It might seem macabre, but once you’ve purchased your first big asset (e.g. your home), you have to think about what happens to it if something happens to you. If you’re young and unattached with no children, estate planning might be the furthest thing from your mind. But as you get older, placing your assets, especially the home you live in, in a revocable trust will make your life and the lives of those around you much simpler in the future.
Revocable vs. Irrevocable Trusts
A revocable trust or living trust is a legal entity you form with the help of an attorney and it becomes the owner of the assets you place into it. Because it’s revocable, you can take assets out of it, put others in, you can refinance the assets or mortgage them for the first time—and you can make these changes as many times as you want.
An irrevocable trust is a legal entity you form with the help of an attorney which also becomes the owner of assets you place into it. But an irrevocable trust can’t be changed. The assets that are placed into the trust must remain in the trust until the wishes of the grantor(s) or trustor(s) (i.e. the person or people who set it up) have been satisfied.
If you’ve set up a revocable trust and you pass away, your trust becomes irrevocable so that no one can make changes to it.
If you want your spouse to be able to make changes to the trust once you pass, you should make them a co-grantor in the document with you. If you want the trust to become irrevocable upon your death (because you’re afraid your spouse or someone else will change the beneficiaries), name yourself as the sole grantor.
Who are the Parties?
The parties of a revocable trust are as follows:
- Grantor or Co-Grantors: the person or people who own the assets that are going to be placed into the trust.
- Trustee: the person responsible for maintaining the trust.
- Beneficiaries: the people to whom the assets will be passed once the grantor(s) pass away.
A grantor can function as a trustee, but a subsequent trustee must also be named in the document in the event of the grantor’s death. A beneficiary can also be a trustee but estate planners don’t usually recommend this setup because it often leads to disputes about how the assets are being handled.
Can a Trustee Sell a House?
The trustee of the trust has a lot of influence over what happens, especially if the grantor(s) become incapacitated either from mental deterioration or illness. So it’s important to choose a trustworthy and neutral third party like an attorney.
Benefits of a Revocable Trust
If you’re planning to buy a new home after selling your current one, you should consider creating a revocable trust. Especially if you are getting older and there is the potential for intra-family conflict. Here are some of the benefits:
- Your family avoids probate court which can take up to a year to divide the assets (even if you have a will) and can cost between 3-7% of the estate’s value. When assets are held within a trust, it usually takes a week or two for the trustee to divide them.
- If you develop Alzheimer’s, dementia, or otherwise start to lose cognitive function, the third party trustee will take over management of your assets. What that means in relation to your house, is that you’re less likely to fall prey to scams targeting seniors. Even if you sign a contract to sell your home for far below market, the document isn’t binding until the trustee signs it. And your trustee won’t sign anything that isn’t in your best interest.
- When the ownership of your home passes to your beneficiaries, the value for tax purposes will be its current market value. That means if your beneficiaries go to sell the home immediately, they likely won’t have to pay capital gains tax. This is a huge benefit if you’re planning to live in your next home for 10 or 20 years, or if you live in a quickly appreciating area.
Things to be Aware of
If you’re planning to set up a revocable trust to own your next home, make sure to communicate with your lender in the case that you need a mortgage, as well as the title and home insurance companies.
Title and homeowners’ insurance policies can be very specific about the parties whom the policies cover. So you want to communicate with your representatives as soon as you’ve made your decision so that they can guide you toward the best solution.
If you want the most flexibility in terms of financing your home (i.e. you want to be able to refinance your mortgage, take out a home equity line, etc., you should borrow from a mortgage company comfortable with trusts as borrowers. If the lender isn’t comfortable with naming your trust as its borrower, you will have to buy the property as yourself, then put it into the trust after the sale closes. Then if you want to refinance the loan, you will have to take the property back out of the trust, close the new loan, then put the property back in.
Putting your next home into a revocable trust is highly recommended if you have dependents or if this is the last home you plan to own. A trust will protect you while you’re still living and protect your loved ones once you’ve passed, and it will ensure your affairs are handled based on your wishes.