The Pros And Cons Explained
Putting A House Into A Trust - Is It A Good Idea?
Over the past decade at Rochester Law Center, we’ve helped 1,000s of clients estate plan. Some of the most common questions we get asked are about living trusts. In this article, we’re going to cover some of the pros and cons of putting a house into a trust.
Additionally, we’re going to answer some common questions asked frequently about putting a house into trusts, who owns your home after putting a house into a trust, and what you can and can’t do with your property after it’s in your trust.
Putting A House Into A Trust Or Last Will And Testament?
Estate planning is about creating a custom plan to allow you to transfer your money, property, and assets to your family in the most efficient way possible. The two most common estate planning documents are the last will and testament and the revocable living trust.
Both of these documents let you specify which of your loved ones should receive your assets after you pass. However, with a last will and testament, your assets must go through probate court before your family can receive them. This can take months, sometimes even years if your will is contested in court.
On the other hand, a living trust avoids probate court. This means that your family can receive your money, property and assets in a matter of days or weeks after you pass instead of months or potentially years.
Putting A House Into A Trust - Why Do People Do It?
There are two main reasons why people put a house into a trust. The first reason is that they want their family to be able to inherit their home without having to go through the long, stressful, and expensive probate court process.
Instead, their home can be transferred to their heirs in a private setting shortly after their death.
The second reason deals with planning for incapacity. It’s a common misconception that estate planning only plans for death, but comprehensive estate planning plans for incapacity as well. When you create a living trust, you will name a successor trustee. This person is responsible for distributing your assets to your heirs after you die. They are also responsible for stepping in and managing the assets in your trust if you become incapacitated and can no longer communicate. By putting a house into a trust, you can ensure that one of your most important assets will be managed and taken care of by someone you trust in the event you become incapacitated.
Putting A House Into A Trust - How Does It Work?
In order to avoid probate court, your assets need to be placed into a living trust. This called funding the trust. When you create a living trust, you are known as the settlor or grantor, depending on what state you live in. When you set up the living trust, you also assign yourself as the trustee. The trustee is the person who has the right to manage all of the money, property, and assets that are placed inside of the living trust. By naming yourself trustee while you are living, you maintain the ability to manage all of the assets in your trust just like you do now. For example, if you plan on putting your house into a trust, you can still sell it at any time in the future.
Additionally, you will name your beneficiaries in your revocable living trust. Your beneficiaries are your loved ones that you want to inherit your money and property after you die. Usually this is a spouse, children, grandchildren etc.
Lastly, you will designate your successor trustee. Your successor trustee is the person who will take over management of your living trust after you die or become incapacitated. They will be responsible for settling your estate and distributing your assets to your beneficiaries after you die. Additionally, if you are putting your house into a trust, the successor trustee is the person who will manage your home, and any other assets you placed in the name of your trust if you become incapacitated.
In the next section we will talk about all of the additional benefits of putting a house into a trust.
Putting A House Into A Trust - What Are The Benefits?
As mentioned earlier, one of the biggest advantages of putting a house into a trust is that, unlike a will, a living trust allows you to avoid probate court. There are three main reasons why this is important.
First, probate can be very expensive.
Probate is the legal process through which the court ensures that, when you die, your debts are paid and your assets are distributed according to the law. Legal fees, executor fees, inventory fees (county taxes), and other costs have to be paid before your assets can be fully distributed to your heirs.
If you own property in other states, your family could face multiple probates, each one according to the laws in that state. We usually expect about 10% of your estate to be eaten up in probate court through legal fees, inventory fees, court costs etc. For smaller estates, the percentage can be much larger – sometimes leaving little behind for your loved ones.
These costs can vary widely, but we’ve had clients who had to pay tens of thousands of dollars throughout the probate process. In general, probate is much, much more expensive than doing some simple estate planning in advance.
Second, probate can take a long time.
The standard probate process takes a minimum of 5 months to complete. However, over the past decade we’ve experienced that it generally takes 9 months to a year to resolve simple cases (and several years for contested cases). We once represented a client whose Probate lasted for 8 years.
Third, probate is public.
Your family has no privacy. Probate is a public process, so anyone can see the size of your estate (often what you actually owned), who you owed debts to, who will receive your assets, and when they will receive them. The process invites upset heirs to contest your will and can expose your family to greedy creditors and potential fraudsters.
