A common estate planning technique that I have talked frequently about on this blog is to place all your assets into a Revocable Living Trust. There are a number of benefits to this strategy, including:
- Maintaining Privacy for Your Family
- Ease and Cost of Administration
- Probate Avoidance
- Administrative Flexibility during Your Incapacity and after Your Death
- Asset Protection
- Estate Tax Avoidance
But that is not to say that there aren’t issues that crop up when you decide to place real estate into a trust, which many people do.
Here are just a few of the considerations you must think about when transferring your home into a trust.
Insurance Concerns that may arise from Funding a Revocable Trust with Real Estate
The first common issue to consider is insurance. There are two main policies that you should have on your home, a homeowners policy and a title insurance policy.
The homeowner’s policy is what protects your home (and it contents) from natural perils, theft, etc. When you transfer your property into a revocable trust, you should contact your homeowner’s policy to notify them of the change in ownership. If the home is your permanent residence, then you (and your spouse) should be named as “additional insureds”. Typically, there will not be a change in premium as a result of this change.
You should also have a title insurance policy. Title insurance protects you from any defects in the title to your home. Many title companies include language in their title policies that will extend coverage to the trustees of a revocable living trust, but some do not.
If you contact your insurance company and they tell you that they will not extend coverage, then you should either ask to purchase an endorsement that will extend coverage to you as a trustee, or purchase a new policy entirely.
These are both relatively inexpensive options and would involve a one-time payment of a couple hundred bucks at the most, but you need to make sure you take care of this. You do not want to be left without title insurance on your property.
There are a number of tax issues that surround real estate, and when you transfer your home into a trust you need to take these issues into account.
- Property Taxes. In North Carolina, we do not have a homestead exemption that would reduce the property tax for our main residence. Therefore, transferring real estate into a trust will not have any bearing on your property taxes. However, some states, such as Florida, do have an exemption. If you own property in Florida or another state with a homestead exemption, you want to make sure that transferring your main home into your trust will not eliminate this exemption.
- Reassessments. Another consideration is how frequently your state will reassess your real estate for property tax purposes. In North Carolina, we seem to get a lot of reassessments during up real estate markets, and not so many in down markets… 😉 Other states, (Florida), do a reassessment when the property is sold or transferred. If your property has appreciated in value, you want to make sure that transferring your property into a trust will not trigger a reassessment that would increase your property taxes.
- Estate Taxes. By including your residence in a revocable living trust, it will be included in your gross estate for estate tax purposes. As such, it will receive a step-up in basis at your death.
- Capital Gains Taxes. By transferring your main residence into a revocable trust, you still qualify for the federal capital gains exclusions (currently $250,000 for an individual, and $500,000 for a married couple).
- Deductions. After you have transferred your property into a revocable trust, you still will receive all the deductions you ordinarily would have received, such as the mortgage interest deduction and property tax deductions.
Asset Protection Considerations
One of the benefits in North Carolina and many other states is that when you hold property as a married couple, you receive a special level of asset protection from creditors.
This is called a “tenancy by entirety”. When you transfer your main property into a trust, depending on the state you live in, you may destroy the tenancy by entirety nature of the property and the creditor protection that comes with it.
In North Carolina, by transferring your residence into a joint trust you will destroy the tenancy by the entirety. However, you do NOT lose the creditor protection that comes with a tenancy by the entirety. See N.C.G.S. 39-13.7.
If you are considering filing for bankruptcy, you may want to consult with a lawyer to determine whether or not a home placed in a trust will still qualify as a “homestead” exemption under your state’s bankruptcy law.
The amount of the exemption will vary by state. For example, North Carolina residents may claim up to $35,000 per individual debtor for the value of the equity in their home, while a Florida resident is entitled to an unlimited homestead amount in the value of their personal residence.
Other Potential Issues when transferring your Home into a Trust
The final issue that many people face when transferring real estate into a trust is that of the mortgage. This concern comes from the potentially ubiquitous “due on sale clause” that can be found in mortgages.
The good news is that you have some protection under the law in this area. So long as you are transferring the property into a trust in which you as the borrower remain the beneficiary and will continue to reside in the property, then you won’t have any problems.
But if you are transferring your property into an irrevocable trust and do not remain a beneficiary, then you could run into some legal problems.
Regardless, it is good practice to notify your lender of the transfer and if necessary, remind them that the transfer does not trigger the “due on sale” clause. (Here is a link to the relevant federal statute that provides your protection)
Other Questions about Transferring Real Estate into a Trust?
If you or someone you know has any other questions about transferring real estate into a trust, you should contact an estate planning attorney for assistance.
For a limited time, Cary Estate Planning Attorney James Hart provides a no-cost Wealth Planning Session in which he will review your legal options as they pertain to using trusts as an estate planning tool and other issues.
You can call us at (919) 460-5422 or fill out our online contact form to schedule your free session.