Why you should consider putting your house into a trust

A plan for what will happen to your home after you die might not be on your top 10 list of fun things to think about, but it’s important, nonetheless. The probate process ensures your assets are distributed according to your will. Or, if you died without a will, according to your state’s inheritance laws. But this can be a lengthy and costly ordeal.

Property trusts aren’t just for those who have large estates or complex estate plan needs. If you’re like most homeowners, your house is your most valuable asset. So having a plan for that asset can make for a less-stressful ordeal for anyone who might be inheriting the house after you pass away.

What is a property trust?

In a nutshell, a property trust is a legal entity that allows a grantor to pass their property to their beneficiary of choice. For the unacquainted, here are some common roles involved in a trust:

• Grantor: The person tasked with creating the trust
• Beneficiary: The person inheriting the property
• Trustee: Oversees the trust. They also manage the assets in the trust on behalf of the beneficiary, according to the grantor’s instructions.

Usually, a trustee is the owner of the home. That way, they can make key decisions and maintain control of their home. As the owner, you can name someone else – such as a friend, your adult children or attorney – as the trustee.

Technically, a trust is a fiduciary arrangement. In other words, it's a contract by which one party entrusts another with managing their assets. Getting even more specific, fiduciaries are parties that are required to put another party's best interests ahead of their own.

Once you understand what a property trust is, the next step is discovering why it might be a good idea to put your house into a trust. You'll also want to get your head around how this process works.

Why put a house in a trust?

The main advantage of putting your house in a trust is to bypass probate when you pass away. All of your other assets, regardless of whether you have a will, will go through the probate process.

Probate in real estate is the judicial process that your property goes through when you die. The probate laws and processes vary from state to state. Generally speaking, during this process, your assets will be used to pay any debts or taxes you owe. Then, the remainder of your property will be distributed according to your will. If you don’t have a will in place, your property will be doled out according to your state’s laws regarding intestate succession.

Probate can be a lengthy process. Simpler estates might be completed in just a few months. Large estates or complex situations might have a probate process that lasts as long as a year or more. And as mentioned, the process can vary by state.

If your will is contested, the process can even be more drawn out. It can also have a hefty price tag when you factor in various court fees, legal expenses and administrative costs. We're talking anywhere between 3% to 7% of the value of your estate.

Considerations before you create a trust

If you’re weighing whether to put your house in a trust, make sure to consider how the process will affect your ability to make changes to your current mortgage. After you've put your home in a trust, it can be tough to change your mortgage terms by refinancing.

You might benefit from a loan refinance, which can help you alleviate stress or lift some financial burdens. If so, you can consider applying and seeing what options are available before you begin the legal process of putting your home in a trust. Keep in mind that trusts can violate the due on sale clause if not executed properly, so it’s important to consult with an attorney to ensure you’re not violating the terms of your mortgage.

How does putting a house in a trust work?

When you put an asset, like a house, into a trust it works as follows:

1. You’ll typically name yourself as the trustee. (If it’s a living, revocable trust, keep reading to learn more.)
2. You’ll name a successor trustee who’ll take over when you pass away.
3. Your chosen trustee will be responsible for following the instructions of the trust and distributing the assets in the trust to your beneficiaries.

It can give you peace of mind knowing that ownership of your home will be passed to the person you designate as soon as you pass away (or under whatever conditions you stipulated in the trust agreement). The process of putting your house in a trust also helps your beneficiary avoid a drawn-out legal process first.

Types of trusts for estate planning

There are many types of trusts. The most important ones to understand as you approach estate planning are “revocable” and “irrevocable” trusts. Let's walk through what both entail.

Revocable trust

A revocable trust, sometimes referred to as a living trust, is one that can be revoked or changed at any time. During your lifetime, you’re free to make changes to the trust or terminate it completely.

With a revocable trust, you’ll usually act as your own trustee. Or you can name someone else to become trustee upon your death or incapacitation, such as a friend, relative, attorney or financial advisor. While you’re alive, you have control over the assets in the trust.

When you pass, a revocable trust becomes irrevocable, and your successor trustee will take control and manage the trust according to your instructions. Revocable trusts are generally still subject to estate taxes, and they won’t protect your assets from creditors.

Irrevocable trust

An irrevocable trust can’t be changed or terminated after it’s been executed.  However, it can be terminated after with the beneficiaries' consent. With this type of trust, you forfeit ownership of any assets in the trust and the trustee takes control of these assets.

