Reasons to put your house in a trust: Pros, cons & alternatives

As a homeowner, you've spent time and resources acquiring and maintaining your property. It's a valuable asset you need a plan for so you and your loved ones can feel more certain about the future.

Putting your house in a trust is something to think about whether you're looking to protect your assets, plan for retirement or lock in a smooth transfer of ownership after you pass away. It's something anyone can consider, no matter your net worth, and it's best to set it up with the help of an estate planning attorney and insight from your financial advisor.

Learn what a trust is and the reasons to consider placing your house in a trust so you can decide if it's the right strategy for you.

A trust is a legal arrangement where one party (the grantor) gives their ownership rights of an asset to a legal entity (the trust), which is managed by one party (the trustee) for the benefit of another party (the beneficiary). It's a way of empowering someone to take care of something on your behalf for a specific purpose and with specific rules.

Getting a deeper understanding of what assets you can protect in a trust is important to your estate planning process. With a trust, you can grant someone control of an asset—whether it's money, a financial account, or real estate—with clear guidelines on handling it during your lifetime and after you pass away. One of the main benefits of a trust is that the assets held in the trust will avoid the probate process, which can be time-consuming and expensive.

Trusts may be used to transfer real estate, such as your home, to your beneficiaries. When you put your house into a trust, you shift legal property ownership from yourself to the trust.

This doesn't mean you lose control of your home. A trust must be managed by a trustee, and you might appoint yourself for this role. You then can retain control over the property until you're no longer able to do so under the terms of the trust. With your real estate in a trust, you can dictate who the next person to manage your home will be after you (the successor trustee) and to whom the property will transfer upon your death or another event.

Placing your home in a trust may offer several benefits, providing financial protection and a sense of certainty for the future. Here are some reasons homeowners take this step:

• Avoid probate. Putting your house in a trust helps to avoid probate, the legal process that occurs after someone passes away. Probate can be a lengthy, expensive and often public ordeal. When you place your home in a trust, it usually allows for a faster, private transfer of ownership to your beneficiaries.
• Protect your beneficiaries. You can protect your loved ones by using a trust to control how and when they receive your property. For example, if you want your children to inherit the house at a specific age or only under certain conditions, a trust allows you to set those terms. This can help provide for beneficiaries who may not be ready or able to manage the property immediately.
• Gain potential tax benefits. Depending on your specific situation, there may be estate tax benefits to placing your home in a trust—particularly if you have a very large estate. Some types of trusts can help reduce estate taxes and ensure more of your assets go to your beneficiaries.
• Safeguard against creditors. Trusts can offer protection against creditors of your beneficiaries, preventing them from seizing the property after your death.

By placing your home in a trust, you can feel confident about having a seamless, efficient and controlled strategy for managing and transferring one of your most valuable assets.

Estate planning guide

Make a plan for your other assets, too. An estate strategy can clarify your intentions for what you own after you're gone. Learn about 5 essential estate planning elements

While there are benefits to placing your home in a trust, there are also some potential drawbacks.

Setting up a trust involves time and legal fees. Maintaining the trust over the years also may require additional costs, particularly if you need to update the terms or deal with other legal formalities. While the benefits outweigh the costs in most circumstances, the financial commitment can deter some homeowners.

Also, refinancing real estate after transferring it into a trust can be complicated. Your lender may require you to temporarily remove the property from the trust to complete the refinancing. This adds an extra step and potential legal fees to the process.

If you think placing your house in a trust may be for you, you'll need to know how to go about it. Here's a guide to get you started.

When planning for your future with an estate plan, it's usually best not to try to do it yourself. Once you've built up wealth and own real estate, you don't want it to be squandered because of ineffective or confusing estate planning documents. Partner with someone who knows the details of your particular situation and can discuss how to prepare a trust document that is right for you. While you can create a trust and transfer real estate into it without legal assistance, an experienced estate planning attorney can ensure your trust is structured correctly, legally sound and aligned with your long-term goals.

Draft a formal trust agreement with the help of your estate planning attorney. The trust agreement lays out the terms of the trust, including a list of beneficiaries and clear instructions for handling the property. This clarity can help avoid family disputes and ensure your wishes are carried out.

