Estate planning is just as much a part of responsible homeownership as repairing the roof or figuring out where that annoying drip is coming from. If you plan to pass your home to a loved one someday, you may be wondering what your options are. Learning about options like a living trust now can be one way to take care of your home and provide for your loved ones tomorrow.
What Is a Living Trust?
A living trust is a legal document that appoints a trustee to manage certain assets on behalf of an eventual beneficiary. Living trusts can be revocable or irrevocable. If you set up a revocable living trust, you can change the terms or take control of the assets at any time. The assets are still counted as part of your estate. With an irrevocable trust, you give up some of those rights to control the trust. Because irrevocable trust assets are no longer counted as part of your estate, this can help some people reduce or avoid estate taxes.
For example, if you put $500,000 in an irrevocable trust for your child, you wouldn’t be able to change your mind about the amount of money or terms of inheritance without approval from your child. Putting the money in a revocable living trust instead would allow you to modify the contents of the trust, change beneficiaries, or revoke the trust altogether at any time.
Putting your home in a revocable living trust doesn’t affect your ability to live there, make renovations, or complete other upgrades. You should, however, contact your homeowners insurance and title insurance providers to confirm that your coverage will continue after you establish the trust.
What Are the Benefits of Putting Your Home in a Trust?
Why would you put your house into a trust while you’re still around to manage it? Ultimately, transferring property into a living trust now may make certain legal, financial, and emotional matters easier on your family later on. Here are a few specific reasons some homeowners choose to put their house into a trust.
If you don’t set up a revocable living trust, the most likely outcome is that your home will go through probate when you die, like many other assets. The issue is that probate can be a costly, lengthy, and stressful process for your loved ones.
As a refresher, probate refers to the legal process of dealing with someone’s estate after their death. It involves verifying that the will (if there is one) is legitimate, distributing property to the appropriate beneficiaries, and paying applicable taxes.
Probate-related costs can add up to roughly 2%-7% of the total estate. This includes your state’s court fees, executor’s fees, and attorney’s fees, along with other miscellaneous costs. If your home is part of your probate estate, the added value can bump up the fees your loved ones will have to pay from your estate.
The entire probate process usually takes months or years. But following instructions to transfer property left in a trust may only take weeks to complete. This is especially significant for a home because during the probate process, the home is basically off-limits until it’s been dealt with officially through the will. The executor may need to consult an attorney before even authorizing basic home maintenance like cleaning gutters or clearing the mail.
Protection in case of incapacity
Estate planning typically makes people think of planning wishes for after their passing. But it’s also important to have plans in place in case you’re medically incapacitated but still alive. Without another plan in place, your family would typically need to go through court to designate a conservator before anyone can handle affairs on your behalf.
Putting a house into a trust gives you more control over who will make those decisions, and it saves your loved ones from having to navigate the court process of establishing conservatorship at what is already an emotionally difficult time.
Maintaining your privacy
The probate process is a matter of public record. Your will and other aspects of the probate process are available for anyone to see. For some families, this is not a major issue. For others, having these final wishes on public record can stir up a lot of strife.
A revocable trust for real estate can keep the details of the property transfer private. While it will ultimately become apparent who did (or didn’t) inherit your house, a living revocable trust can make the actual transfer less stressful than a public probate process.
How to Put Your Home in a Living Trust
After you consider the advantages and disadvantages of putting a house in a trust, decide whether this decision would be in your favor. If so, here’s your quick guide to setting up a living trust. Real estate is only one type of property you can include in a trust, so you may be able to apply these principles to other assets, as well.
Your revocable living trust needs three parties to function:
- Grantor: Also known as a settler or trustor, this term refers to the current owner of the asset (e.g., your home). If you’re the homeowner putting the house into a trust, you’re the grantor.
- Successor trustee: The person responsible for managing assets in the trust after the original grantor becomes incapacitated or dies. The trustee has a fiduciary duty to act in the beneficiary’s best interest with regards to the trust.
- Beneficiary: The person who will ultimately receive the assets in the trust. You may be able to name multiple beneficiaries. Talk to the attorney who helps you set up the trust to make sure your plans are clear.
Because the trustor is making plans to transfer property, it’s essential that you have legal ownership before talking to an estate planning attorney to prepare documents. Make sure your name is on the deed. From there, a qualified attorney can walk you through requirements to establish a trust in your state.
Make sure financial plans work together
Estate planning is important to ensure that your final wishes are respected. It’s also crucial to pay attention to how long-term plans and more immediate plans work together.
If you still owe mortgage or other loans on your home, you may not be eligible to create an irrevocable living trust. Or, if you do create one, you may find that these loans become due in full immediately.
If you create a revocable living trust, you keep full rights over the property, and you may not see an impact in your ability to continue an existing mortgage. Although if you plan to enter any new financial agreement on your home, make sure to tell your attorney and financial advisor before establishing the trust. Refinancing a mortgage, applying for a home equity loan, or taking equity out of your house through other financing agreements can be more difficult if the house is in trust.
How Much Does Setting Up a Living Trust Cost?
Setting up a trust is a major legal decision. It is advisable to work with an attorney, rather than attempt to prepare these legally binding documents yourself. Legal fees can vary depending on your area and the complexity of the trust, but generally you can expect to pay somewhere between $1,500-$5,000.
If you look into probate costs in your area, you may be able to get a sense of how much the various fees will add up to for your estate. Some smaller, more straightforward estates may be eligible for a simplified probate process, sometimes known as summary probate. In other cases, probate might be much more complicated. The costs of probate can range from under $1,000 to more than $100,000, depending on the size of your estate. It’s worth investigating whether a living trust could significantly reduce overall estate-related costs in your case. In many cases, you can save time and money by pursuing a living trust.
Looking to Set Up Your Home for the Future?
Homeownership is full of important decisions. Over the years, you’ll have many opportunities to change your home’s appearance or refinance your home in a way that fits your family’s needs.
If you’re planning to use home equity to make a large purchase or boost your savings and investments, Noah can help you access funds you need. And if you’re thinking about long-term estate planning at the same time, reach out! Our home advisory team would be happy to listen to your plans and talk through options. With assistance from us and your estate planning advisors, you can find the best path to care for your home, both now and in the future.