Because you no longer own the asset, it’s no longer part of your estate. In turn, you generally won’t be subject to an estate tax or vulnerable to your creditors. Though that might seem like a positive, you'll want to consider the full implications of no longer legally owning the assets you put into the irrevocable trust.

If you’re thinking about putting assets into this type of trust, you might want to first consult an attorney.

How to put a house in a trust

If you’re interested in putting your house into a trust, there are a couple of initial steps you’ll need to take in order to start this process.

1. Create a revocable living trust

If you want to hold your property in a trust, you’ll first need to create one. To create a revocable, living trust, you’ll need to choose a successor trustee who’ll take control of the trust once you pass away. You’ll also need to name your beneficiaries.

You can choose anyone to be your successor trustee. That being said, just be sure they’re someone you can count on. If your estate is fairly complex, you might choose an attorney, financial advisor, accountant, trust company, or other professional to be your successor.

2. Prepare your trust agreement

You’ll then prepare your trust agreement, which is a document outlining the details and specifics of the trust. You can find standard trust agreements online, or you can ask your lawyer to create the documentation. For the trust to be valid, you’ll have to sign it in front of a notary public.

3. Fill out a new deed

To move your home into the trust, you’ll need to fill out a new deed. You can typically find state-specific property deed forms online, or you can have your attorney complete this process for you. This document will also need to be signed in front of a notary public before you record it with your county recorder’s office or clerk’s office.

Should I put my house in a trust?

Still not sure whether to put your home in a trust? Let’s look specifically at some of the pros and cons of choosing this option.

Advantages of putting your home in a trust

There are several pluses to putting your home in a trust that you should consider.

• Avoids probate: The main benefit of putting your home into a trust is avoiding probate, which can be a costly and prolonged ordeal.
• Privacy: Placing your home in a trust also keeps some of the details of your estate under wraps. The probate process is a matter of public record, but the passing of a trust from a grantor to a beneficiary is not.
• Helps avoid multistate process: Putting your home in a trust can also help you avoid a multistate probate process.
• Potential tax savings: Trusts can offer tax advantages. For example, if you've set up an irrevocable trust, it might be eligible for a step-up in tax basis once the grantor passes. This can bring down estate taxes and capital gains taxes.
• Makes it simpler for the trustee: It can also make things easier for the trustee. It bypasses probate and can make things easier for them.

Case in point: If you own a primary residence in Colorado and a vacation home in Florida, your Florida property will need to go through that state’s probate process while the rest of your estate goes through the Colorado probate process. That means the executor of your estate will need to handle two probate processes. By putting the Florida house in a living trust, however, you can save your executor this extra work.

Disadvantages of putting your home in a trust

Whether it makes sense for you to put your house into a trust is largely contingent on your goals. Here are some of the downsides of putting your home in a trust:

• Expensive: Setting up a living trust – depending on how you do it and the assets you put into it – can be a complex and costly process. For example,
• May not bypass probate entirely: 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.
• Permanence: If you are creating an irrevocable trust, once you create a trust, you can change any details with your trust.
• Can make refinancing harder: Putting your house into a trust can also make refinancing more difficult. If you’re planning a rate-and-term refinance or cash-out refinance soon, you might want to hold off on establishing your trust.

Do you need a trust if you have a will?

If you already have a will, should you set up a trust? It really depends. This depends on your needs, the needs of your family, your preferences, and your situation. Generally, a trust is a faster, more efficient way to get your assets to your heirs, but setting up a trust is often more expensive than creating a will.

Well-planned estates often use both trusts and wills. You might choose to put just vital assets, such as your house, in a trust, and have everything else be dictated by your will. This can help with a speedy transfer for your most important assets, while the rest of your estate goes through the normal probate process.

The bottom line: Putting your house in a trust can make the inheritance process easier

Preparing for what happens after your death is never easy, but knowing you’ve made arrangements for your assets to be passed to your heirs once you’re gone can give you invaluable peace of mind.

Because estate and trust laws vary from state to state, it’s always a good idea to consult an attorney who specializes in estate planning and is well-versed in the laws of your state as you begin to create an estate plan.

Before moving forward in the legal process, be sure your mortgage loan is squared away. Refinancing may be an option you’ll want to consider before putting your house in a trust. Explore your refinance options to see what you qualify for or talk with one of our Home Loan Experts today.