After purchasing property, individuals may consider adjusting their estate plan to account for what happens to it when the buyer becomes incapacitated or passes away. One option is to place the property in a trust, which has several pros and cons. Understand the benefits and disadvantages of putting your house in a trust and learn how a Minnesota and Florida elder law and estate planning attorney from Roulet Law Firm, P.A. can assist individuals with their legal issues by calling our Minnetonka, MN office at (763) 420-5087 or our Venice, FL office at (941) 909-4644.
What Is a Trust?
In simplistic terms, the Internal Revenue Service (IRS) defines trusts as relationships where one individual or entity holds a property’s legal title with the view of using or keeping this property to benefit others. Since trusts fall under state laws, consulting these before establishing one is advisable. For instance, Chapter 736 of the 2015 Florida Statutes outlines the trust laws in Florida, whereas Chapter 501C of the 2022 Minnesota Statutes provides the trust laws in that state.
While popular among the wealthy, all individuals can use trusts as part of their estate planning. When creating one, the settlor or grantor, who is the person establishing the trust, dictates how they want to distribute their assets to their beneficiaries. They then appoint a trustee to manage these assets, who can be the settlor, a family member, a trusted friend, or another party.
Why Do Rich People Put Their Homes in a Trust?
Rich people frequently place their homes and other financial assets in trusts to reduce taxes and give their wealth to their beneficiaries. They may also do this to protect their property from divorce proceedings and frivolous lawsuits. They may also do this to avoid probate, thereby keeping their affairs private during any period of incapacity or after their passing.
However, trusts are not just for the rich. In fact, most middle class families should consider using a trust as well to avoid probate, keep their affairs private, and protect their assets.
Is It Worth Putting Your House in a Trust?
Here is why placing a house in a trust can be worthwhile:
- Avoid probate: This refers to the process where a court ensures a deceased individual’s estate pays its debts and legally distributes its assets minus any court costs, inventory and legal fees, and other expenses. Probate is a costly procedure that has the potential to last several months or even years.
- Maintain privacy: Since property within a trust is not subject to probate, the trust’s contents remain private. This means knowledge of the trust’s assets is only available to a select few, including the beneficiaries, grantor, and trustee. Individuals may want to prevent their property from undergoing probate as this public process enables anyone to see an estate’s size, its liabilities, and learn about the estate’s asset distribution, potentially attracting creditors, fraudsters, and disgruntled heirs.
- Asset protection: A properly designed trust can also protect the assets in it from creditors, predators and failed marriages. In addition, a properly designed trust can protect the assets in it from long-term care and nursing home costs.
What Are the Disadvantages of Putting Your House in a Trust?
The key disadvantages of placing a house in a trust include the following:
- Extra paperwork: Moving property in a trust requires the house owner to transfer the asset’s legal title. This involves preparing and signing an additional deed, and some people may consider this cumbersome. However, if you create a trust with our office, we prepare the paperwork you will need to put your home into the trust as part of your plan.
- Additional investment to set up the trust: Since there is more legal work involved in setting up a trust versus just using a will, trusts generally cost a bit more to set up. However, trusts tend to be less expensive overall by avoiding probate upon your passing.
What Are the Negatives of a Trust?
The main negative of a trust is that it tends to be a bit more expensive to set up. However, when you consider that it avoids probate, it tends to be a less expensive option overall. It also has the additional benefit of keeping your affairs private and can be used to protect your home and assets from taxes and other expenses. A specific type of trust can also be used to protect your home and life savings in the event you or a spouse require long-term care or go into a nursing home.
Discover more about putting your house in a trust and find out how a Minnesota and Florida-based elder law and estate planning attorney can help by contacting Roulet Law Firm, P.A. for a consultation.
What Kind of Trust Does Suze Orman Recommend?
Suze Orman’s trust recommendations vary depending on an individual’s circ*mstances. Below are the differences between irrevocable and revocable trusts, which are two trust types they recommend, and how these can benefit different people.
Revocable Trusts
Revocable trusts allow settlors to adjust the trust’s terms whenever they please and ultimately control the trust’s assets. Say, for example, that they place their house in a trust, they can then sell the property or remove it from the trust at any time. For these trusts, the assets within them remain part of the grantor’s taxable estate, meaning it receives no creditor protection. However, they do avoid probate. They can also be structured to minimize taxes and to protect assets you leave to your children and grandchildren in the event they get divorced, get sued, have poor money management skills, or require some additional protection or oversight.