When placing your house in a trust, knowing the differences between revocable and irrevocable trusts can help you determine the right structure for your needs.

• A revocable trust lets you retain control over the assets during your lifetime, and you can modify or dissolve the trust at any time.
• An irrevocable trust can't be altered after it's established without the permission of the beneficiaries. This type of trust often offers greater asset protection and may reduce estate taxes, but it means permanently giving over the asset to control under the terms of the trust.

You'll also need to select a trustee to manage the property in the trust. As the grantor, you may serve as the initial trustee during your lifetime. You'll also need to designate a successor trustee to take over after you pass away or become incapacitated.

You can appoint a professional trustee to handle the responsibilities if you prefer. Appointing a trust company or attorney is beneficial if you expect complicated legal or financial issues.

Once the trust agreement is in place, you will need to transfer the ownership of your home into the trust by creating a new deed that lists the trust as the property owner.

Have the deed signed and notarized, then file it with your local county recorder's office to make the transfer legally official. Your estate planning attorney can guide you through this process.

After transferring the property to the trust, notify your homeowners' insurance company about the change in ownership. The insurance company will add the trust as a policyholder or an additional insured party.

If you have a mortgage, inform the lender that the trust owns the property. The lender may require you to fill out specific paperwork.

Regularly review and update the trust document to reflect any changes in your circumstances, such as adding or removing beneficiaries, updating your trustee selection or changing how the property should be managed.

What happens to a house in trust after death depends largely on the terms of the trust agreement. One advantage of having real estate in a trust is a smoother and more straightforward process for transferring ownership to the beneficiaries than having the property go through probate.

Here's what generally happens:

1. The successor trustee takes control. Upon your death, the successor trustee you appointed in the trust document assumes control of the trust, including the property. They're responsible for following the terms of the trust.
2. The trustee manages the property. Depending on the instructions you've included in the trust, the trustee might manage the property until a specific event occurs, like a child reaching a certain age. The trustee is legally obligated to follow the instructions outlined in the trust and manage the property in the best interests of the beneficiaries.
3. The trustee takes care of debts and liabilities. If the trust still owes debts—such as a mortgage on the home—the trustee continues making payments or decides, based on the terms of the trust, to sell the property to settle outstanding obligations.
4. The trustee transfers ownership to beneficiaries. When the time comes, the successor trustee transfers ownership of the house to the beneficiaries named in the trust. The property in the trust may receive a step-up in basis for tax purposes at your death. This means your heirs' basis in the property is the value at your time of death rather than your basis in the property (i.e., what you paid for the property). This can reduce the capital gains taxes your beneficiaries may face if they decide to sell the home. However, not every trust allows for the step-up in basis for property held in a trust.

If you're hesitant about putting your house in a trust, there are other ways to pass down your home to your heirs:

• Transfer-on-death deed. A transfer-on-death deed allows you to keep ownership of the house while you're living but automatically transfers ownership to your beneficiaries upon death without going through probate. It's simpler and more cost-effective than setting up a trust, but it doesn't offer the same level of control over the property after your passing and often can lead to costly family disputes if the beneficiaries don't agree on how the property should be handled or how the expenses for it should be paid.
• Joint tenancy. You can add a co-owner to the deed to ensure a smooth transfer of property ownership. In joint tenancy, the property automatically passes to the surviving owner(s) without probate. However, this method can complicate matters if relationships change, and it exposes the property to the co-owner's potential financial issues.
• Last will and testament. You can leave the property to your heirs in a will. However, this method requires going through probate, which, as mentioned, can be costly and time-consuming. It also doesn't offer the same level of protection or control as a trust.

Each alternative has advantages and disadvantages, so you should weigh your options based on your financial situation and family dynamics. An estate planning attorney can help you choose the right approach to fit your long-term goals.

Placing your home in a trust can protect your assets, ensure a smooth transfer to your beneficiaries and give you more control over how and when your property is passed down. However, it's crucial to consider the complexity and ensure the decision aligns with your financial goals.

If you're ready to take the next step in safeguarding your home and estate, connect with a local Thrivent financial advisor who can work with you, an estate planning attorney and a tax professional to help you evaluate your options. With their help, you can develop a comprehensive plan that secures your legacy.