(Getty Images)

Realtor.com writes, "thinking about what you will do with your house and other assets when you pass away is not exactly fun. Yet, estate planning is something you can’t put off if you want to pass your home down to your children and ensure they benefit from your lifetime of hard work.

Sure, you can name your heirs in your will, but a trust is a more effective way for your offspring to inherit your home.

With a trust, you bypass the long and tedious process of probate court. Trusts can also be set up to protect and preserve the family property and assets for future generations. Here’s what you need to know about the types of trusts that will protect your assets for your children.

There are many types of trusts, but the two primary ones used by parents to pass real estate down to their children are revocable and irrevocable.

Trust No. 1: Revocable trust

A revocable trust is also known as a revocable living trust and can be changed or updated when needed.

“It is typically a will substitute that helps you avoid probate and is created for the benefit of the grantor (creator of the trust) and assets belonging to the grantor during their life,” says Tracy Craig, partner and chair of the trusts and estates practice group at SederLaw.

The parent is usually the trustee, but a trusted individual or attorney can be chosen to be the trustee to manage the assets while the parent is alive and upon the parent’s death.

How a revocable trust works

If a parent doesn’t have a lot of assets but wants to leave the house to the children, a revocable living trust could be a good fit. What usually happens is that the parent retitles the house in the name of the trust.

“By holding the house in a revocable trust, the house will be included in the parent’s estate upon death,” says attorney Joy Matak, a partner and leader of trust and estates practice at Sax. ”

A major pro of putting a home in a revocable trust is that heirs will avoid taxes.

“The basis will be the same as the fair market value as of the date of death,” says Matak. “If the child were to sell the property, they would have no taxable gain and no federal or state income tax.”

Key benefits of a revocable trust

  • Heirs avoid probate, which can amount to thousands of dollars and take months to complete. The trust also helps maintain control over a parent’s assets and estate while the parent is alive and of sound mind.
  • The parent can name a successor trustee to take over in the event of the parent’s mental or physical incapacity.

Disadvantages of a revocable trust

  • A revocable trust is still under the grantor’s ownership, and it won’t save money on the grantor’s yearly income taxes or an heir’s estate taxes.
  • If a parent runs into financial problems, creditors can still come after the parent’s assets to recover the debts owed.
  • Annual reviews of the trust are also necessary so a parent can amend the trust to align with his or her financial goals—for example, life events such as the divorce of a beneficiary.

Trust No. 2: Irrevocable trust

As the name implies, an irrevocable trust can’t be changed, amended, or terminated—at least not easily.

Modifications can be made only under specific circumstances and must be agreed on by all named beneficiaries before the court approves the amendments.

Once the assets—like stocks, life insurance policies, and real estate—are transferred to the trust, the grantor gives up ownership, and they are removed from the taxable estate and managed by a trustee.

Unless a parent is uber-rich, he or she might not need an irrevocable trust to avoid paying federal estate taxes, since currently there is no federal estate tax if the estate amounts to below $12.92 million per taxpayer or $25.84 million per couple.

How an irrevocable trust works

Irrevocable trusts are more complicated than revocable trusts and typically require a meticulous examination of tax issues, so it’s critical to get a cash flow analysis before creating one.

“We should confirm your sources of income and ensure that planning does not disrupt your current lifestyle or future comfort,” says Matak. “This is perhaps more important than determining the structures that will protect your wealth for future generations of your family.”

Key benefits of an irrevocable trust

  • Since a parent no longer owns the assets, the parent is shielded from creditors.
  • Parents and their assets are protected in case they suffer mental or physical incapacity.

Disadvantages of an irrevocable trust

  • A trustee will control and manage substantial assets, meaning the parent must give up total control of the estate.
  • Any income generated from the trust is taxed separately and often at a higher rate. So, an additional tax return might need to be filed.

Which trust is right for you?

State and federal rules have precise trust requirements and can be challenging to understand. The trust you choose depends on your particular circumstances and needs.

To get you started on what trust you might pick, here are some questions to ask yourself.

  • What is the tax basis for the house, and if it is sold, what will the capital gains taxes be?
  • Do you live in an area with a state estate or inheritance tax?
  • Do you want your children to be able to use the house for a while after your death, or should it be sold right away?

Once you’ve thought about your answers, talk to a qualified estate planning attorney to determine the best way to leave your house to your children."

Source: Realtor.com

Written by: Lisa Marie Conklin

Published: November 9, 2023

Posted by Grossman & Jones Group on


Email Send a link to post via Email

Leave A Comment

e.g. yourwebsitename.com
Please note that your email address is kept private upon posting.