 in most states.
Disadvantages of a Trust
Setting up a trust can be complex. There are usually more costs in creating a trust than a will.
With a revocable trust, you need to track income from assets held in the trust to report on your personal tax returns. If you designate a third-party trustee to manage the trust, maintenance costs could add up over time.
And if you put just your home in a trust, your other assets will still be subject to the probate process.
When a house is the only large asset, buying a house from a family member is a possible alternative. Though this can be contentious among relatives, it’s another option to pass on a valuable asset to the family while providing some financial security.
The Takeaway
Estate planning isn’t always easy. Putting your house in a trust is one strategy to reduce the time and costs associated with inheritance. Probate costs can eat up 4% to 7% of an estate, and putting assets into a trust can help avoid that. Even if you put a house in a trust, however, you are still liable for any mortgage payments due, which you may be able to lower via refinancing.
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This article is not intended to be legal advice. Please consult an attorney for advice.
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