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Why Put Your House in an Irrevocable Trust? 6 Pros and Cons

Why Put Your House in an Irrevocable Trust? 6 Pros and Cons

May 10, 2024

When you pass, you want your financial legacy to be as impactful as possible for your loved ones. In some instances, this might mean figuring out what to do with your home or any properties you may own. 

Trusts play a crucial role in estate planning, and they are much more involved and comprehensive than simply writing a will. Some people will consider putting their real estate in an irrevocable trust because it comes with some serious benefits, but it isn’t the right move for everyone. 

Why put your house in an irrevocable trust? Check out these pros and cons to see if it is the right financial move for you. 

Why Put Your House in an Irrevocable Trust?

When you set up an irrevocable trust, it comes with real benefits for your beneficiaries. These benefits often outweigh the drawbacks of a potential loss of control over the asset, but we will cover those in a moment. Take a closer look at some advantages of adding real estate to your irrevocable trust. 

Avoid Probate

One of the most significant benefits of placing your house in an irrevocable trust is that it allows your beneficiaries to avoid probate. 

When your loved ones lose you, the last thing they want to do is deal with the courts. Your beneficiaries likely need time to process their grief and get the inheritance you always intended to leave behind for them.

A trust lets your beneficiaries enjoy the assets you left to them without worrying about settling your estate first. It’s faster and more private for all parties involved. 

Protect Assets 

After a lifetime of building a financial legacy, nobody wants to worry about that legacy disappearing overnight. Whether it’s a valuable real estate investment or a family house filled with memories, you don’t want it to fall into the wrong hands.

Putting a house in an irrevocable trust protects it from creditors who might come calling after your passing – or even before. It’s removed from your estate and is no longer subject to credit judgments. 

Similarly, you can even protect your assets from your family. If some family members are too young or lack the responsibility or knowledge to properly care for the assets you leave behind, they might inadvertently squander their inheritance. It’s sad how often we see this.

An irrevocable trust makes it much easier to ensure that your wishes are honored. The right rules in a trust can establish specific rules about who, how, and when your assets are distributed to beneficiaries.

Shelter from Taxes 

Placing your home in an irrevocable trust also comes with some tax advantages. Since the assets in the trust are removed from your taxable estate, this move can help minimize your tax liability

Another primary benefit of putting real estate into an irrevocable trust or charitable remainder trust is that it can help you avoid capital gains taxes if your appreciation has been significant. 

If you plan to sell the home, one strategy is to donate your real estate to a charitable remainder trust (a specific type of irrevocable trust) instead. Instead of selling the house and then funding the trust with money from the sale, you can sell the property within the CRT. This strategy helps you get the most value from the sale since it will avoid capital gains taxes. You can also use this approach to sell a house in an irrevocable trust after death.

You can even split gifts if you do not want to give the full value to the CRT.

Why NOT Put Your House in an Irrevocable Trust 

The benefits of putting your house in an irrevocable trust can be appealing, but let’s take a look at the flip side of the coin as well. There are a few downsides of irrevocable trusts, which can affect whether it makes sense to fund one with real estate.

Loss of Control

Once you place an item into an irrevocable trust, you no longer have control over what happens to it. You cannot reclaim the property, mandate its sale, or choose how to invest the proceeds if the property has already been sold. If you like having total control over the entire process, this may feel frustrating or restrictive. 

Cost to Create the Trust 

Keep in mind that there will be some initial costs associated with setting up a trust. You will need to hire a trust attorney to draw up the legal paperwork, a financial expert and CPA to ensure you are making the right money moves, and potentially a real estate expert to facilitate any property sales. All of this comes with significant financial investment in the here and now. 

However, the tax benefits and the time saved by avoiding probate can easily make the setup and out-of-pocket expense of establishing an irrevocable trust worth it, especially if you have a much larger estate to consider or property in multiple states. 

Permanency

You must decide on the terms of the trust upfront, and unlike revocable trusts, irrevocable trusts are more or less set in stone. Make sure you are positive about how you want this trust to be leveraged before signing on the dotted line. 

Once the ink has dried on your paperwork, making any adjustments, such as changing the beneficiaries of the trust, is extremely challenging or even impossible. If you’re unsure about who should receive the funds from your trust, how those funds are to be used, and what the payout should be, wait before setting up an irrevocable trust. 

Alternatively, you could set up a revocable trust which is much easier to alter in the future if and when necessary. Know the differences between a revocable and irrevocable trust before you start signing anything.

Contact Magellan for Comprehensive Help 

Is putting your house into an irrevocable trust the right move for your finances and estate? Explore what your best financial move is with the expert team at Magellan. We can guide you through the process of setting up a trust that works for you and your beneficiaries now and well into the future.

We are a one-stop shop to give you everything you need under one roof: legal, estate, tax, and even financial planning. Contact us today to learn how we can assist you with trust formation.

 

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. 

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