A trust can allow you more control over how your assets are given than a will, and it may also provide additional benefits, such as assisting you in qualifying for Medicaid.
Many people use their last will and testament to pass on money and possessions after they die, but other people may benefit from transferring their home or other important assets to a trust.
What is Trust ?
A trust is a legal arrangement in which you can put your money, goods, and other assets so that you or your heirs can use them later. Trusts aren’t exclusively for the wealthy. Trusts can give you more control over who gets your money and belongings after you die than a will. Unlike a will, trusts can also provide instructions for how and when assets will be distributed to beneficiaries. A trust can also be useful if you want to pass on specific assets before you die.
How does a relationship of trust work?
Here’s a quick rundown of how a trust works, which isn’t as complicated as you would think:
- You make a document of trust.
- You put money into the trust.
- The trust’s assets are distributed by the trustee.
Why Would you Put your House in a Trust?
One of the most common reasons individuals place their house in a trust is that assets in a trust do not have to go through probate when they die, whereas anything you leave in your will does. Probate is a public process that allows anybody to examine what was in your estate at the time of your death, how much it was worth, and who received it. Using a trust to transfer ownership of your home is also faster than using probate.
Depending on the particular language of your trust’s foundation document, you can usually sell your residence after putting it into a trust. If you’re still paying down your mortgage, you can put your house in a trust; there will be no “due on sale” clause if you do so.
By reducing your taxable estate, putting your residence into certain types of trusts can also help you qualify for Medicaid.
7 Reasons to put your home in a trust.
Your specific circumstances will determine whether or not putting your home in a trust is a wise option. Here are eight frequent reasons to put your house in a trust to assist you make your decision:
- After you die, your house (and everything else in the trust) will avoid probate.
- A trust can transmit property ownership to your heirs more quickly than probate.
- With an irrevocable trust, wealthy estates can avoid or reduce estate taxes.
- You can use trusts to set conditions to how and when your heirs get their inheritance.
- Unlike a will, a trust can help you pass on assets before you die.
- By reducing your taxable estate, putting a house in an irrevocable trust can help you qualify for Medicaid.
- Asset protection: A home held in an irrevocable trust is immune to creditors and the Medicaid estate recovery program.
Probate is avoided when you use a trust
A key reason why many people put their house or other assets into a trust is to avoid probate. Probate is the legal process by which a judge verifies the validity of your will and distributes your assets to your heirs after you die.
After the probate procedure is completed, the contents of wills and estates become public record, allowing anybody to see what you had, how much it was worth, and who inherited it after you died. Using a trust to transfer assets is a private process.
Probate can also take a long time in some situations, costing a lot of money and taking months or even years to complete.
Trusts allow you to pass on your home before you pass away.
The grantor (the trust’s founder) can put conditions on when and how beneficiaries will receive trust assets through trusts. That implies you might put your house in a trust and transfer ownership to someone else before you pass away. For example, if you need long-term care or become paralyzed, you may choose to leave your home to your family. Only after the grantor has died may a will transfer assets.
The tax advantages of transferring a home in a trust are numerous.
Your taxable estate can be reduced by transferring your home or other assets to a trust (particularly, an irrevocable trust). In most cases, estate taxes are only applied to estates worth millions of dollars.
Reasons not to put your house in a trust
You may not wish to put your house (or other assets) into a trust for two reasons:
- You don’t want to pay the fees associated with establishing and maintaining a trust.
- You’ll still have to wait for the probate of other assets.
The cost of establishing a trust varies depending on where you live and the specifics of your trust, but if you engage with an estate planning attorney, creating the legal documentation for a simple trust will likely cost $300 or more. It could cost $1,000 or more to set up a larger or more intricate trust, such as one that holds your whole estate or has more limits on when your beneficiaries can receive trust assets.
You must pay to keep your trust after you have established it. Maintenance isn’t going to be a huge expense for everyone, but it may be if you pay someone to act as your trustee (the person or corporation who maintains your trust and the assets within it).
If you still plan for other assets to go through probate, especially significant things that could slow probate or result in a contested will, the cost of a trust may not be worth it for you. However, if your home is your only significant asset, setting up a trust just for that asset may be worthwhile.
Should I put my house in a revocable trust or irrevocable trust?
A revocable trust, sometimes known as a living trust, is one that you set up while you’re still alive and can change or close at any time. You can’t close an irrevocable trust because you set it up in such a way that you can’t revoke it, or because you’ve already died. (Find out how to dissolve a trust.)
A revocable living trust is popular because it allows the trustee more control over the trust’s assets. If you put your house in a revocable trust, you can amend the terms of the trust or remove the house from it at any time. A revocable trust makes taxes and personal money much easier to manage.