Keep Your Financial Matters Private
Since there is no probate court process when you have a living trust, there is no need to make your assets public. On the other hand, if your house is only included in a will, the will’s contents are made public when it is entered in probate court.
Since the trust avoids probate, the contents of the transfer stay private. In general, the only people who will ever see the living trust, are the beneficiaries that you name. And even then, only after you pass
If you become incapacitated during your life, then a living trust can protect your family from undergoing a conservatorship. A conservatorship is when a court-appointed guardian is given the authority to manage an incapacitated person’s financial matters for them.
This feature of a living trust is especially comforting to families in times of difficulty since they do not have to worry about going to court and requesting access to the incapacitated person’s finances. A revocable living trust gives the family one less problem to face when someone becomes incapacitated.
If the trust is set up as an individual trust, then the trustee can take over and manage the assets. If the trust is owned by a married couple, then the second spouse will usually step in as the acting trustee.
It is also prudent to have a durable power of attorney for finances in addition to a living trust to grant the new acting trustee the power to manage any property and finances outside of the trust.
Putting A House Into A Trust - What Are The Disadvantages?
While the benefits of putting a house into a trust greatly outweigh the drawbacks, it does have some additional complexities…
In order to make your living trust effective, you need to make sure that the ownership of your house is legally transferred to you as the trustee. Since your house has a title, you need to change the title to show that the property is now owned by the trust. To do this you need to prepare and sign a new deed to transfer ownership to you as trustee of the trust. In the end, a little bit of additional paperwork and record keeping is worth much more than the time and money that will be lost in probate, not to mention the stress that your family will have to go through to access your assets after you pass.
Accurate Record Keeping
Once you create a living trust you don’t need separate income tax records if you are both the grantor and the trustee. Any income you receive from property that you are holding in the trust will simply be reported on your personal tax returns. However, if you transfer property in or out of the trust, you need to keep accurate written records. This isn’t difficult, but it’s easy to forget if it has been a few years since you created your trust.
The advantages of putting a house into a Trust far outweigh the disadvantages. This is why it is one of the best, simplest, and most commonly used methods for avoiding financial disaster and your passing assets to your loved ones after you’re gone.
Now that we have talked about some of the major pros and cons of putting a house into a trust, we are going to answer some additional questions we get from clients about putting a house into a trust.
One of the main questions we get is…
Is Putting A House Into A Trust Difficult?
Putting a house into a trust is actually quite simple and your living trust attorney or financial planner can help. Since your house has a title, you need to change the title to show that the property is now owned by the trust. To do this you need to prepare and sign a new deed to transfer ownership to you as trustee of the trust.
Besides Putting A House Into A Trust, Are There Other Assets I Should Consider Putting Into A Trust?
Aside from putting a house into a trust, there are other assets you should consider titling in the name of the trust. Usually it’s best to include all real estate, stocks, CDs, bank accounts, investments, insurance and other assets with titles. Some people also include jewelry, clothes, art, furniture, or other assets in a one page assignment.
Will I Lose Control Of My Home When Putting A House Into A Trust?
Not at all, you keep full control of all of the assets in your trust. As Trustee of your trust, you can do anything you could do before – buy and sell assets, gift them away, mortgage them out, and you can still change or even cancel your trust altogether. That’s why it’s called a revocable living trust. You even file the same tax return. Nothing changes but the name on the titles.
How Do I Set Up A Living Trust?
If you need help putting a house into a trust and you’d like to set up a living trust, we can help. Over the past decade, we’ve helped 1,000s of clients set up all matters of living trusts, wills, powers of attorney, and estate plans. We’d be happy to answer any questions you have about whether a living trust is the right estate planning option for you. Just give us a call today at (248) 613-0007 to schedule your complimentary consultation.
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Written By Chris Atallah - Founder, Rochester Law Center, PLLC
Written By Chris Atallah - Founder, Rochester Law Center, PLLC
Chris Atallah is a licensed Michigan Attorney and the author of . Over that pastdecade, Chris has helped 1,000s of Michigan families and businesses secure their futures in all matters of Wills, Trusts, and Estate Planning.He has taught dozens of seminars across the State of Michigan on such topics as avoiding the death tax, protecting minor children after the parents’ death, and preserving family wealth from the courts and accidental disinheritance.If you have any questions, Chris would be happy to answer them for you – just call at248-613-0007.
