What Are The Disadvantages Of Putting Your House In A Trust?

What Are The Disadvantages Of Putting Your House In A Trust

What are the disadvantages of putting your house in a trust?

In this article, you’ll learn about: 

  • the disadvantages of putting your house in a trust
  • the advantages of it
  • whether a trust protects your assets from creditors and lawsuits
  • who should have a trust instead of a will
  • who owns the house in a trust

Let’s dig in. 

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What Are The Disadvantages Of Putting Your House In A Trust?

Placing a house in a trust can have several advantages, such as:

  • avoiding probate
  • protecting assets
  • planning for incapacity 

However, there are also potential disadvantages to consider. 

Here are some of the disadvantages of putting your house in a trust:

  • Cost and Complexity: Setting up a trust can be complicated and requires the assistance of a trust attorney, which can be expensive. Additionally, there may be ongoing costs for managing the trust.
  • Loss of Control: Depending on the type of trust, you may lose some control over the property. In an irrevocable trust, for example, once the property is in the trust, you generally cannot remove it.
  • Potential Tax Issues: In certain situations, transferring property to a trust could have unintended tax consequences. For example, if the house appreciates in value, beneficiaries might face capital gains taxes. Also, there might be issues regarding property tax exemptions that were previously available to you.
  • Refinancing Challenges: If you want to refinance the house that is in the trust, you may find that some lenders are reluctant to work with trusts or may require you to remove the property from the trust during the refinancing process.
  • Limited Asset Protection: Not all trusts provide asset protection. For instance, a revocable living trust does not protect assets from creditors during the grantor’s lifetime.
  • Impact on Eligibility for Government Benefits: If you are relying on Medicaid or other government programs, transferring your home to a trust may affect your eligibility.
  • Trust Administration: Being a trustee or having to manage a trustee can be burdensome and time-consuming. This includes record-keeping and accounting responsibilities.
  • Potential Conflicts Among Beneficiaries: A trust can sometimes create conflicts among beneficiaries, especially if they feel that they have not been treated fairly in terms of inheritance.
  • Limited Flexibility: Once the trust is created, especially if it’s an irrevocable trust, it can be difficult to change the terms of the trust to adapt to new situations or needs.
  • Possible Negative Implications on Home Sale: If you sell a home that’s in an irrevocable trust, there may be differences in how the proceeds are handled compared to selling a home that you own outright. There might also be less favorable tax treatments for sales by a trust.
  • Impact on Homestead Exemptions: Some jurisdictions offer homestead exemptions that can reduce property taxes. Putting a house in a trust may affect the availability of these exemptions.
  • Difficulty in Securing Renter’s or Homeowner’s Insurance: Some insurance companies may not be familiar with insuring trust-owned properties, making it difficult or potentially more expensive to secure appropriate coverage.

Before placing your house in a trust, you should talk to an estate planning attorney.

We can help you weigh the advantages and disadvantages specific to your situation.

Read More: What Happens To An Irrevocable Trust When The Grantor Dies?

What Are The Advantages Of Putting Your House In A Trust?

Putting your house in a trust can offer various benefits. 

Here are some of the key advantages of putting your house in a trust:

  • Avoiding Probate: One of the primary benefits of placing a house in a trust is to avoid the probate process. Probate can be time-consuming and costly. By transferring your house to a trust, the property can pass directly to the beneficiaries without going through probate.
  • Privacy: Since a trust does not go through the probate process, the details of the trust and its assets remain private. In contrast, a will becomes a public document during probate.
  • Estate and Inheritance Taxes Planning: Placing your house in a trust, particularly in an irrevocable trust, can remove it from your taxable estate, potentially reducing estate taxes that may be due upon your death.
  • Protection from Legal Judgments: An irrevocable trust may provide some level of protection against legal judgments or creditors. This can be particularly important for those in high-risk professions or with significant assets.
  • Planning for Incapacity: A trust allows you to plan for the possibility that you may become incapacitated and unable to manage your affairs. The trustee or successor trustee can manage the property on your behalf according to the terms of the trust.
  • Maintaining Continuity: A trust allows for seamless transition and continuity in management of the property upon your death or incapacitation.
  • Flexibility in Distribution: A trust allows for more complex and tailored ways to distribute assets to beneficiaries. For instance, you can set conditions, stagger distributions, or create incentives for beneficiaries.
  • Reducing Family Conflict: By clearly specifying how the property should be managed and distributed, a trust can help avoid disputes among family members after your death.
  • Efficient Management: A trustee can be given the authority to manage the property efficiently, make investments, and take care of other financial matters.
  • Special Needs Planning: A special needs trust can allow you to leave property to a loved one with special needs without affecting their eligibility for government benefits.
  • Preserving Property for Children: If you remarry, a trust can ensure that your house ultimately goes to your children from a previous marriage rather than to the new spouse.
  • Out-of-State Property: If you own property in multiple states, putting it into a trust can avoid the need for ancillary probate proceedings in other states.
  • Medicaid Planning: Although this can be very complex and requires very careful planning, sometimes an irrevocable trust is used as part of Medicaid planning strategies.

