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Selling a House in an Irrevocable Trust After Death

Selling a House in an Irrevocable Trust After Death

March 15, 2024

For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.

For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.

Selling a house is an important consideration when it comes to managing your estate. You may want to consider selling a house in an irrevocable trust after death because it comes with some excellent benefits for your beneficiaries, starting with the protection of the funds earned via the sale.

Here is what you need to know about why you should include a house in your irrevocable trust and how to sell it upon your death.

Understanding Irrevocable Trusts 

Trusts play a powerful role in estate planning, especially when it comes to handling high-value assets such as a house. 

Before you decide to include the sale of a home in an irrevocable trust, it’s crucial to know what sets it apart from a revocable trust. An irrevocable trust cannot be changed or ended after you create and fund it. The trustee (also known as the person who manages your trust, if not yourself) is unable to make changes and must follow the written instructions you have set out in your trust. 

The benefit is that this type of trust is generally protected from creditors, divorces, and lawsuits in the future, which can be a great perk. They can also be great for spendthrift children and those who have failed to launch.

On the other hand, a revocable trust can be modified after its creation. They tend to be easier to set up but do not come with the same inherent benefits. Revocable trusts lack the tax benefits of irrevocable trusts and could be subject to legal judgments or creditors who come knocking.  

This is why many people prefer irrevocable trusts, especially if they feel that their beneficiaries are likely to be sued in the future or are bad with money management. A home is a large asset that would fund a trust for many years. Don’t allow the sale to go to waste by letting creditors and lawsuits drain your trust. 

How to Sell a House in an Irrevocable Trust After Death

Once you have met with a fiduciary and estate planning expert to form an irrevocable trust and fund it with your real estate, the good news is that the hard work (for you) is done. Many individuals worry that the burden of selling a house will be thrust upon their loved ones after their death, but this is not always the case. Your trustee will handle the rest of the work going forward.

Here are the steps that will happen when selling a house in an irrevocable trust after death:

Allow the Trustee to Weigh In 

At this point, you should already have a professional appointed to look after your irrevocable trust, unless you have an adult child or trusted friend to act as your trustee. They should always be fiduciaries who have your best interests and your beneficiaries’ best interests in mind. They will go through the details of your trust to ensure that selling the home aligns with their fiduciary duties to you. 

Hire a Real Estate Agent 

From here, your trustee will contact a real estate agent to assist with the sale of the house. Although a real estate agent is not strictly required, it would be in your best interest to work with one as they will generally help the home sell for more. They can better prepare the house for the market and help the trustee handle prospective buyers who are willing to pay top dollar for the property. 

Paperwork is Filed 

After accepting an offer on the home, the trustee will file all of the paperwork on your behalf to sell the property and move the proceeds from the sale into the trust. The house is no longer a part of the trust but rather belongs to the new buyer.

Depending on the unique circumstances, your house may or may not be subject to probate. Most often, it is not subject to probate if it is included in an irrevocable trust. If, for some reason, your house is subject to probate, then the trustee would handle the paperwork to get “Letters Testamentary" in order to sell the house according to your wishes. 

Distribute Assets 

The trustee is almost done with the hard work involved in selling a property as part of your trust. Once the sale is officially closed, they will take the proceeds from the sale and make sure they are accurately distributed to the named beneficiaries of your trust. This could include either lump sum payments or payments distributed out on a regular schedule 

This is a great time for the trust to pay taxes on the proceeds, if applicable. If not, the beneficiaries may be required to report that as income on their tax returns at the end of the year and pay taxes on their own. 

File Form 1041 

Last but not least, the trustee will file Form 1041 with the IRS for each tax year. This document catalogs the gains and losses of the estate or trust, income accumulated or held for a future date, and the income tax liability of the estate, among other things. Any beneficiaries that received income will also receive a K-1.

Benefits of Selling a House in an Irrevocable Trust

One of the main reasons why someone may decide to include a home in an irrevocable trust is the favorable tax benefits of certain trusts that qualify as tax-exempt. You can avoid capital gains tax that would have been triggered by the sale of the property under other circumstances. Plus, you can take the tax deduction for donated real estate if you do so as part of a charitable remainder trust 

The other benefit is that your trustee handles everything on behalf of your family. If you have a professional appointed as the trustee (and you may consider doing so), this can spare your family and beneficiaries some stress. They will be distraught, grappling with the death of a loved one, and may not have the bandwidth or emotional capacity to handle selling real estate for top dollar. 

Secure Your Estate’s Future With Magellan

Magellan is a one-stop shop for everything related to your estate, financial, legal, and tax planning needs. We can assist you with taking the next steps to include the sale of a house as part of your irrevocable trust and handle the details so you don’t have to worry about a thing. From the creation of a charitable remainder trust to ongoing financial management, we offer everything you need. 

Contact us today to learn more about how our services could benefit your estate planning! 

This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group and Cetera Advisor Networks LLC. 

For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.