How to transfer real estate into a living trust can be a tricky process, but it is a good way to avoid probate. The more diligent you are setting up the entity the easier it will be for your loved ones when you pass.
- Take logical steps to transfer your assets
- Learn who has the legal title to a house
- Consider the property tax implications
Begin by taking an inventory of your possessions. Find out what you have and think about where you want it to go. Once you gather this information begin the work of forming the entity. Do not do this alone. Work with a lawyer and/or estate planner to make sure everything is correct, and no one will question its legality.
Steps to Transfer Real Estate into a Living Trust
You can establish a trust simply with an attorney, but you must be careful about the steps you take to transfer your property. Let’s look at three steps to take to transfer property:1
Assess Your Assets
You should always begin any endeavor with a good foundation, and when creating the entity that means you need to assess your situation and assets. The first step is to:
- Understand the benefits – Avoid probate, validate the will, set up a conservatorship
- Categorize your property – Real property, cash accounts, financial instruments (stocks and bonds), and personal property
- Create a will
The hard part is not the creation of the entity. It is compiling and properly placing each property into the trust legally.
Your attorney helps you prepare to transfer assets. Bigger assets are more complicated and take more time.
- Your house – Start with this because you may pay transfer or recording fees, need to add the trust as a responsible party for your mortgage, need to contact your title and homeowner’s insurance companies to add the entity to the policies.
- Financial accounts – banks have different procedures for how to transfer these, so contact the bank and ask them about their policy.
- Stock and bonds – Each broker may have different procedures as well. For securities, you need to get paperwork notarized. You also need to fill out a W-9 form for the IRS.
- Tangible property – attach an inventory as an addendum to the trust document or keep it in a safety deposit box owned by the entity.
- Vehicles – Contact your insurance company to add the entity as an insured party. Then, contact your local division of motor vehicles (DMV) about procedures to transfer the title.
This is the most complicated and tedious part of the process. Dealing with banks, insurance companies, the IRS, the DMV, and lawyers may be frustrating, but it’s worth it. You protect your loved ones from probate and other excessive fees, taxes and frustration later.
Ensure Orderly Disposal of Assets
How you make your plan makes all the difference. It doesn’t matter the steps you take to set up the entity if it isn’t handled properly.
- Select the right trustee – A spouse, adult family member, family attorney, or a third-party professional trustee are all good options.
- Alternate trustee – This is a good idea if you pick a close family member.
- All trustees, even alternates, must be on the signature cards of your financial accounts
- Only your spouse can name additional beneficiaries.
After this, select your beneficiaries. This is important because the trust must name them. After your passing, the property can’t just sit with no place to go. You must assign people to take possession of assets or the courts will do it.
Finally, include a long-term care plan. If you can’t make your own decisions the trust can carry on and use the assets for your care. Long-term care insurance and Medicaid help with care, but recent changes in the laws make it harder for you to use your trust as a shelter. Talk to your attorney, family, and/or planner about all of these issues before you start.
Legal Title of Property
The title to the property is split between the trustee and the beneficiary. The trustee holds legal, and the beneficiary holds an equitable title. Because the trustee holds legal title, the property is always held in the trustee’s name. The trust:
- Cannot hold any property
- Denotes a legal relationship between the grantor and trustee
- Transfers property to the trustee who holds it according to the agreement between the grantor and trustee
Many people say that they transfer property to a trust. A more accurate statement would be that they transfer property to a trustee to be held in trust.2
Does a Trust Override a Deed?
A trust may not ever override a deed because they are two different legal structures. To understand why it helps if we examine what a deed is and how it relates to the title. A deed is a legal document that:
- Transfers title to a new owner
- Is not itself the title
- May be vulnerable to legal challenges if you do not notarize it and enter it into the public record
A deed transfers the title, the legal document proving ownership, to someone else. The recorded title states who is the owner of the house, and it overrides any other document. Unless the owner executes a new deed to transfer title, ownership never changes.3
You continue to pay your property taxes for your revocable trust. This is because you are the owner for tax purposes.
- You report any income on your personal return under “Grantor Trust” rules.
- It uses your social security number.
- You file a 1040 return if it doesn’t have any foreign holdings.
Placing your house in a revocable trust won’t affect your property taxes if you do it correctly. Some states have specific requirements about how to handle your primary residence. This is why it is important for you to hire a local attorney who has experience with writing trusts to help you.
Final Thoughts About How to Transfer Real Estate into a Living Trust
How to transfer real estate into a trust is a complicated task. No matter where you live you must coordinate with your bank and local authorities to smoothly accomplish this goal. Don’t do this alone. Sit down with a planner and/or an attorney and hash out a reasonable plan for how to deal with your assets when you pass. The more property you have the more important this is.