What is the downside of putting your house in a trust? ›
Disadvantages Of Putting Your Home In A Trust
Additionally, if the trust only holds your house, you'll still have other assets that need to go through the probate process, so you can't truly bypass probate completely.
Trusts are regularly used by wealthy families to minimize taxes and transfer assets to heirs. Trusts are also used to insulate wealth from frivolous and unfounded lawsuits and sometimes from divorcing spouses.What are the disadvantages of a family trust? ›
Disadvantages of a Family Trust
You must prepare and submit legal documents, which the court charges a fee to process. The second financial disadvantage of a family trust is the lack of tax benefits, especially when it comes to filing income taxes. When the grantor dies, the trust must file a federal tax return.
Revocable living trusts have a few key benefits, like avoiding probate, privacy protection and protection in the case of incapacitation. However, revocable living trusts can be expensive, don't have direct tax benefits, and don't protect against creditors.What are the bad things about a trust? ›
One major disadvantage is that they can be complicated and expensive to set up. Although the idea of avoiding probate costs is attractive, it's important to realize that trusts come with their own costs, including legal fees and compensation for the trustee, if needed.What are the 3 types of trust? ›
- Revocable Trusts.
- Irrevocable Trusts.
- Testamentary Trusts.
According to SmartAsset, the wealthiest households commonly use intentionally defective grantor trusts (IDGT) to reduce or eliminate estate, income and gift tax liability when passing on high-yielding assets like real estate to their heirs.How much wealth do you need to set up a trust? ›
How much money do you need to start a trust? There isn't a fixed minimum amount required to start a trust. You may want to check whether the institution where you plan to open a trust has any requirements, but they're likely to be low. If you set up a trust yourself, it likely won't cost you more than $100.How rich do you have to be to have a trust fund? ›
Here's a good rule of thumb: If you have a net worth of at least $100,000 and have a substantial amount of assets in real estate, or have very specific instructions on how and when you want your estate to be distributed among your heirs after you die, then a trust could be for you.What assets Cannot be placed in a trust? ›
- Retirement assets. While you can transfer ownership of your retirement accounts into your trust, estate planning experts usually don't recommend it. ...
- Health savings accounts (HSAs) ...
- Assets held in other countries. ...
- Vehicles. ...
What type of trust is best for a family? ›
An irrevocable trust offers your assets the most protection from creditors and lawsuits. Assets in an irrevocable trust aren't considered personal property. This means they're not included when the IRS values your estate to determine if taxes are owed.Do trusts pay taxes? ›
A trust is subject to tax in California “if the fiduciary or beneficiary (other than a beneficiary whose interest in such trust is contingent) is a resident, regardless of the residence of the settlor.” See Cal.What is the downfall of a living trust? ›
One of the primary disadvantages to using a trust is the cost necessary to establish it. It's generally more expensive to prepare a living trust than a will. You must create new deeds and other documents to transfer ownership of your assets into the trust after you form it.Are trusts worth it? ›
Trusts are a great way to reduce, and in some cases eliminate, hefty Estate taxes. Essentially, by transferring assets into Trusts you can reduce your overall taxable Estate. Though there are various types of Trusts to choose from, they almost all take tax planning into account.Are family trusts worth it? ›
So transferring assets to a family trust can make life much easier for your family in this way. You can use an irrevocable family trust to insulate assets from creditors. Most importantly, a family trust can help to minimize estate taxes once the trust grantor passes away.Is your money safe in a trust? ›
One of the primary benefits of having a trust is that the assets held within it are protected from legal claims. With the possible exception of retirement savings, any assets that you have are subject to seizure by courts and creditors. However, assets held in trust are legally protected.What is a trust and why is it a problem? ›
Trust is a subjective way of measuring how much we're able to rely on and believe in the honesty and integrity of others. But when our ability to trust others is compromised, we may develop trust issues.Who is the best person to set up a trust? ›
A good Trustee should be someone who is honest and trustworthy, because they will have a lot of power under your trust document. The person you choose to act as a Trustee should also be financially responsible, because they will be handling the investments for the benefit of your beneficiaries.What is the best state to set up a trust? ›
That really depends on which benefits are most important to you. But, generally, the consensus among advisers and estate attorneys is that the trust laws of South Dakota and Nevada offer the best combination of tax benefits, asset protection, trust longevity and flexible decanting provisions. Why Do I Need a Trust?Who has the most power in a trust? ›
Technically, assets inside a Trust are owned by the Trust itself. They are managed and controlled by the named Trustee, who owns the legal title to said assets. The Trustee will also act on behalf, and in the best interest of, the Trust's beneficiaries.
