Selling a House in a Trust: A Comprehensive Guide for Trust Settlors and Beneficiaries

Many people put their house in a trust to avoid the probate process after their passing or for tax reasons and often use a trust as an estate planning tool. However, due to changing circumstances, they may want to sell a home that is in a trust. The first question is whether selling a house in a trust is even possible.

The simple answer is – yes. However, there are different types of trusts, so the answer is actually a bit more complex. In this article, we’ll explain how trusts work, different types of trusts, and how you can sell a home that is in a trust when you are the trust settlor or the beneficiary.

If you are familiar with trusts and how they function, feel free to skip to the ‘How To Sell a House in a Trust’ section.

What Is a Trust?

A trust or a trust fund is a legal arrangement created during a person’s lifetime (different terms can be used for the creator of the trust: trust settlor, grantor, owner) for managing their assets for the benefit of another person – the beneficiary. A trust is a separate legal entity from the person who owns it.

A trust agreement can include assets such as vehicles, bank accounts, stocks, valuable personal items, etc., and, of course, real estate property. A trust is usually managed by a third person called a trustee, but the grantor can also designate themselves as the trustee.

The trustee needs to manage the trust in the best interest of the beneficiaries and in accordance with the guidelines that the grantor set when the trust was created. A trust is meant to enable an easy transfer of the assets to the beneficiary after the creator’s passing, bypassing the probate process.

Can a Trustee Be a Beneficiary?

Yes, it's possible for a trustee to also be a beneficiary of the same trust. For example, a parent may create a trust for their children (beneficiaries) and appoint themselves as the trustee. Similarly, an individual may establish a revocable living trust, serving as both trustee and beneficiary during their lifetime.While this arrangement is permissible, it’s essential to maintain transparency and avoid conflicts of interest. Legal and ethical guidelines must be followed to ensure fair treatment of all beneficiaries.

Why Do People Put Their Home in a Trust?

As was previously stated, a trust cannot be contested and bypasses the probate process, so people choose it as the means to divide their assets after they are deceased. The other reasons are related to the irrevocable trust – namely, avoiding federal estate taxes and protection from creditors.

Revocable (Living) Trust vs. Irrevocable Trust

There are two main types of trusts, and the type of trust will determine how selling a house in a trust is done:

A revocable trust (also called a living trust) is a trust wherein the terms of the trust can be changed and modified by the grantor after its creation. This can include adding or removing beneficiaries or changing how the assets held in the trust should be managed.

An irrevocable trust is a type of trust that cannot be modified after it was created unless the beneficiaries consent to the modifications. Once the grantor has created the trust and signed all trust documentation, all control is effectively given over to the trustee, and they no longer own the assets.

Because a grantor relinquishes control over the trust if they create an irrevocable trust, it may seem like a revocable trust is the better option. However, an irrevocable trust has two advantages:

1. the trust assets are not subject to estate tax after the grantor’s death;

2. the assets in the irrevocable trust are protected from creditors.

Conversely, a house in a revocable trust is subject to estate tax after the grantor’s passing, and creditors can sue the grantor and force the liquidation of assets to pay off certain debts. So, a revocable trust gives more control but provides less protection, while an irrevocable trust trades control for protection.

What's the Difference Between a Trust and a Will?

Trusts and wills serve similar purposes, so it’s no surprise that people confuse them. However, there are some differences. For one, a will requires a death certificate and is active only after the creator passes, while a trust is active the day it is created.

Then, a will is more expansive – it can designate the guardians of minor children, how the funeral is to be conducted, etc., along with the distribution of assets after the creator’s passing, while a trust mostly deals with the creator’s estate.

But the main difference is that a will must go through the probate process, which can be both very lengthy and costly if someone contests the will. A trust cannot be contested, and there is no probate process after the grantor is deceased – this is the main reason most people put their house in a trust.

What About a Testamentary Trust?

A testamentary trust is a type of trust established according to the instructions outlined in a person’s last will and testament. It's created after a person’s death, specifically in accordance with their will. It is sometimes referred to as a “will trust” or a “trust under will.” Unlike other trusts, a testamentary trust doesn’t come into existence until the individual has passed away.

The purpose of a testamentary trust is to manage the assets of the deceased on behalf of the beneficiaries. It ensures that the deceased’s wishes regarding asset distribution are carried out.The trust can be used to reduce estate tax liabilities and ensure experienced professionals manage the assets.

How To Sell a House in a Trust

Now, let's deal with what you came for – selling a house in a trust. Many property owners who have homes held in trust often seek advice from real estate agents on selling such properties and understanding the advantages of doing so. There are three options for selling trust properties: selling property in a living trust, selling property in an irrevocable trust as the grantor, and selling a home as the trust beneficiary.

Let's break down the sale process for each one.

