Putting your house in a revocable living trust usually won't affect your mortgage because federal law (the Garn-St. Germain Act) protects you from the lender calling the loan due, as long you remain the beneficiary and live there. However, it's crucial to inform your lender, especially for refinancing or if it's an irrevocable trust, as that can trigger a due-on-sale clause, requiring full payment; proper documentation and updating insurance are also key steps.
Should I Put My House With a Mortgage Into a Trust? For almost every homeowner in California, the answer is yes. A trust: avoids probate (saving your family thousands)
Disadvantages of putting your house in a trust include upfront legal costs and complexity, potential difficulty refinancing mortgages, the risk of losing control (especially with irrevocable trusts), the need for meticulous paperwork and ongoing management, and the fact that some tax benefits aren't guaranteed, with potential issues like losing capital gains tax relief or triggering other taxes. It also doesn't protect other assets from probate unless they are also in the trust.
During the initial term, the grantor typically continues making mortgage payments. After the term expires, if the mortgage isn't fully paid, the beneficiaries who receive the property generally become responsible for the remaining mortgage unless the trust document specifies otherwise.
By placing your home in a trust, you can reduce the value of your estate, which can help minimize these taxes. When you purchase a home through a trust, any income generated by the property is taxed at the beneficiary's tax rate, which is often lower than the tax rate for trusts.
If you die within 7 years of making a transfer into a trust your estate will have to pay Inheritance Tax at the full amount of 40%. This is instead of the reduced amount of 20% which is payable when the payment is made during your lifetime.
People put property in a trust primarily to avoid probate, saving heirs time, cost, and stress, while also ensuring privacy, maintaining control over distribution, planning for incapacity, and offering potential asset protection or tax benefits, depending on the trust type. A trust allows assets to transfer directly and privately, bypassing public court processes, and can set specific rules for how and when beneficiaries receive the property.
Living trusts are revocable, meaning you remain in control of the assets and you are the legal owner until your death. Because you legally still own these assets, someone who wins a verdict against you can likely gain access to these assets.
If you place assets such as real estate or investment accounts into an irrevocable trust, borrowing against them can be challenging. Many banks and lenders are reluctant to: Approve loans on trust-owned properties, as ownership is separate from the grantor.
Heirs who inherit a house with a mortgage can choose to either sell it or keep it and assume the mortgage. If there are any other heirs, you may be able to buy them out. Even if you plan to sell, you must usually continue making mortgage payments until then, as well as paying property taxes and insurance premiums.
The best way to transfer property to children depends on your goals, but generally, using a Revocable Living Trust or a Transfer-on-Death Deed (TODD) (where available) are superior to gifting directly because they avoid probate, allow you to retain control, and often provide a crucial "step-up in basis" for capital gains tax purposes upon your death, minimizing taxes for your children. Gifting property now can trigger high capital gains taxes for your children later, while trusts offer control and tax advantages, but have upfront costs.
What are the tax benefits of a trust vs a will? An irrevocable trust can reduce or eliminate estate taxes for your beneficiaries, since your assets are transferred out of your estate and into the trust. A will or revocable trust generally do not provide tax benefits.
So, who owns the property in a trust? The trust is the legal owner. The trustee holds the title and manages it, but always for the benefit of the beneficiaries. The trustor decides the terms, and beneficiaries enjoy the property or its benefits according to those terms.
Tax Issues and Capital Gains
The tax rate for capital gains can be as high as 15%. However, parents can use strategies to reduce tax liabilities when transferring property to their children. For example, by transferring the property to children through a trust, you can potentially reduce or avoid estate taxes.
Putting your land in a trust can provide substantial benefits. “It may protect your family from estate taxes, creditors, divorce and lawsuits, and it defines your wishes as to how you want that land to be taken care of and by whom,” Norstog says. A trust can establish: How the land will be managed.
If a trust earns income (as most of them do), taxes will need to be paid on that income — just as individuals and businesses generally have to pay taxes on the income they earn. There are two types of income tax rates that could apply to trusts: ordinary income tax and capital gains tax.