Read More: How Much Does An Estate Have To Be Worth To Go To Probate?

Does A Trust Protect Your Assets?

Yes, a trust can protect your assets, but the type of trust matters.

An irrevocable trust protects your assets from creditors and legal judgments. 

You put assets into the trust and give up control. 

This means the assets no longer belong to you, so creditors can’t reach them.

A revocable trust, or living trust, doesn’t offer the same protection. 

You keep control of the assets, so creditors can still go after them.

Timing is important. 

If you move assets into a trust right before getting sued or having creditor problems, a court might undo it.

Read More: How Much Money Can You Inherit Without Paying Taxes On It?

How Much Does It Cost To Set Up A Trust?

The cost of setting up a trust varies depending on factors such as complexity and location. 

Basic living trusts can cost around $1,000 to $3,000. 

More complex trusts, like irrevocable trusts or special needs trusts, can range from $3,000 to $10,000+. 

Additional costs may include:

  • attorney fees
  •  document preparation
  • administrative expenses 

It’s important to consult with a trust lawyer to get an accurate estimate of the cost to set up a trust.

Read More: What Happens To A House In A Trust After Death?

FAQs On What Are The Disadvantages Of Putting Your House In A Trust

Here are other common questions our clients ask us about the disadvantages of putting a house in a trust. 

What Are The Disadvantages Of A Living Trust?

Some disadvantages of a living trust are: 

  • Costs Money to Set Up: Hiring an attorney to create a living trust can be expensive.
  • Time-Consuming Property Transfers: Changing titles and deeds to the trust’s name requires effort and time.
  • Demands Ongoing Management: The trust needs regular paperwork and legal maintenance, handled by you or a trustee.
  • No Protection from Creditors: Since a living trust is changeable, creditors can still reach the assets inside it.
  • Requires a Will Anyway: A living trust only covers property in it, so you still need a will for any other assets.
  • Tax Complications: Managing taxes for a trust can be more complex than handling personal taxes.
  • Refinancing Challenges: Lenders may ask you to remove property from the trust to refinance it.
  • Potential Control Limitations: Though you retain some control, the trust’s rules might restrict how you use the property.
  • Limited Benefits for Young and Healthy: A living trust is typically more beneficial for older individuals or those with health issues.

Read More: How To Set Up A Trust Fund For A Child

Who Should Have A Trust Instead Of A Will?

People who should have a trust instead of a will are:

  • People with Significant Assets: Use a trust to avoid the probate process, which can be long and expensive.
  • Privacy Seekers: Choose a trust to keep estate details private, unlike wills that become public records.
  • Parents of Children with Special Needs: Opt for a trust to ensure proper care for children without jeopardizing their government benefits.
  • Individuals with Blended Families: Consider a trust to clearly define how assets are shared among children from different marriages.
  • Multi-state Property Owners: Have a trust to prevent dealing with probate proceedings in multiple states.
  • People with Specific Distribution Conditions: Use a trust to set terms on how assets are distributed or to create a financial legacy.
  • Those Concerned about Incapacity: Set up a trust to allow a trustee to manage assets if you become unable to do so.
  • Entrepreneurs and High-risk Professionals: Consider an irrevocable trust to shield personal assets from legal liabilities or creditors.
  • Individuals Seeking Control and Flexibility: Choose a trust for greater control over asset management and distribution after death.

Read More: How Much Money Do You Need To Start A Trust Fund For A Child?

Who Owns The Property In A Trust?

The trust owns the property in the trust

The grantor, trustee, and beneficiaries do not own the property in the trust. 

The trustee can manage the assets in the trust. 

But they do not own the property in the trust. 

The beneficiaries can receive benefits from the trust. 

But they do not own the property in the trust. 

The property in the trust is owned by the trust. 

The property is in the trust’s name.

Read More: How Long Can A House Stay In A Trust After Death?

If A Property Is In Trust Can It Be Sold?

Yes, a property in trust can be sold. 

The trustee, who manages the trust, is responsible for handling the sale. 

The trust document outlines the trustee’s powers and may specify conditions or limitations on selling the property. 

If the trust allows for the sale, the trustee must ensure that the sale is in the best interest of the beneficiaries. 

The proceeds from the sale typically remain in the trust and are distributed according to the trust’s terms.

Read More: How Much Do Trusts Cost?

What Does It Mean When A Property Is Owned By A Trust?

When a property is owned by a trust, it means that the title to the property is held in the name of the trust instead of an individual. 

A trustee manages the property according to the rules set out in the trust document. 

This setup is often used for estate planning, as it can make transferring the property to beneficiaries smoother and more efficient. 

It can also provide some level of protection against creditors, depending on the type of trust. 

Additionally, it can save time and money by avoiding the probate process, which is required when assets are passed on through a will.

The original owner of the property often acts as the trustee, managing the property as usual until they pass away or become incapacitated.

At this point, a successor trustee takes over the management.

Read More: Can I Set Up A Trust Without My Spouse?

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