Selling a House in a Revocable Trust as the Grantor/Trust Settlor

If you are the owner of a home in a revocable trust, selling it (as far as the legal aspects regarding trust law are concerned) is no issue. You can modify or dissolve the trust as you wish. You have two options:

1. If you are both the grantor and the trustee, you can sell as the trustee and keep the gains from the sale in the trust.
2. You can transfer the title of the home to your name and sell it personally, outside the trust.

However, in both cases, you are liable to pay the capital gains tax as with any other sale. But, you can also file for capital gain exemptions, depending on your circumstances. If you are interested in how capital gains tax works and how to minimize the capital gains taxes, you can read the article here.

Selling a House in an Irrevocable Trust as the Grantor/Trust Settlor

When it comes to selling a house in a trust that is irrevocable after the death of the original owner, the situation is slightly more complex. An irrevocable trust cannot be altered or dissolved solely by the grantor. Consequently, you will need consent from the benefactors of the trust.

You can either dissolve the trust and take back the title of the home, and then sell regularly or sell the home through the trustee. Once again, both of these actions would require the benefactors to consent. If there are specific stipulations within the trust that the home cannot be sold for any reason, you may not be able to sell at all, even if you have an attorney or agent with experience in dealing with trust by your side.

Selling an Inherited House: Post-Death Real Estate Sale

What about selling a house in a trust after death? Any trust becomes irrevocable after the original grantor’s passing. Then, it is up to the trustee to divide the assets in accordance with the conditions of the trust, including access to inheritance. If you are the sole benefactor and inherit the title of a home that was in a testamentary trust, it is your property, and you can sell it as you please.

However, in certain instances, it can make sense for the trustee to sell the home. For example, if there are multiple benefactors, the trustee can sell the home, and the gains become part of the trust, which will then be distributed to the benefactors as stipulated in the trust.

When putting inherited house for sale, it's crucial to start with a solid foundation. Use the expertise of a licensed appraiser to evaluate the property and determine its fair market price. Armed with this information, you can set a fair asking price that attracts potential buyers and increases the likelihood of a quick sale.

To sell a property owned by a trust, the proper legal documentation, including the trust documents, such as the trust agreement and property deed, must be in place. To navigate this process easily, you can hire an agent with experience in selling trust-owned properties. Once an offer is made and accepted, the buyer will pay the agreed-upon sales price.

What Are the Tax Implications of Selling a House in a Trust?

When selling a house in a trust, the tax implications depend on various factors, including the type of trust. 

In a revocable trust, changes can be made until the grantor’s death. If you’re selling a house from a revocable trust, you have more flexibility. An irrevocable trust doesn’t allow changes after it’s set up. If the house is in an irrevocable trust, the sale proceeds must stay within the trust.

• Capital Gain Taxes: When selling a house in a trust, the grantor (seller) is taxed on the capital gains (profits) made from the sale. If the trust was revocable, the grantor never relinquished the asset, so they owe the tax liability. However, selling a house in a trust before death, there can be tax advantages thanks to a capital gains exclusion.
• Estate Taxes: Estate taxes are levied on the assets of a deceased individual. If the heirs decide to sell the family home, the resulting profits become part of the estate. The estate is also responsible for paying any applicable taxes.
• Inheritance Taxes: Some states impose an inheritance tax. Instead of or in addition to the estate paying taxes, the individual or group inheriting the property directly pays a tax based on its value.
• Stepped-Up Basis: Stepped-up basis is a tax advantage that can apply after inheriting property.When you sell the property after receiving a step-up in basis, its value is determined by its worth at the time of inheritance rather than the original purchase price. This adjustment can potentially reduce your overall tax liability.
• Primary Residence Exclusion: If the grantor lived in the house for at least two out of the last five years, they could exclude up to $250,000 of profit (or up to $500,000 if married) from federal income taxes when selling their primary residence. Losses on the sale generally don’t impact federal income taxes.

Remember, selling a house in a trust can be a complicated process involving many legal intricacies, so consulting a tax advisor or real estate attorney can help ease the selling process. Experienced attorneys will ensure compliance with legal documents and tax laws for your peace of mind.

Selling a House in a Trust? We'll Buy It As-Is

Even after the legal aspects are sorted out, selling a house in a trust, regardless if you are the grantor or benefactor, is a time-consuming process. You need to prepare the home for sale, make repairs, hold showings and open houses, look for the right buyer, etc. But, if you want to sell quickly and get top dollar, you can contact SleeveUp Homes - your all-cash buyer.

We will buy your home as-is, so you don’t need to make any repairs or preparations. And, since we're not wholesalers or realtors, you won’t pay any commission and we can offer you the best price possible. If you want to close in as little as 7 days, contacts us to request a cash offer.

Author:

Cesar Gomez , Broker /

Cesar has worked as a real estate agent and broker in the southern California region since 2013.

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