A lot of 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, but due to changing circumstances, they may want to sell a home that is in a trust. Then, the first question is whether selling property in a trust is even possible?
The simple answer is – yes. However, there are different types of trusts so the answer is, in truth, more complex. In this article, we’ll explain how trusts work, the different variations, 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.
First, let’s define what a trust is. A trust 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 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.
There are two types of trusts and they determine how selling property 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 trust that cannot be modified after it was created, unless the beneficiaries consent to the modifications. Once the grantor has created the trust, 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 assets are not subject to estate tax after the grantor’s death; 2. the assets in the 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.
Trusts and wills serve a similar purpose, so it’s no surprise that people get them confused. However, there are differences. For one, a will 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.
As was previously stated, a trust cannot be contested and bypasses the probate process, so people chose it as the means to divide their assets after they are deceased. The other reasons are related to the irrevocable trust – namely, avoiding the estate tax and protection from creditors.
Now, we will deal with selling property in a trust. There are three variations: selling property in a living trust or selling property in an irrevocable trust as the grantor, and selling a home as the beneficiary of a trust.
If you are the owner of a home in a revocable trust, selling it (as far as the legal aspects 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 exclusion of the capital gains tax, depending on your circumstances. If you are interested in how it works and how to minimize the capital gains tax, you can read the article here.
If your home is in an irrevocable trust, 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. However, 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.
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. If you are the sole benefactor and inherit the title of a home that was in a 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.
Even after the legal aspects are sorted out, selling a home, regardless if you are the grantor or benefactor of a trust, 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.
We will buy your home as-is, so you don’t need to make any repairs or preparations, and because we are 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.