Who controls the money in a trust? ›
Trust Funds are managed by a Trustee, who is named when the Trust is created. Trust Funds can contain money, bank accounts, property, stocks, businesses, heirlooms, and any other investment types.What is income from a trust called? ›
Trust accounting income(also called fiduciary accounting income or FAI) refers to income available for payment only to trust income beneficiaries. It includes dividends, interest, and ordinary income. Principal and capital gains are generally reserved for distribution to the remainder beneficiaries.What type of trust avoids taxes? ›
A Living Trust can help avoid or reduce estate taxes, gift taxes and income taxes, too.How the rich avoid taxes with trusts? ›
A grantor-retained annuity trust — or “Grat”— facilitates tbenefit. In basic terms, the wealthy put assets like stocks in a privately held business into the trust for a specified time, maybe two, five or 10 years. Afterward, any investment growth passes to their heirs and the owner gets back the principal.Should I put all my money in a trust? ›
There are several benefits of creating a trust. The chief advantage is to avoid probate. Placing your important assets in a trust can offer you the peace of mind of knowing assets will be passed on to the beneficiary you designate, under the conditions you choose and without first undergoing a drawn-out legal process.What is the minimum size for a trust fund? ›
There's no set minimum amount needed to start a trust fund. However, it's generally worth starting one only if you have a reasonable amount of assets you want to protect, because it can take time and money to set one up.How do the wealthy protect their money? ›
Millionaires have many different investment philosophies. These can include investing in real estate, stock, commodities and hedge funds, among other types of financial investments. Generally, many seek to mitigate risk and therefore prefer diversified investment portfolios.Does having a trust fund mean you're rich? ›
Trust funds may be used by individuals, even some of modest means, who wish to set aside assets for specific purposes. For example, affluent, but not necessarily ultra-rich parents and grandparents create college trust funds to pay for children's postsecondary education.Can you earn income from a trust? ›
Like individuals, a trust can own assets such as stocks and bonds, which may earn dividends, or real estate, which may earn rental income. In the same way individuals would have to pay taxes on such income, trusts have to as well.Should I put my bank accounts in a trust? ›
In the state of California, for instance, you may hold up to $166,250 in assets, property, or accounts outside of a Trust and still avoid Probate. But if you have over $166,250 in your account, you should consider transferring it to your Trust so that your Beneficiary can receive their inheritance outside of Probate.
Can the IRS take assets in a trust? ›
The IRS and Irrevocable Trusts
When you put your assets into an irrevocable trust, they no longer belong to you, the taxpayer (this is different from a revocable trust, where they do still belong to you). This means that generally, the IRS cannot touch your assets in an irrevocable trust.
Retirement accounts like an IRA, Roth IRA, 401K, 403b, 457 and the like don't belong in your trust. Placing any of these assets in your trust would mean that you're taking them out of your name to retitle them in the name of your trust. The impact this will have on your taxes can be disastrous.Can creditors go after a trust? ›
Can Creditors Garnish a Trust? Yes, judgment creditors may be able to garnish assets in some situations. However, the amount they can collect in California is limited to the distributions the debtor/beneficiary is entitled to receive from the trust.At what age should you create a trust? ›
There is no Ideal Time to Consider a Living Trust
Unfortunately, there is no real answer to the “right time” to create a living trust because it is not solely based on your age. Instead, wealthier people with expensive assets, regardless of age, should consider one of these documents.
If the ultimate beneficiaries of the Living Trust are family members of the person who created the trust, the trust will often be referred to as a “Family Trust.” If those beneficiaries include friends, charities, or other non-family members, then the trust is typically called a “Living Trust.”Do trusts have to file tax returns? ›
Q: Do trusts have a requirement to file federal income tax returns? A: Trusts must file a Form 1041, U.S. Income Tax Return for Estates and Trusts, for each taxable year where the trust has $600 in income or the trust has a non-resident alien as a beneficiary.What is the 65 day rule for trusts? ›
What is the 65-Day Rule for estates and trusts? Any distribution by an estate or trust within the first 65 days of the tax year can be treated as having been made on the last day of the preceding tax year. This year, that date is March 6, 2023.What is the trust fund loophole? ›
The capital gains tax is paid when the heir or beneficiary sells the inherited asset, so it may be several years before the tax is paid. Wealthy individuals often use trusts to transfer assets to their beneficiaries – hence, the “trust fund loophole”.Why is trust so easily destroyed? ›
Not being able to trust people can be linked to a number of factors. Early childhood experiences, social experiences, adult relationships, personality factors, and mental health conditions can all play a role in undermining trust in other people.How does a beneficiary get money from a trust? ›
The trustee can transfer real estate to the beneficiary by having a new deed written up or selling the property and giving them the money, writing them a check or giving them cash.
