Many people want to know does it make sense to put my house in a trust. Often, this question comes up with a vacation home, or a home that has been in the family for some years and the family wishes to keep the home in the family.
A trust can give you better control than a will or a deed over how your assets are transferred from one generation to the other. And, a trust may offer other advantages such as asset protection and qualifying for Medicaid.
A trust is a legal structure in which you can place your money, possessions, and other assets so they can later be used by you or your future heirs. A trust isn’t just for rich people. Trusts can offer greater control than a will over who will get your money and possessions after you die. Unlike a will, trusts can also include instructions for how or when your beneficiaries will receive the assets. If you want to pass on certain assets before you die, a trust may also help.
One of the main reasons people put their house in a trust is because assets in a trust do not go through probate after you die, while everything you bequeath through your will does go through probate. Probate is a public process and allows anyone to see what was in your estate when you died, how much your estate was worth, and the people who received your things. Using a trust to pass on your house can also transfer ownership faster than a will would have.
You can generally still sell your house after putting it into a trust, depending on the exact language of your trust’s founding document. You can also move your house into a trust if you’re still paying off a mortgage; moving a house into a trust won’t trigger a “due on sale” clause. Placing your house into certain types of trusts can also help you qualify for Medicaid by decreasing your taxable estate.
Key Points:
- A trust can provide more control than a will or deed;
- Assets in a truist do not go through probate;
- Trusts can help pass on assets before you die;
- Putting your home in a trust may also decrease your taxable estate or help qualify you for Medicaid.
Reasons to put your house in a trust
Your personal circumstances will dictate whether or not it’s a good idea for you to put your house in a trust. To help you make your decision, here are seven common reasons to put your house into a trust:
- Your house (and everything else in the trust) will avoid probate after you die.
- Ownership of the house can transfer to your heirs faster from a trust than through probate.
- Wealthy estates may avoid or minimize estate taxes with an irrevocable trust.
- Trusts allow you to add conditions for how or when heirs receive an inheritance.
- A trust, unlike a will, can help you pass on assets even before you die.
- Placing a house in an irrevocable trust can help you qualify for Medicaid by decreasing your taxable estate.
- With an irrevocable trust you can get asset protection from creditors, including nursing homes.
Trusts avoid probate
Avoiding probate is a major reason people put their house into a trust. Probate is a legal process where a court, after you die, (1) proves the authenticity of your will and (2) oversees that your possessions are passed on to your heirs.
Probate can be expensive and take many months or even years to complete. For some heirs, it is important to gain access to assets quickly and the lengthy probate process can cause problems.
Probate is a public process and the contents of wills are a matter of public record after the probate process is completed, so anyone could see what you owned, how much it was worth, and who received it after you died. Transferring assets via a trust is a private process.
Probate can also drag out in certain cases, potentially costing a significant amount of money and lasting for months or even years. Trust assets are only passed on according to the instructions in the trust document, so you can help your heirs avoid a long and costly probate.
The probate process, because it is a legal process, invites legal disputes because it is too easy for heirs to object to a will or raise other issues which can lead to costly and unnecessary legal costs and delay and diminish the assets of an estate.
Situations where probate may drag out include if your estate is large; if you left unclear instructions for bequeathing your assets; or if you have assets in multiple states. (Each state has its own probate laws so moving a house from another state into a trust could especially simplify things for your heirs.) Issues can also arise if someone contests your will to change how your assets are distributed. For instance, someone may contest a will to get full or partial ownership of valuable assets like a house, investments, or a patent you owned.
Trusts help you pass on your house before you die
Trusts make it possible for the maker of the trust (known as the grantor) to place conditions on when and how beneficiaries will receive the trust assets. That means you could move your house into a trust and then transfer ownership to someone else even before you die (like by setting it up as a trust fund). For example, you may choose to pass on your house should you go into long-term care or become incapacitated. A will can only transfer assets after the grantor has passed away.
Tax benefits of transferring a house through a trust
Moving your house or other assets into a trust (specifically an irrevocable trust) can decrease your taxable estate. For a wealthy estate that could otherwise be subject to a state or federal estate tax, putting assets into a trust can help avoid or minimize estate taxes. Estate taxes generally apply only for estates worth millions of dollars.
Should you put your house in a revocable trust or irrevocable trust?
A revocable trust, also called a living trust, is one that you create while you’re alive and that you can revoke (close or modify) at any time. An irrevocable trust is one that you cannot close, either because you structured it such that you cannot revoke it or because you have already died.
Many people use a revocable living trust because it gives them more control over the trust assets. Putting your house in a revocable trust still allows you to change the terms of the trust or remove the house from the trust if you want to. Taxes and personal finances are generally easier to manage with a revocable trust. A revocable trust becomes irrevocable after you die since you can no longer close it.
Irrevocable trusts do offer some distinct advantages, though. You may want to put your house in an irrevocable trust if you need to lower your taxable estate for Medicaid eligibility or other income-restricted programs. Assets in an irrevocable trust usually cannot be claimed by a creditor, offering you asset protection in the event you need to repay someone. Assets in an irrevocable trust are also safe from the Medicaid estate recovery program.
If you’re considering an irrevocable trust, know that it will have to pay its own tax returns (the trust manager, trustee, would file the returns). You may also want to have someone other than yourself manage it, for legal reasons.
Todd Murphy
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- Should I put my house in a trust? - July 26, 2023
