After you've created a living trust, the next logical step is to transfer ownership of your property into it. Otherwise, the trust serves no purpose – it's just an empty vessel. But trusts aren't ideal for holding all assets. They're commonly funded with real estate, but there are pros and cons involved with doing so.
The advantages of trusts are somewhat universal regardless of what assets you place into them. Both revocable and irrevocable trusts avoid the time, expense and privacy issues involved with probate. Irrevocable trusts can also help your estate avoid taxation when you die. They can shield your assets from lawsuits and creditors, and even guard your property or money against dissipation by spendthrift beneficiaries. There may seem like there's no downside to all this, but when it comes to real property, moving ownership from yourself to a trust can open the door to some problems and inconvenience.
If your house is encumbered by a mortgage, check with your lender before you transfer it to your trust. You might trigger a due on sale clause if one is included in your mortgage contract. The lender can call the entire mortgage due all at once because you technically no longer own the home. This is particularly true if you make the transfer without clearing it with the company first. Even if you're safe on this issue, if you ever want to refinance the home, your new lender may not be willing to do so if your trust holds title. You'd typically have to transfer the property back to yourself, then back to the trust after the refinance – and if you forget to transfer it back, the property doesn't enjoy any of the usual advantages of trust protection.
Homestead Exemption Issues
If creditors are an issue for you, or if you work in a profession that leaves you vulnerable to lawsuits, you'll also want to consider your state's homestead exemption statutes. These laws put your house – or at least a portion of its value – out of reach of judgments or, in a worst-case scenario, your bankruptcy estate. When it comes to trusts, homestead laws can vary significantly from state to state. In some states, your property is only protected if you personally hold title. If you transfer ownership of your house to an irrevocable trust, however, this shouldn't be a consideration. This type of trust also shields assets from creditors, so you'd just be exchanging one form of protection for another.
The deed you use to transfer your property to your trust can present another issue. Two types of deeds can accomplish this: a warranty deed or a quitclaim deed. A warranty deed guarantees a future buyer that there are no hidden liens against your property, and that you – or your trust – actually owns it. You therefore have something to sell. A quitclaim deed makes no such representations. It simply transfers any ownership interest you might have without guaranteeing that you have an interest or that it's not encumbered by liens. A future buyer would be wary of this type of deed if your trustee finds that he must sell the house after your death. Depending on the type of deed you use to make the transfer to your trust, you could create a snarl in the process of settling your estate when you die.
Trusts can be particularly advantageous if you own real property in a state other than the one in which you live or die. If you don't transfer such property to your trust, your heirs are left with the problem of opening a probate proceeding in whatever state your house is located in. Your local probate court would not have jurisdiction. A caveat to this benefit exists, however. Your deed must conform to the laws in the state where your property is located, not in the state where you live. If you don't consult with or use an attorney in the location of your property, it's possible that your house will still be subject to probate there due to flaws in the transfer process.
- house image by Byron Moore from Fotolia.com