Buying a Home in Trust

It can give you greater control over what happens after you die, including taxes

When you buy a home, you may have the option of buying it in a trust. Legally, that means the trust, rather than you, owns the home. However, you can be the trustee of the property and have significant control over it and what happens to it after you die. Buying a home in a trust can have tax and other advantages, but it's more complicated than buying one in the conventional way.

Key Takeaways

  • Buying a home in trust can give you greater control over what happens to the property when you die and possibly avoid inheritance taxes.
  • A revocable trust allows you to change the beneficiary and other terms at any time.
  • An irrevocable trust is much harder to change but offers tax advantages.
  • For either type of trust, make sure you enlist expert advisors who know the laws of your state.

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What Does It Mean to Own a House in Trust?

When you buy a home in trust, you can become the trustee (rather than the outright owner) of the property. Then, when you die, a person or financial institution you have designated becomes the trustee.

The trustee is essentially the administrator of the assets in a trust, in this case, a home. But as trustee, you'll also have certain powers over the property and what becomes of it, depending on the type of trust you choose and how it is written.

You can even put a home with a mortgage into a trust. Seek out the best mortgage lenders to work with during the purchase process if you plan to transfer a mortgaged home into a trust.

The first step to buying a home in trust is to establish a living trust. That is a trust created during a person's lifetime, and it allows the trustee to manage the assets for the benefit of a beneficiary, such as a child. 

In setting up a trust, you can name your successor trustee, who may or not be the same as the trust's beneficiary. For example, you might choose to name your son as both your beneficiary and your successor trustee, or one but not the other.

The benefit of a trust is that the home won't go through the lengthy court process of probate, which reviews your will and approves the distribution of assets after your death. Also, by avoiding probate, the name of the person or other entity who inherits the home will not be a matter of public record as is the case with a will.

There are two types of trusts you can establish: a revocable trust or an irrevocable trust.

Revocable vs. Irrevocable Trust

Revocable Trust
  • You can change the beneficiaries and other terms at any time.

  • The home will bypass the probate process when you die.

  • Doesn't have the tax or liability protection advantages of an irrevocable trust.

Irrevocable Trust
  • Beneficiaries and other terms are very hard to change.

  • Trust assets are not included in your estate for inheritance tax purposes.

  • Can shield the assets from creditors.

Buying a Home With a Revocable Trust

In a revocable trust, the owner or grantor of the trust has full control over it at all times and can change its terms whenever they please. The grantor can assign beneficiaries, or in some cases, be the beneficiary of the trust.

For example, let's say the son you appointed as your future beneficiary does not want the estate, or you've changed your mind and would now like to leave the home to your daughter. A revocable trust allows you to do that. You can also appoint multiple trustees or beneficiaries.

Note that revocable trusts do not have the inheritance tax or liability protection benefits that irrevocable trusts do.

Buying a Home With an Irrevocable Trust

Unlike a revocable trust, an irrevocable trust does not allow modification or termination of the trust without the permission of the beneficiary. The trustee acts as a fiduciary who is responsible for managing the assets on behalf of the beneficiary.

Families often use an irrevocable trust to avoid taxes on inheritances that are above the federal estate tax threshold, which is $12.92 million in 2023.

Irrevocable trusts can also be useful when you want to protect the estate from possible future financial liability.

For example, suppose you have built a sizable estate, but your children fall on hard financial times later in life. An irrevocable trust can protect their assets from creditors, given that the assets were put into the trust before the credit problems arose.

For obvious reasons, it's extremely important with an irrevocable trust to be careful in choosing your beneficiaries.

How to Buy a House in Trust: The Steps

Both revocable and irrevocable trusts are estate planning tools, and there are some crucial steps to take when doing this type of estate planning.

Determine the Level of Control You Want

The first step is to decide how much control you want to have over the assets in the trust. That can help you decide between a revocable or an irrevocable trust. You'll also want to consider questions such as whether the home can be sold upon your death and what happens if you become ill or incapacitated. In addition, look at the size of your estate (both your home and other assets) to see if inheritance taxes are likely to be an issue.

Call in the Professionals

Find a financial advisor and an estate planning attorney who are familiar with the laws and inheritance tax rules of your state. Each has their own specialty, and you will need both of them to direct the dispersion of your assets appropriately. One of the biggest mistakes individuals make, experts say, is meeting separately with their financial advisor and attorney only to find out after the legal document is drafted that there are problems.

For example, by meeting with your advisor and attorney separately, you could lose out on possible tax advantages that the attorney wasn't aware of and that the financial advisor would better understand. Conversely, you could receive advice from the financial advisor that doesn't make legal sense. So it's crucial to be sure all three of you are communicating effectively.

Consider the Costs

A lawyer might charge between $1,500 and $3,000 to establish a typical trust, whether it's revocable or irrevocable. Of course, costs can vary depending on the level of work involved. The financial advisor's fees will also depend on the time they expend as well as on their professional credentials.

Rather than serving as trustee yourself, you may decide to engage a bank or law firm to handle that role. If so, you'll typically pay maintenance fees equal to 1% or more of the trust's assets each year.

Can You Put a House With a Mortgage in a Trust?

Yes, you can put a home with a mortgage into a trust. Be aware that the bank that holds the mortgage might require advance notice if you plan to put the home in a trust; also, you'll of course need to make sure the mortgage continues to be paid. You may need to remove the home from the trust with a transfer if you wish to refinance; you can transfer the property back into the trust when the refinance is complete.

What Are the Disadvantages of Buying a House in Trust?

Despite the estate planning benefits of buying a home in trust, there are some disadvantages to be aware of—the first of which is that it can be an expensive, time-consuming process. Another drawback is that putting your home in a trust can make refinancing your mortgage more complex. Finally, although the trust can help you avoid probate for your home, it doesn't affect other property or assets which will still need to go through probate.

Do You Need a Trust If You Have a Will?

There are benefits to a trust that you don't get if you only have a will. For example, trusts don't have a probate period, as wills do. That means your property can pass much more quickly to your heirs (and without the fees associated with the probate process) if you've placed it in a trust. Also, a will only takes effect when you die; you can arrange things with precision using a trust while you're still alive, and protect your assets even if you are incapacitated.

The Bottom Line

Buying and owning a home in trust is more complicated and expensive than buying one in the conventional manner. However, depending on the type of trust you choose, it can have its advantages. Those may include greater control of what happens to the home after your death, the minimization of estate taxes, and protection from financial liability in the event of a lawsuit. It's important to seek the help of knowledgeable professionals to ensure that the trust is established correctly and in accordance with your wishes.

Article Sources
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  1. Internal Revenue Service. "Estate Tax."

  2. Vaksman Khalfin. "How Does a Mortgage Work With a Living Trust?"

  3. Charles Schwab. "We Asked Our Experts: Do You Need a Trust?"

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