Selling a House in a Trust Before Death: Can You Do It? | The Sundae Blog

There are advantages to putting a house in a trust. But can you sell a house that is in a trust?

Putting a house in a trust can provide tax advantages, save your children time and money on the probate process, and help you qualify for Medicaid in your old age. But it does make selling that property a little more complicated. If you’re wondering, “Can you sell a house that is in a trust?”

The short answer is yes. You typically can, unless the trust documents preclude the sale. However, there are many factors to consider. Ensuring legal compliance is crucial to avoid damaging relationships and adhere to the requirements for both revocable and irrevocable trusts. The process depends on the type of trust, whether the grantor is still living, and who is selling the home. This article will show you the ins-and-outs of selling a home that’s in a trust.

What is a trust?

Trusts are used for a variety of purposes and in many circumstances. Investopedia defines it as follows:

“A fiduciary relationship in which one party, known as a trustor, gives another party, the trustee, the right to hold title to property or assets for the benefit of a third party, the beneficiary.”

Essentially, a trust is established to protect certain assets during the estate planning process. Assets such as real estate, cash, life insurance, and the like are often included in a trust.

The following are common scenarios in which a person may want to sell a house in a trust. We’ll go over your options in each scenario and the steps you’ll need to take to sell your home.

Types of Trusts

There are several types of trusts, each with its own unique characteristics and implications for selling a house. Understanding these differences is crucial for making informed decisions.

• Revocable Trusts: A revocable trust is a flexible estate planning tool that allows the grantor to modify or terminate the trust at any time. This type of trust is often used to manage assets during the grantor’s lifetime and to ensure a smooth transfer of assets upon death. When selling a house in a revocable trust, the grantor retains control and can easily make changes to the trust as needed.
• Irrevocable Trusts: Unlike revocable trusts, irrevocable trusts cannot be altered or terminated once established without the beneficiaries’ consent. These trusts are commonly used for asset protection and tax planning. Selling a house in an irrevocable trust requires careful consideration of the trust agreement and the beneficiaries’ interests, as the proceeds from the sale must remain within the trust.
• Testamentary Trusts: Established through a will, a testamentary trust only takes effect after the grantor’s death. This type of trust is often used to manage and distribute assets to beneficiaries according to the grantor’s wishes. Selling a house in a testamentary trust involves the trustee managing the sale and ensuring compliance with the trust’s terms.
• Living Trusts: A living trust is created during the grantor’s lifetime and can be either revocable or irrevocable. This type of trust allows for the management of assets while the grantor is alive and provides for the distribution of assets upon death. The process of selling a house in a living trust depends on whether the trust is revocable or irrevocable, impacting the level of control and flexibility.

Understanding the type of trust you are dealing with is essential for navigating the sale process and ensuring compliance with legal and financial requirements.

Trustee’s Role and Responsibilities

The trustee plays a crucial role in the management and sale of a house in a trust. Their responsibilities are multifaceted and require a thorough understanding of the trust agreement and applicable laws.

• Managing Trust Assets: The trustee is responsible for managing all assets within the trust, including the house. This involves maintaining the property, paying any associated expenses, and ensuring the assets are used in the best interest of the beneficiaries.
• Decision-Making: When it comes to selling a house in a trust, the trustee must make informed decisions that align with the trust agreement and the beneficiaries’ interests. This includes determining the right time to sell and selecting the appropriate method of sale.
• Compliance: Ensuring compliance with the trust agreement and applicable laws is a critical responsibility of the trustee. This includes adhering to any specific instructions outlined in the trust and following legal requirements for the sale of trust property.
• Reporting: The trustee must provide regular accountings and reports to the beneficiaries, detailing the management and disposition of trust assets. Transparency and clear communication are essential to maintaining trust and avoiding disputes.
• Distribution of Proceeds: After the sale of the house, the trustee is responsible for distributing the proceeds according to the trust agreement. This may involve reinvesting the funds within the trust or distributing them directly to the beneficiaries.

By fulfilling these responsibilities, the trustee ensures that the sale of the house is conducted smoothly and in accordance with the trust’s terms.

Selling a house in a revocable trust as the grantor

A revocable trust allows the grantor to make changes or dissolve the trust at any time. Perhaps you put your house in a revocable trust in case of your death, but now you’d like to downsize to a condo on the beach. If you’re the grantor of a revocable trust, you have two options for selling your house:

• Sell the home as the trustee and keep proceeds in the trust
• Transfer the title of the property to your name and sell it as your own

In either case, selling a house in a revocable trust is very straightforward. If you sell the home as the trustee, you’ll just need to verify the validity of the trust with the title company prior to sale. If you transfer the title to your name first, you can eliminate that step. You’ll be able to claim the capital gains exclusion either way, assuming you are eligible.

Related: What Expenses Can You Deduct When Selling a Home?

While a revocable trust makes it easy to sell a house, it comes with some downsides: It doesn’t exempt your home from estate taxes at the time of your passing, nor does it protect your home from creditors.

Selling a house in an irrevocable trust as the grantor

A revocable living trust allows the grantor to make changes or dissolve the trust at any time. Perhaps you put your house in a revocable living trust in case of your death, but now you’d like to downsize to a condo on the beach. If you’re the grantor of a revocable trust, you have two options for selling your house:

• Sell the home as the trustee and keep proceeds in the trust
• Transfer the title of the property to your name and sell it as your own

When selling property held in trusts, particularly irrevocable trusts, the complexities of paying capital gains tax can arise. The tax implications can vary based on factors such as the type of trust and the treatment of property sales, highlighting the responsibilities of grantors, trusts, and beneficiaries in relation to capital gains tax.

