Putting your house in a trust comes with a lot of tax advantages. You can enjoy valuable tax benefits and spare your heirs the time, headaches, and money of going through probate court. Plus, it could help you qualify for Medicaid.
However, having assets in a trust can make for a more complicated situation. Here, we navigate the complexities of selling a house in a trust and the steps to take for a smooth and painless experience.
Types of trusts and their implications on selling
The type of trust you have can impact the selling process. Let's look at the three main types of trusts:
Revocable living trust
A revocable trust, also known as a living trust, allows the grantor (the person who creates the trust) to make changes, modify, or even revoke it at any time.
Selling a house in a revocable trust: The grantor retains control over the trust, managing assets as they see fit, including selling property. Beneficiaries can only obtain and sell assets after the grantor passes.
Irrevocable living trust
An irrevocable trust is not easily altered or revoked by the grantor once it's established. Any changes typically require the consent of the beneficiaries.
Selling a house in an irrevocable trust: The trust maps out how you can sell and distribute profits, and the terms can't be modified. In turn, there are more limitations in selling your home.
These trusts are created through a will and only come into effect after the grantor's death. They have specific instructions and provisions on how assets are managed and allotted.
Selling a house in a testamentary trust: If you sell a house in a testamentary trust after death, the process tends to be more straightforward. How and if you can sell is laid out in the trust's provisions. For instance, a condition might state that all beneficiaries must agree to sell a property.
Tax implications of trusts
Understanding the tax implications is important when you sell a home in a trust. Consult a licensed tax professional to get specific advice. A few general tax implications are:
Capital gains tax: Capital gain taxes are owed on profits made from the sale of an asset (the home). For example, if you bought the home for $500,000 and sold it for $750,000, you would owe taxes on the $250,000 profit. The tax rate is determined by various factors, such as how long you've owned the property and your income.
Selling a house in a trust before death means the grantor is responsible for paying capital gains tax. Alternatively, the trust or beneficiary could owe the tax under an irrevocable or testamentary trust, depending on how the trust is set up.
Inheritance tax: States levy inheritance tax on assets received from a deceased person. Beneficiaries are typically responsible for paying this tax, including those who receive proceeds from a home sale within a trust.
Estate taxes. State and federal taxes could be owed, depending on the size of the estate. Estate taxes occur after the settlor passes, and the estate is responsible, not the beneficiaries.
Steps for selling a house in trust
There's a lot that goes into preparing a house for a sale. Let's look at how selling a house in a trust impacts the process:
Connecting with professionals
As navigating selling a house in a trust has its added challenges, working with experienced professionals and forming a team can help you wade through any potential quagmires.
- Trustee (the third party responsible for managing the assets): A trustee or executor can help guide and facilitate the sale by explaining trust provisions, ensuring legal compliance, and advising on any necessary approvals you may need. Additionally, they can ensure the sale proceeds are dispersed or stored according to the conditions outlined.
- Estate attorney: An estate attorney can clarify property sale conditions, provide legal guidance in case of disputes, and explain the handling of sale proceeds.
- Real estate agent: Collaborating with a real estate agent who is experienced in trust sales is vital. If possible, work with a real estate agent with experience with your type of trust. They can help you navigate the home sale and ensure all necessary documentation and obligations are completed.
Preparing the house for sale
If you've sold a home before, you're familiar with listing, staging, and showing your property.
- Obtain necessary documentation: You'll want copies of the trust certification, death certification if a trustee has passed away, a complete copy of the trust certification, and, if applicable, a copy of the physician's statement on the capacity of a trustee.
- Tackle maintenance and repairs: Note any repairs and improvements to the home before putting it up for sale. Ensuring the property is in tip-top shape makes it more attractive to potential interested buyers and can increase its value. On average, sellers spend $5,400 on fixing their homes before listing them.
- List and market the property: Work with an agent or DIY hack staging the home to make it appealing to buyers. Invest in curb appeal to boost its value. It's also important to disclose the trust status to potential buyers early. That way, they understand the tax implications and the fact that, depending on the process and type of trust, they could end up being a trustee of the trust rather than the owner of the property.
Escrow and closing process
The escrow and closing process for the sale of any home can be a tricky matter. If you're a homeowner, you know the steps involved. Besides working with an escrow company and title agency that you trust and have a good rapport with, look for one that has experience in specifically selling a home in a trust.
These professionals can prepare you for closing, which involves providing required trust documentation such as:
- The trust agreement
- Deed to your property
- Standard legal documents for closing on a home, such as proof of homeowners insurance, loan application, note, and deed and trust
Special cases: selling a house in specialized trusts
Charitable trusts and real estate donations
You can donate assets–like property–to charitable causes in a charitable trust. Charitable trusts fall into two main camps: charitable lead trusts and charitable remainder trusts.
In a charitable lead trust, you allocate a portion of the proceeds on the sale of a house, and the remainder is provided as income to the beneficiaries. In a remainder charitable trust, it's the other way around: the trust's creator receives income, and the rest goes toward charity.
There are additional tax implications that come from charitable donations.
Qualified personal residence trust (QPRT)
A qualified personal residence trust (QPRT) is a type of irrevocable trust — in other words, a trust where the terms cannot be changed.
One of the main perks of a QPRT is that the owner of the property can continue to live there for a set amount of time. There's "retained interest" in the house. Once the period of time is up, the interest gets transferred to the trust beneficiaries.
Another perk of a QPRT is that the trust's creator can remove the home as one of the listed assets in their estate. The benefit of this? It bumps down how much gift tax is owed – a valuable tax advantage.
A gift tax is the tax owed when one person transfers an asset, such as property, from one person to another without getting anything in return.
Medicaid irrevocable trusts and the impact on home sales
With a Medicaid irrevocable trust, the donor names their children as beneficiaries and funds the trust with assets such as property, investments, and savings. If contributions are made to the trust five years before the donor applies for Medicaid, it won't impact the donor's eligibility for Medicaid. So, should the need for long-term care arise, this type of trust will protect your assets from liquidation.
Knowing the ins and outs, potential issues, and special considerations in selling a house in a trust can smooth the process. Whether you're the creator, trustee, or beneficiary of a trust, make sure you understand your role and the options available for selling property. Consult with the necessary legal and financial professionals to determine the best route based on your situation and needs.