While trusts can be a useful estate planning tool, they are not the right choice for everyone.
Deciding whether to place your home in a trust depends on your financial and estate planning goals. If you want to avoid probate and ensure a smooth transfer of your property to heirs, a trust may be a good option. However, if your primary concern is maintaining flexibility or minimizing costs, other estate planning tools, there are other option available.
What Is a Trust?
A trust is a legal entity that holds assets on behalf of a beneficiary. There are different types of trusts, but the most common ones for homeowners are revocable and irrevocable trusts.
- Revocable Trust – Allows the homeowner to maintain control over the property during their lifetime. The terms can be changed, and the homeowner can remove the property from the trust if needed.
- Irrevocable Trust – Once placed in this trust, the home can no longer be removed or modified without the consent of the beneficiaries. This type of trust can offer benefits like asset protection and tax advantages.
Who sets up my Trust?
A family estate lawyer.
Benefits of Placing a Home in a Trust
- Avoiding Probate – One of the main advantages of placing a home in a trust is that it bypasses the probate process, which can be time-consuming and expensive. This allows heirs to receive the property more quickly.
- Privacy Protection – Unlike wills, which become public records after probate, trusts remain private.
- Incapacity Planning – If the homeowner becomes incapacitated, a successor trustee can manage the home without the need for court intervention.
- Potential Tax Benefits – Depending on the type of trust, there may be estate tax advantages or Medicaid planning benefits.
- Control Over Distribution – Trusts allow homeowners to specify how and when their beneficiaries receive the home, preventing potential disputes and disruptions.
Potential Drawbacks of a Trust
- Upfront Costs and Maintenance – Setting up a trust requires legal assistance and can involve ongoing administrative costs.
- Limited Flexibility (Irrevocable Trusts) – Once a home is placed in an irrevocable trust, making changes can be difficult.
- Mortgage and Financing Challenges – Some lenders may be hesitant to issue loans on properties held in a trust, especially if it is irrevocable.
- Capital Gains Tax Considerations – If a home is placed in an irrevocable trust, heirs may lose the step-up in basis rule, (Sometimes a tax-saving benefit for heirs inheriting a home. Instead of inheriting the original purchase price as the basis, the home’s value is reset to its fair market value at the time of the previous owner’s passing. This means that if heirs sell the property shortly after inheriting it, they may owe little to no capital gains tax) which could lead to higher capital gains taxes when selling the property.
Before deciding, it’s best to consult with an estate planning attorney and your financial advisor to ensure that a trust aligns with your overall strategy. If you have questions about how to find those people, I’m happy to help you navigate the process
