When you're creating an estate plan, your home is likely one of your more important assets. Ensuring it is properly and easily passed to your beneficiaries is probably one of your main concerns. Placing your home in a trust is one way to transfer it.
When people talk about trusts for estate planning purposes, they are usually talking about living trusts. A living trust is a revocable trust created during your lifetime. The trust is created and then your assets are transferred so that they are owned by the trust. A trustee is named to manage the assets. This can be you, your spouse, or anyone else you choose, although most people name themselves.
During your lifetime, although your assets — and in this situation, your home — are technically owned by the trust, you can continue to live in the home or you could rent it, sell it, or do anything you normally would. After your death, the assets in the trust are transferred to the beneficiaries you have chosen according to your instructions. Trust assets do not go through probate and are not made part of the public record.
Reasons to Place Your Home in a Living Trust
There are several good reasons why placing your home into a living trust might be a good choice:
- The home is transferred to your beneficiary or beneficiaries immediately upon your death if you wish. There is no waiting period as there is with assets that must go through probate.
- You also have the option of scheduling the transfer to your beneficiaries at a future point in time, such as when they reach a certain age or complete some requirement, such as finishing college.
- The value of the home is not made public, so your family retains privacy.
- If you become incapacitated during your lifetime, the home is already in the trust, under the management of the trustee (or successor trustee if you are the trustee), so you can be sure your home will be cared for.
- You can change your mind about the trust or keeping the home in the trust at any time and make alterations to or revoke the trust completely at any time as your life or your estate planning goals change.
- Trusts are very difficult to contest, so if you are concerned about family members trying to challenge your will, placing your home in a trust avoids this potential problem.
Drawbacks to Keep in Mind
While placing your home into a living trust has benefits, there are also some drawbacks to be aware of:
- Transferring the home into the trust requires some legal paperwork, and you will also need to pay for legal services to have the trust set up.
- If you don’t correctly transfer the ownership, the home will not legally be owned by the trust and it will pass through probate.
- Most homes are covered by title insurance, which is usually required by the lender when you get a mortgage on the home. When you transfer the ownership of the home to the trust, you will need to notify your title insurance company and an updated policy may have to be issued.
- If you are hoping to increase your eligibility for Medicaid (which is asset-based), placing your home in a living trust will not help you. For that, you need a Medicaid asset protection trust, which takes ownership and control of the home out of your hands and is irrevocable.
- Assets in a living trust do not avoid estate taxes, so the value of your home will be considered in determining if you owe estate taxes.
- Living trust assets are not protected from creditors, so placing your home in a trust will not shield it from creditors.
- Even though you may place your home and other assets into a living trust, you still need a will (an additional expense) just in case there is a problem with the transfer of ownership into the trust
Homes, Trusts, and Mortgages
Because moving your home into a living trust changes the ownership of the home, you may be concerned about how this will affect your mortgage, home equity loan, or home equity line of credit (HELOC), most of which include a clause that makes them payable when there is a transfer in ownership. There is a federal law that prohibits a lender from interfering with the trust or requiring you to pay the mortgage back when ownership is transferred to a trust, so your mortgage or loan can remain in place.
Another concern is whether you can take out a new loan against the home while it is in the trust. While you can definitely get a mortgage, refinance a mortgage, or take out a home equity loan or HELOC on your home when it is held by a trust, there may be extra paperwork you'll have to work through with your lender, complicating the process.
Placing your home into a living trust can simplify the handling of your estate and provide peace of mind. A living trust does require some legal paperwork that must be done correctly. Be sure to talk to your attorney about how you can best meet your estate planning needs when it comes to your home.*
When you're ready to plan for the future, download our Savvy Guide to Estate Planning. Our free guide takes the fear and worries out of creating an estate plan and tells you what you need to know to get it done. Download your copy here.
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* This content is developed from sources believed to be providing accurate information. The information in this material is not intended as legal advice. Please consult legal professionals for specific information regarding your individual situation.