Are you thinking about placing your home under a trust? While there are advantages to doing so, there are also disadvantages that one must consider when planning for an estate in this way.
Before any estate planning strategy, it is essential to understand its good and bad sides.
Although it may seem like a complex legal concept, having an estate planning attorney can make creating trusts much easier and quicker.
This article outlines some drawbacks of putting your house in a trust. Therefore, you will have enough information to make an informed choice before putting your house in a trust.
Let’s get started!
What is a Trust?
A trust is an agreement that permits another entity or someone else to keep property to benefit one person or several people called beneficiaries.
When a settlor creates this arrangement, it starts when he/she transfers title to certain assets to the trustee. This individual then governs and manages these items as specified in the trust instrument.
They help safe-keep and allocate these properties according to what the settlor wishes thus protecting the interest of beneficiaries.
Trusts have many uses, including estate planning, asset protection, philanthropy, and managing minors’ funds or specialized individual finances.
Different Types of Trusts
There are three different types of trusts;
- a)• Inter-Vivos Trust (Living Trust)—This puts a person’s assets into trust while alive. After the grantor passes away, the trustee managing it will pass down the assets to its beneficiaries.
b)• Will Trust (Testamentary Trusts) – These are trusts created by testators to specify how their estate should be shared or allocated upon their death and
- a)• Revocable Living Trust—A trust that can be modified or even terminated by its creator.
b)• Irrevocable Trust – Changes cannot be made to this type of trust once drafted and established.
On the other hand, testamentary trusts are usually irrevocable upon inception but may be revocable through a will if the grantor is still alive.
- a)• Funded Trust—This refers to a situation in which a person transfers their property into a bank account during their lifetime.
b)• Unfunded Trust—A funding mechanism may be used after the testator’s death, or it may not be funded.
Proper capitalization, as opposed to unfunding, helps keep such trusts safe from any potential risk imposed on the assets that would otherwise have been covered ordinarily with trusts.
Which is the Best Trust to Place a House in?
An irrevocable trust is the best trust to put your house in. Once established, it cannot be changed or terminated, providing robust protection for your assets.
Such a trust also shields your assets from creditors and lawsuits. This makes them exempt from IRS valuations for estate taxes and safe in bankruptcy or debt default.
Creating an irrevocable trust as part of the estate planning process ensures the effective protection of your home and other belongings.
Creating a Trust for Your House
Start by setting up the trust. This is accomplished by drafting a document stipulating how ownership of your estate should be divided, to whom it goes, and at what time. Then, follow these easy steps below.
Step 1: Draft a new property deed. You may copy the existing one and update any necessary details, such as naming the trust the new owner.
The usual format generally includes the trustee’s name followed by “trustee of” and the trust’s name, e.g., “Jacktone Etemesi, Trustee of Etemesi Family Trust.”
Step 2: Notarize your deed. A notary public can do this and authenticate it at an agreed-upon fee.
Step 3: File the deed with an appropriate office. In most cases, this will entail recording the transfer of property in your local county clerk’s office, which keeps records about properties within that locality.
If, at some point, you feel that it would be best to remove assets from the trust, you can follow the same steps discussed above to do this.
What Disadvantages Can There Be When You Put Your House in a Trust?
Before making any decision, you need to know the cons of transferring your house into a trust. Here are some problems that need your attention:
Loss of Direct Ownership – Once you have put your property into a trust, you will no longer have direct ownership rights.
However, remaining its trustee may affect your ability to take a mortgage or refinance it anyway. This can make them more cautious and thereby limit your financing options.
No Creditor Protection – Revocable living trusts, unlike irrevocable trusts, do not provide any protection from moneylenders.
Creditors can easily reach the assets in the trust over your lifetime. If creditor protection is important, other estate planning strategies should be considered instead.
Complexity and Administrative Burden – Trusts can make estate planning very difficult, with all changes requiring meticulous record-keeping and documentation.
This might be too much, especially for those who know nothing about legal matters. It might include extra expenses due to the need for expert advice.
Limited Tax Benefits – Although revocable living trusts do not offer direct tax advantages, they can impact capital gains taxes upon your demise.
This might not be pleasing for those focusing on tax planning and considering alternatives like qualified personal residence trusts.
High Costs – Expenses like legal fees and trustee charges are involved in creating and maintaining a trust.
In simpler estates, such costs may outbalance the benefits, especially if the main goal is to avoid probate, which may be cheaper in certain areas.
Lack of Asset Protection – Unlike irrevocable trusts, there is no protection from backers with revocable living trusts. Therefore, during your lifetime, the assets contained in the trust can be open to legal action.
What Advantages Are There to Putting Your House In A Trust?
The following are some of the advantages of placing your house in a trust:
- Trusts help avoid probate after death – Your house and other property will not go through probate when you die, making transferring ownership to the beneficiaries very easy.
- Estate tax minimization—An irrevocable trust may minimize or even obliterate estate taxes for rich estates, which can mean huge tax savings on asset transfers.
- Creditor protection—Irrevocable trusts provide creditor protection, shielding your assets against creditors, including nursing homes, and preserving the inheritance for your beneficiaries’ use.
- Conditional Inheritance—Trusts allow heirs to receive their inheritance subject to certain conditions, such as how and when they receive it. They help direct how assets are distributed according to preferences.
- Faster transfer to heirs—By putting a house into a trust, there can be a quick change of ownership without waiting for probate processes associated with delays. This facilitates faster asset distribution.
- Medicaid qualification—Putting your house into an irrevocable trust will lower your taxable estate. This could assist you in qualifying for Medicaid benefits due to asset reduction.
- Pre-death asset transfer—Unlike wills, trusts allow property transfer before one dies. This enables advanced estate management planning and provides proactive estate planning and asset management opportunities.
Conclusion
It’s wise to consider the possible negatives before placing your home under a trust. Despite some plusses associated with such an estate planning approach, as discussed above, these merits must be compared against the demerits.
By deliberating on these considerations and consulting professionals, you can make a well-thought decision appropriate for your objectives and situations. Remember that disadvantages may not hold for others as every situation has specifics.