Irrevocable Trusts
Grantors opting for these trusts lose their ownership rights to the assets within them. They lose the ability to decide how to manage or sell these assets. This loss of ownership means the assets are no longer part of the settlor’s taxable estate, protecting the assets from creditors.
These trusts are suitable for individuals who want to avoid large tax bills once they pass away. As indicated by the IRS, the federal estate tax exemption for 2023 is nearly $13 million. However, it is set to sunset to $5 million in 2026. And, Minnesota’s estate tax exemption is only $3 million.
These trusts can also be used to protect your home and life savings from long-term care and nursing home costs; which can be a substantial benefit to middle class families.
Can Property Left in a Trust Be Sold?
To sell property left in a trust, it is first necessary to speak to the trustee to determine how to make the sale happen, and gaining approval from the trustee might be a requirement to proceed. Assuming the trustee grants this permission, the following steps entail locating a property buyer using an agent or house-buying firm, negotiating a price, and then drafting an agreement to outline the sale’s terms for the buyer and trustee to sign.
After signing, the trustee signs the deed over to the purchaser to complete the sale and the buyer pays the sales price. Finally, the trustee gives the beneficiaries the sale details.
Contact an Elder Law and Estate Planning Attorney Today
Understanding the pros and cons of placing houses and other assets in a trust can help individuals make informed decisions when formulating estate plans. Consider contacting a seasoned attorney to discuss your elder law and estate planning requirements. Learn more about putting your house in a trust and other legal issues by phoning Roulet Law Firm, P.A. at our Minnetonka, Minnesota office at (763) 420-5087 or our Venice, Florida office at (941) 909-4644.
If you would like to learn how to protect your home and life savings from long-term care and nursing home costs,click here to download our FREE guide Save our Home: How to Protect Your Home and Life Savings From Long-Term Care and Nursing Home Costs.
And, if you would like to learn how to make it as easy and inexpensive as possible for your family to manage your affairs during incapacity and after passing, while ensuring your assets only go to whom you want and how you want,click here to register for our FREE online masterclass.
FAQs
One disadvantage of placing your house in a trust is the loss of direct ownership. Transferring your property to a revocable living trust makes the trust the legal owner. While you retain control as the trustee, this change in ownership may affect your ability to mortgage or refinance the property.
Why do rich people put their homes in a trust? ›
Asset protection: A properly designed trust can also protect the assets in it from creditors, predators and failed marriages. In addition, a properly designed trust can protect the assets in it from long-term care and nursing home costs.
What are reasons to not have a trust? ›
Four Reasons You Don't Need a (Revocable) Trust
- Probate avoidance is the only goal. While this is an admirable goal, a trust may not be the only way to avoid probate. ...
- You have straightforward wishes. ...
- You're motivated by tax savings or Medicaid eligibility. ...
- You're not great at follow-through.
A trust helps an estate avoid taxes and probate. It can protect assets from creditors and dictate the terms of inheritance for beneficiaries. The disadvantages of trusts are that they require time and money to create, and they cannot be easily revoked.
What are the pros and cons of a trust? ›
A living trust helps your estate avoid the time and costs associated with the probate process. Cons: The assets in the trust are not protected from creditors. Which means if you are sued, the trust assets can be liquidated to satisfy a judgement.
Can you put a house with a mortgage in an irrevocable trust? ›
Can a house with a mortgage be put in an irrevocable trust? Yes. If you're setting up an irrevocable trust, you can certainly transfer your mortgaged house to the trust. You are not required to pay off the mortgage before you transfer the property to the trust.
Is a trust worth the money? ›
While establishing a trust can be more expensive and time-consuming than establishing a will, trusts offer several potential benefits, including: Avoiding probate, simplifying and speeding up the distribution of your assets.
What are the negatives of a family trust? ›
Disadvantages of Family Trusts
If you continue to treat the assets as your own, any trust could be open to challenge as a sham. Additional administration – If you establish a trust, you need to allow for the time and cost involved with meeting the trust's annual accounting and administrative requirements.
What are the risks of a trust? ›
What Are the Disadvantages of a Trust?
- Loss of Control. Setting up the trust necessitates you giving up some amount of control of the assets you place within the trust. ...
- Loss of Asset Access. ...
- Cost. ...
- Recordkeeping Complexity. ...
- High Need for Competency.
