Is It Time to Place Your Home in a Living Trust?

Image of a person sitting on a bench in a wooded area with two children. Captioned: Is It Time to Place Your Home in a Living Trust?

With a revocable (living) trust, you can assume the role of trustee, and stay in control of your real estate during your lifetime. After you pass away, your living trust becomes a substitute for probate. This is especially helpful if your estate would otherwise face multiple probate processes because you have real estate in several locations. It is also a helpful way to pass a home along to children when they become old enough to receive it, as the trust can direct a title change to a child at a specified age.

If you need to modify your estate plan due to children growing up, a marriage or divorce, or other significant changes in the makeup of your household, or because of your age or physical needs, you may. You can take the asset out of the trust, assign a new trustee, change your beneficiaries, or modify other terms of your trust.

For many homeowners, this is the best of both worlds in estate planning. You keep full control during your life, but seamlessly transfer the home on when you pass on, avoiding the time, expense, and stress of probate. Still, there are plenty of things to know before making this decision, as we’ll observe in this article.

The Flexibility and the Limitations of a Living Trust

With a living trust, you have a great deal of flexibility. You can:

  • Keep and exercise your full ownership rights
    during your life.
  • Avoid putting anyone else on the deed while
    you’re living, so only your financial actions create debts and claims on
    the value of your home.
  • Avert gift tax issues connected with
    transferring a deed to others during your lifetime.
  • Avoid having your affairs go through the public
    process of probate.
  • Establish the terms by which your home’s value
    passes to your designated beneficiaries.
  • Potentially relieve your beneficiaries of large capital
    gains taxes if they decide to sell the house.

Because you can take the home out of the trust at your discretion, it’s still in your taxable estate, under your own social security number. Your property taxes should remain unchanged. You can still qualify for your capital gains exclusion if it’s your primary residence and you decide to sell.

Pro tip: If you sell your trust property to purchase a new home, keep the benefits of your trust by having your buyer make out the payment to your trust, and pay for your new house with the proceeds out of the trust.

Nuts and Bolts of the Living Trust — And Traps for the Unwary

You’ll convey the deed of the house from yourself to the trust to establish it. For guidance as you title your real estate into the trust, work with an experienced local estate planning attorney. There are potential traps for the unwary, as you’ll note when reading the steps in creating this instrument:

Step 1: Contact your title insurance company.

Be sure your policy allows for putting your home in a revocable living trust. There are cases in which the title company will not continue to cover a house moved into a trust. In other cases, owners are required to get an endorsement that covers the transfer and continues their coverage. The insurance policy will need updating, to show that your trust is the title holder.

Step 2: Draft the deed.

Deed the home, for example, to the Revocable Living Trust of Hannah Homeowner. A special warranty deed is a good choice for keeping the title company on board when the beneficiaries decide to sell the property sometime down the road. Sign and print your name: Hannah Homeowner, Grantor and Trustee of the Revocable Living Trust of Hannah Homeowner. Name the beneficiaries who will take title to your home. Name a successor trustee, in the event that you pass away or become unable to manage your trust. (By naming a neutral professional, you can lift that potential burden from your beneficiaries and avert disagreements among them.)

State that the trust survives you, and date the deed.

Step 4: Sign the deed.

Sign the deed with a notary public’s acknowledgment.

Step 5: Record the deed.

File the deed in with recorder of deeds in your home’s county.

Step 6: Update your trust documents.

Update the contents of your living trust’s list of assets.

What If There’s a Mortgage — Can the House Still Go Into a Trust?

Homes with loans on them can go into a living trust. It can make good sense to put a home into a living trust when you have no need to do any later refinancing, which may or may not require retitling the home into your individual name. Should you need to retitle the home and then return it to the trust, though, it can be done using a trust transfer deed.

Call your mortgage agent to advise the company if you plan to move a home from your name into your trust. Placing the home into a living trust should not trigger the due on sale provision of your mortgage — another important advantage to transferring a home into a living trust if it has a mortgage.

And yes, you can still claim your mortgage interest deductions.

If you do not make the final mortgage payoff before you pass on, the debt will stay on the property. Before the home goes to the beneficiary, the successor trustee will determine how to correctly administer the trust according to your instructions — including how to satisfy the mortgage. This can get complicated. A local estate planning lawyer can provide important guidance for a placing a mortgaged home into a living trust.

What Are the Best Alternatives to a Living Trust?

If you pass away while co-owing your house, your co-owner(s) receive your interest by virtue of their survivorship rights. Here, we explore how vesting the title among co-owners works.

Joint owners may transfer property into a living trust in order to pass a home to beneficiaries after both are deceased. If the co-owners are spouses who live in a community property state, and both die simultaneously, a trust — naming each other as beneficiary and adding an alternate beneficiary — could keep the home out of probate and deliver it to the person they select.

There are other methods of passing your home to your beneficiaries through a trust, depending on your state.

  • There are several kinds of irrevocable trusts, including the domestic asset protection trust (also called DAPT, or the self-settled asset protection trust).
  • There’s the transfer-on-death deed (also called the TOD deed or beneficiary deed) for real estate. As of 2021, most states permit owners to use the TOD deed to easily convey their homes to designated beneficiaries on death, much as they would pass their assets along from a bank account or IRA.
  • There’s the testamentary trust, established with instructions in a homeowner’s last will, to take effect after death. The will names the trustee, the beneficiaries, and the trust assets, plus any conditions such as the age of the children when they receive assets. Often included in case when children are still minors, a testamentary trust requires a trustee to appear in probate court every year until the trust distributions are complete. Meanwhile, the trust is taxed.

Indeed, there are various ways of using a last will in conjunction with a revocable trust. An estate planning attorney can walk you through them. Your attorney can also make sure you don’t inadvertently pass assets to anyone who is receiving vital government assistance that could be compromised by the transfer. Additionally, an experienced estate planning attorney can help you and your beneficiaries receive the best possible tax advantages currently available under the law. For all these reasons, your investment in an attorney’s expertise will pay off.

Photo credit: Benjamin Manley, via Unsplash.