Hiring a qualified real estate professional can provide guidance and streamline the selling process, ensuring you get the best sale price and navigate necessary improvements and market conditions effectively.

In either case, selling a house in a revocable trust is very straightforward. If you sell the home as the trustee, you’ll just need to verify the validity of the trust with the title company prior to sale. If you transfer the title to your name first, you can eliminate that step. You’ll be able to claim the capital gains exclusion either way, assuming you are eligible.

See Also:What Expenses Can You Deduct When Selling a Home?

While a revocable trust makes it easy to sell a house, it comes with some downsides: It doesn’t exempt your home from estate taxes at the time of your passing, nor does it protect your home from creditors.

Tax Implications of Selling a House in a Trust

Selling a house in a trust can have significant tax implications, which vary depending on the type of trust and the timing of the sale. Understanding these implications is crucial for making informed decisions and minimizing tax liabilities.

Capital Gains Tax and Estate Tax

Capital gains tax is levied on the profit made from the sale of an asset, such as a house. The tax rate and exemption limits depend on the type of trust and the grantor’s income. For instance, if the house is sold shortly after the grantor’s death, the tax basis is typically stepped up to the fair market value at the time of death, potentially reducing the capital gains tax owed.

Estate tax, on the other hand, is a tax on the transfer of assets from the grantor to the beneficiaries. The tax rate and exemption limits vary based on the size of the estate and current tax laws. It’s important to consider both capital gains tax and estate tax when planning the sale of a house in a trust to ensure compliance and optimize tax benefits.

Inheritance Tax Considerations

Inheritance tax is another consideration when selling a house in a trust. This tax is imposed on the transfer of assets from the grantor to the beneficiaries and varies by state. Some states have an inheritance tax, while others do not. The tax rate and exemption limits depend on the state and the size of the estate.

Given the complexity of these tax implications, it’s essential to consult with a tax professional who can provide guidance tailored to your specific situation. They can help you navigate the intricate tax laws and ensure compliance with all applicable regulations.

In addition to tax implications, selling a house in a trust can have other legal and financial implications. Consulting with a real estate agent, attorney, and financial advisor can help you make informed decisions and avoid potential pitfalls.

By understanding the types of trusts, the trustee’s role and responsibilities, and the tax implications of selling a house in a trust, you can ensure a smooth and successful transaction.

Selling a house inherited in a trust

You may have chosen to put your house in an irrevocable trust, either for the tax benefits or to exclude the house from your assets when qualifying for Medicaid. An irrevocable trust can’t be altered or dissolved without the consent of the beneficiaries. If your home is in an irrevocable trust, you have two options should you decide to sell:

• Break the trust with permission from the beneficiaries
• Keep the trust intact and sell the home

The process of selling a house in a trust can vary significantly depending on whether the sale occurs before or after the grantor’s death.

If you break the trust, you can take back the title and sell the house as your own. If you keep the trust intact, you’ll need to sell the home with the trustee. Here’s how:

1. Review the trust documents to make sure the trustee has the power to sell the home
2. Have the trustee hire a real estate agent or sell the home off market. Selecting qualified real estate agents is crucial for navigating the complexities involved in trust property sales.
3. Prove the validity of the trust to the title company by providing the Certification of Trust, the grantor’s death certificate, and a tax ID number. An escrow company will manage the distribution of sale proceeds and ensure compliance with legal requirements.
4. Have the trustee sign the purchase agreement with the buyer
5. Earnings from the sale go back into the trust and the trust pays capital gains tax

See also:What is a Deed of Trust?

Selling a house inherited in a trust

Whether the house was in a revocable or irrevocable trust before the grantor’s passing, the trust becomes irrevocable at the time of the grantor’s death. This change impacts the authority to sell trust assets and the associated tax implications. At this time, the trustee is responsible for distributing the assets in the trust to the named beneficiaries. They’ll typically hire an attorney to write up a Trustee’s Deed, which transfers ownership out of the trust and into the hands of the beneficiary. So if you inherited a house that was in a trust, it’s likely that it’s now yours to sell.

However, there are some instances when it makes sense for the trustee to sell the house. For example, there may be multiple children inheriting the house or no named beneficiary. In this case, the trustee can sell the house using the steps listed above and distribute the assets. It is crucial to handle the sale proceeds according to the trust’s instructions and legal obligations.

Keep in mind that in either instance, the tax basis of the home is stepped up to fair market value at the time of the grantor’s death. That means that you won’t pay capital gains taxes if you sell the house immediately after you inherit it. However, estate tax may still apply depending on the value of the estate and the applicable thresholds.

The tax implications of selling a house in a trust can be complicated, and every trust is constructed a little differently. Don’t hesitate to seek legal help if you have questions or concerns.

Selling an inherited house fast

Whether you now hold the title or are working with the trustee to sell the house, you’ll need to prepare the house for sale, market the home, host open houses, and field offers from buyers. The grantor’s passing can significantly impact this process, especially regarding tax responsibilities and legal intricacies. All of this can be time-consuming and frustrating during a time when you’re dealing with the death of a loved one. Not to mention, you’ll be on the hook for costly real estate commission fees and closing costs.

If you want to sell the house fast, consider requesting an offer from Sundae’s marketplace. Selling property held in a trust can be complex, particularly when dealing with an irrevocable trust or after the grantor’s death. We help sellers sell fast in any condition by connecting them with qualified investors. When you sell with us, you can expect full transparency throughout the process.