Selling a house in a trust: everything you need to know

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. 

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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.

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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.

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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. 

Testamentary trust

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.

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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. 

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: 

Connect 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. 

Prepare 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

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. 

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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

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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: 

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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. 

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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. 

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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.

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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. 

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. 

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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. 

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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.

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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.

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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. 

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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. 

Pros and cons of selling a house in a trust

Pros

• Avoids probate: Since the house is owned by the trust, selling it doesn’t typically require going through probate. This can save time and money.
• Tax benefits: Depending on the trust type (like a revocable or irrevocable trust), heirs may receive a step-up in basis. This can reduce capital gains taxes if the property is sold after the original owner’s passing.
• Privacy: Trusts are not part of public records, so selling a house through a trust offers more privacy for the family than a standard probate sale.
• Flexibility for heirs: If the property is part of a revocable trust, the trustee can manage the property sale based on the trustor’s wishes. This can allow you to carry out any specific wishes for the distribution of proceeds.
• Asset protection: For irrevocable trusts, assets are shielded from creditors, which can protect the house’s sale proceeds from claims against beneficiaries.

Cons

• Complexity and costs: Selling a house in a trust may involve more complex paperwork and legal considerations. As a result, it often requires attorney support, which can add to costs.
• Trustee limitations: Generally, you'll need to follow the terms outlined in the trust document. This may restrict the timing, sale price, or conditions for the sale.
• Potential tax implications: Selling a home within an irrevocable trust might incur capital gains tax without the benefit of a step-up in basis, especially if the trust owns the house rather than the beneficiaries.
• Limited control: In an irrevocable trust, changes to the trust or decisions about the property often require court approval or compliance with strict trust guidelines.
• Beneficiary disputes: Multiple beneficiaries may have conflicting opinions on selling the property, potentially leading to disagreements or even legal disputes.
  

Final thoughts

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.

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Selling a house in a trust can be costly. With Point's Home Equity Investment, you can tap into the equity to cover maintenance and repairs, home renovations, or even legal fees. There are no restrictions on funds and no monthly payments for a flexible 30-year term.