Should I put my house in a trust?

A trust can give you better control than a will over how your assets are transferred, and a trust may offer other advantages, like helping you qualify for Medicaid.

Derek Silva

Derek Silva

Published September 10, 2020

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KEY TAKEAWAYS

  • A trust can give you more control than a will over who gets your assets after you die and how they get the assets

  • Assets in a trust do not go through probate, unlike everything passed on via your will

  • Trusts can also help you pass on your assets before you die

  • Putting your house in certain types of trusts also decrease your taxable estate, potentially qualifying you for your Medicaid

Many people use their last will and testament to pass on money and belongings after they die, but some people could benefit from using a trust to pass on their house or other valuable assets.

A trust is a legal arrangement in which you can place your money, possessions, and other assets so they can later be used by you or your future heirs. A trust isn’t just for rich people. Trusts can offer greater control than a will over who will get your money and possessions after you die. Unlike a will, trusts can also include instructions for how or when your beneficiaries will receive the assets. If you want to pass on certain assets before you die, a trust may also help.

One of the main reasons people put their house in a trust is because assets in a trust do not go through probate after you die, while everything you bequeath through your will does go through probate. Probate is a public process and allows anyone to see what was in your estate when you died, how much your estate was worth, and the people who received your things. Using a trust to pass on your house can also transfer ownership faster than probate would have.

You can generally still sell your house after putting it into a trust, depending on the exact language of your trust’s founding document. You can also move your house into a trust if you’re still paying off a mortgage; moving a house into a trust won’t trigger a “due on sale” clause.

Placing your house into certain types of trusts can also help you qualify for Medicaid by decreasing your taxable estate.

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8 reasons to put your house in a trust

Your personal circumstances will dictate whether or not it’s a good idea for you to put your house in a trust. To help you make your decision, here are eight common reasons to put your house into a trust:

  • Your house (and everything else in the trust) will avoid probate after you die.
  • Ownership of the house can transfer to your heirs faster from a trust than through probate.
  • Wealthy estates may avoid or minimize estate taxes with an irrevocable trust.
  • Your heirs may save on capital gains taxes if they later sell the house.
  • Trusts, unlike wills, allow you to add conditions for how or when heirs receive inheritance.
  • A trust, unlike a will, can help you pass on assets even before you die.
  • Placing a house in an irrevocable trust can help you qualify for Medicaid by decreasing your taxable estate.
  • Asset protection: A house in an irrevocable trust cannot be claimed by creditors or through the Medicaid estate recovery program.

Planning for the future? Get started with our guide to estate planning.

Trusts avoid probate

The ability to avoid probate is a major reason that many people put their house or other assets into a trust. Probate is a process where a court, after you die, proves the authenticity of your will and your possessions are passed on to your heirs.

The contents of wills and estates go into the public record after the probate process is completed, so anyone could see what you owned, how much it was worth, and who received it after you died. Transferring assets via a trust is a private process.

Probate can also drag out in certain cases, potentially costing a significant amount of money and lasting for months or even years. Trust assets are only passed on according to the instructions in the trust document, so you can help your heirs avoid a long and costly probate.

Situations where probate may drag out include if your estate is large; if you left unclear instructions for bequeathing your assets; or if you have assets in multiple states. (Each state has its own probate laws so moving a house from another state into a trust could especially simplify things for your heirs.) Issues can also arise if someone contests your will to change how your assets are distributed. For instance, someone may contest a will to get full or partial ownership of valuable assets like a house, investments, or a patent you owned.

Trusts help you pass on your house before you die

Trusts make it possible for the grantor (the trust’s creator) to place conditions on when and how beneficiaries will receive the trust assets. That means you could move your house into a trust and then transfer ownership to someone else even before you die. For example, you may choose to pass on your house should you go into long-term care or become incapcitated. A will can only transfer assets after the grantor has passed away.

Tax benefits of transferring a house through a trust

Moving your house or other assets into a trust (specifically an irrevocable trust) can decrease your taxable estate. For a wealthy estate that could otherwise be subject to a state or federal estate tax, putting assets into a trust can help avoid or minimize the estate taxes. (Estate taxes generally apply only for estates worth millions of dollars.)

There may also be a tax benefit for heirs who receive a house from a trust instead of through probate, because the house will have a stepped-up basis. Normally, when you sell a house, you need to pay capital gains tax on the difference between your original purchase price and the price at which you sold the property. When a house is passed through probate, the property will likely retain your original purchase price as its value for the sake of calculating capital gains tax from any future sale. However, someone who receives a house from a trust will normally have a step-up in basis, meaning the original value used to determine capital gains tax (the basis) is the value of the house when they inherited it, and not the value of the house when you first purchased it.