If a home in the trust produces income, you're not required to pay the taxes on that, either. Simply put, it's a way to save money on your tax bill. An irrevocable trust may also limit your estate's vulnerability to creditors. If you die in debt, your assets can be sold off to creditors to pay them off.
A trust is a legal contract that ensures your assets are managed according to your wishes during and after your lifetime. Among the many benefits trusts offer are potential tax benefits and the ability to set parameters for how and when your assets will be used and distributed.
Why is a trust better than a will? ›
A living trust, unlike a will, can keep your assets out of probate proceedings. A trustor names a trustee to manage the assets of the trust indefinitely. Wills name an executor to manage the assets of the probate estate only until probate closes.
What is the problem with trust? ›
When a relationship lacks trust, it allows for the potential development of harmful thoughts, actions, or emotions, such as negative attributions, suspicion, and jealousy. Over time, this can lead to bigger problems, such as emotional or physical abuse. Trust issues can also be linked with: Depression.
When should you consider setting up a trust? ›
If a client is concerned about incapacity or wants their assets to transfer to beneficiaries in a particular manner, a trust is a useful tool to make that happen. Another thing to keep in mind is that as useful as trusts are, there are certain things the trust's creator can do to help the process.
What is the best trust to put your house in? ›
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.
Should I put all my bank accounts into my trust? ›
Not all bank accounts are suitable for a Living Trust. If you need regular access to an account, you may want to keep it in your name rather than the name of your Trust. Or, you may have a low-value account that won't benefit from being put in a Trust.
Who controls the money in a trust? ›
Trust funds include a grantor, beneficiary, and trustee. The grantor of a trust fund can set terms for the way assets are to be held, gathered, or distributed. The trustee manages the fund's assets and executes its directives, while the beneficiary receives the assets or other benefits from the fund.
What are the disadvantages of buying a house in a trust? ›
Disadvantages of putting a house in trust
- Expense. Creating and maintaining a trust is typically more expensive than creating a will.
- Loss of control. If you create an irrevocable trust, you typically cannot change the terms of the trust or change the beneficiaries. ...
- Other assets may still be subject to probate.
Shifting assets into a revocable trust won't save estate taxes, but it will provide the opportunity for a basis step-up, helping minimize potential capital gains taxes. Revocable trusts provide opportunities for increased privacy and help clients avoid the expense and publicity of a public probate process.
What is the primary purpose of a living trust? ›
The main purpose of a living trust is to provide a flexible and efficient way to manage and distribute assets after the grantor's death while avoiding the costly and time-consuming probate process.
A mortgage in trust may be something that you have never previously considered, but it may be appropriate. Anyone who owns property can put their mortgage in a revocable living trust so as to not deal with the probate process after death and utilize other estate planning benefits.
What are the only three reasons you should have an irrevocable trust? ›
The grantor, having effectively transferred all ownership of assets into the trust, legally removes all of their rights of ownership to the assets and the trust. Irrevocable trusts are generally set up to minimize estate taxes, access government benefits, and protect assets.
Why do lenders not like irrevocable trusts? ›
Conventional lenders, such as banks and credit unions, are reluctant (or in most cases unable) to offer loans to irrevocable trusts in California. This reluctance is partly due to the complexity, lack of personal guarantee, as well as the hassle to set up this loan.
Why are trusts bad for the economy? ›
Trusts are problematic for several reasons. Monopolies develop from trusts and give total control of a specific industry to one group of companies. Owners and top-level executives of monopolies profit greatly, but smaller businesses and companies have no chance to make money at all.
What are the disadvantages of trust issues? ›
When a relationship lacks trust, it allows for the potential development of harmful thoughts, actions, or emotions, such as negative attributions, suspicion, and jealousy. Over time, this can lead to bigger problems, such as emotional or physical abuse. Trust issues can also be linked with: Depression.
What are the disadvantages of a trustee? ›
A trustee can end up having to pay taxes out of their own personal funds if they fail to take action on behalf of the estate in a timely way. Of course, they can also face criminal liability for such crimes as taking money out of a trust to pay for their own kids' college tuition. Yup, that's stealing.
What is the difference between a revocable and irrevocable trust? ›
A revocable trust and living trust are separate terms that describe the same thing: a trust in which the terms can be changed at any time. An irrevocable trust describes a trust that cannot be modified after it is created without the beneficiaries' consent or court approval, and possibly both.