What happens to an irrevocable trust when the grantor dies? ›
After the grantor of an irrevocable trust dies, the trust continues to exist until the successor trustee distributes all the assets. The successor trustee is also responsible for managing the assets left to a minor, with the assets going into the child's sub-trust.What are the disadvantages of putting your house in a trust? ›
Generally, trusts have higher preparation costs than other estate planning tools. They require the individual to retitle their assets in the name of the trust. This can take both time and money. If a person fails to retitle their assets, they will not pass through the trust and they will instead go through probate.Is it smart to set up a trust? ›
Consider setting up a trust if you want to: Ensure that your assets are managed for the benefit of your heirs, according to your wishes. Preserve your assets while potentially minimizing taxes and probate costs associated with transferring assets through a will. Establish a tax-advantaged charitable gift.What is the major disadvantage of a trust? ›
The major disadvantages that are associated with trusts are their perceived irrevocability, the loss of control over assets that are put into trust and their costs. In fact trusts can be made revocable, but this generally has negative consequences in respect of tax, estate duty, asset protection and stamp duty.Is it better to inherit a trust? ›
The bottom line is that a trust provides far more potential asset protection than an outright inheritance. Depending upon the needs of your family, an estate planning attorney can create a trust for you that protects assets and preserves them for your beneficiaries.What are the pros and cons of putting your estate in a trust? ›
- Avoid Probate Court.
- Your Personal And Financial Matters Remain Private.
- You Maintain Control Of Your Finances After You Pass Away.
- Reduce The Possibility Of A Court Challenge.
- Prevent A Conservatorship.
- Additional Paperwork.
- Maintain Accurate Records.
Some of the Cons of a Revocable Trust
Shifting assets into a revocable trust won't save income or estate taxes. No asset protection. Although assets held in an irrevocable trust are generally beyond the reach of creditors, that's not true with a revocable trust.
A revocable trust does not pay taxes. For federal and California income tax purposes, the assets in the trust are treated as belonging to you.What is the best type of trust to protect assets? ›
An irrevocable trust offers your assets the most protection from creditors and lawsuits. Assets in an irrevocable trust aren't considered personal property. This means they're not included when the IRS values your estate to determine if taxes are owed.What are the negatives of an irrevocable trust? ›
The downside to irrevocable trusts is that you can't change them. And you can't act as your own trustee either. Once the trust is set up and the assets are transferred, you no longer have control over them, which can be a huge danger if you aren't confident about the reason you're setting up the trust to begin with.
What is a major benefit of a revocable trust? ›
One of the primary benefits of a revocable trust is the ability to provide uninterrupted investment management should the grantor become incapacitated, as well as after the grantor's death. Since the assets were previously transferred into the trust's name, there is no need to reregister securities after death.Does a revocable trust survive death? ›
A revocable trust turns into an irrevocable trust when the grantor of the trust dies. Typically, the grantor is also the trustee and the first beneficiary of the trust. Once the grantor dies, the terms written into a revocable trust cannot be modified in any way, nor can anyone add or remove assets.Do revocable trusts avoid federal taxes? ›
Revocable trusts are the simplest of all trust arrangements from an income tax standpoint. Any income generated by a revocable trust is taxable to the trust's creator (who is often also referred to as a settlor, trustor, or grantor) during the trust creator's lifetime.Can the IRS touch a revocable trust? ›
When you place property in a revocable trust, you have the right to take it back out. As a result, the Internal Revenue Service and state income-tax collectors treat your assets the same whether they're in the trust or not. Putting a house in trust offers no protection against tax liens on the property.Who pays capital gains taxes on a revocable trust? ›
Capital gains on the sale of assets held in a revocable trust are still taxable to the grantor and must be reported on the grantor's income tax return. Any income generated by the trust may also be taxable to the grantor, depending on the type of income and other factors.