Example of step-up basis: If you bought a house for $200,000 and then sold it for $300,000, you would generally pay capital gains tax on the $100,000 difference between your sale price and the price at which you purchased the house. If you never sold your house and instead passed it to your child through probate, your child would pay tax on the difference between $200,000 and whatever price they sell the house for. That difference could be huge if they keep the house for decades or even generations. But if you passed the house on through a trust instead of probate, the basis of the house would be recorded as the house’s value when it was inherited. If the house is worth $300,000 when you die and you pass it on to someone via a trust, whenever that person sells the house, their capital gains tax will be determined as the difference between $300,000 and the future sale price.

Note that the first $250,000 of profit from selling a house is exempt from capital gains tax if you're a single filer, and the first $500,000 is exempt for married couples selling a house.

Reasons not to put your house in a trust

There are two main reasons you may not want to move your house (or other assets) into a trust:

  • You don’t want to pay the cost of setting up and maintaining a trust.
  • You still have to wait for other assets to go through probate.

The cost of setting up a trust varies based on where you live and the exact details of your trust, but drafting the legal paperwork for a simple trust will likely cost $300 or more if you work with an estate planning attorney. Creating a larger or more complicated trust — like one that contains your entire estate or has more restrictions on when your beneficiaries can receive their trust assets — could potentially cost you $1,000 or more.

The Policygenius app provides step-by-step guidance to help you make your will and a trust for less than $300.

After creating your trust, you must also pay to maintain it. Maintenance won’t be a significant cost for everyone, but it might be if you hired someone to serve as your trustee (the person or corporation who maintains your trust and the assets within it).

The cost of a trust also may not be worth it for you if you still plan for other assets to go through probate, especially valuable possessions that could slow down probate or result in a contested will. However, if your house is the only big investment you own, using a trust just for that house could be worth it.

Keep in mind that if you use a testamentary trust — a trust that’s created via your will — your assets will still go through probate before going into the trust.

Do you need a trust if you have a will?

If you have a small estate or if you’re leaving everything equally to a spouse and children, then a will may be all you need. However, a well-made trust can give you more control over when and how your house is transferred to someone else. For example, you could set up your trust such that your house passes to your chosen beneficiaries before you even die.

As mentioned above, using a will can also leave issues in probate if someone doesn’t like their inheritance and challenges your will. A house is the most valuable asset in many people’s estates, so tensions between your heirs may rise if you leave a house entirely to one person — like if you give it to one child and your other children get nothing. Using a trust to bequeath your house increases the likelihood that your house will go to the intended beneficiary, without your family having to go through an expensive or protracted legal battle.

Learn more about the differences between wills and trusts.

If you do choose to put your house in a trust, ensure that the instructions in your will and trust are in agreement. Having competing information could cause confusion among your family members, even if it ultimately doesn’t affect probate. (To simultaneously create a will and trust that work well together, try the Policygenius app.)

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Should you put your house in a revocable trust or irrevocable trust?

A revocable trust, also called a living trust, is one that you create while you’re alive and that you can revoke (close or modify) at any time. An irrevocable trust is one that you cannot close, either because you structured it such that you cannot revoke it or because you have already died. (A revocable trust becomes irrevocable after you die since you can no longer close it.)

Many people use a revocable living trust because it gives them more control over the trust assets. Putting your house in a revocable trust still allows you to change the terms of the trust or remove the house from the trust if you want to. Taxes and personal finances are generally easier to manage with a revocable trust.

Irrevocable trusts do offer some distinct advantages, though. You may want to put your house in an irrevocable trust if you need to lower your taxable estate for Medicaid eligibility or other income-restricted programs. Assets in an irrevocable trust also cannot be claimed by a creditor, offering you asset protection in the event you need to repay someone. Assets in an irrevocable trust are also safe from the Medicaid estate recovery program.

If you’re considering an irrevocable trust, know that it will have to pay its own tax returns (the trust manager, trustee, would file the returns). You may also want to have someone other than yourself manage it, for legal reasons.

Talk with an estate lawyer to learn more about what type of trust of best for your situation.

About the author

Personal Finance Expert

Derek Silva

Personal Finance Expert

Derek is a tax expert at Policygenius in New York City. He has written about multiple personal finance topics in the past, and his work has been covered by Yahoo Finance, MSN, Business Insider and CNBC.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.

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