Trusts can be powerful estate-planning tools to ensure your property passes to your children. Certain types can also be helpful in protecting your assets from estate taxes or from government seizure. While the process of deeding your property is relatively straightforward, building a strategy for how to set up your trust can be more complicated. While it's entirely possible to create a trust and deed your property by yourself, many property owners choose to get help from an estate or trust attorney.
Because there are several types of trusts, one of the first steps in deeding property to your children through a trust is to determine what you want to do. If your goal is simply to ensure that the title to the property passes to them without having to go through probate, a simple revocable, or living, trust can be enough. Irrevocable trusts, which put a third-party trustee in control over the property, can shelter the property from estate tax and even protect it from being seized to pay expenses in old age or if you get into financial trouble.
Tax and Asset Protection
One of the key benefits of an irrevocable trust is that it passes to your heirs without estate taxes. However, as of 2014, you can pass up to $5.34 million in assets to your children or other heirs tax-free, so estate tax might not be a factor for you if your estate is not that large. The other key benefit of deeding your property to an irrevocable trust for your children is that, because the trust owns it and you don't, it gets protected from you. If you go bankrupt or get sued, the property will usually remain untouched. This protection also applies if you need to have Medicaid pay for long-term care for you in old age. The property needs to have been in the trust for at least five years before you apply for Medicaid for it to be protected, however. As such, getting started as quickly as possible can protect your property from being taken by the government instead of given to your children.
Creating a Trust
A trust is a legal entity similar to a person. You create a trust by signing a legal document that establishes it, sets up its structure and defines the rules under which the trust operates. For instance, with a living trust, you can create it by saying that any assets in it shall remain under your control as trustee while you live, then pass to your spouse, then pass to your children. Attorneys can draft trusts, or you can do it yourself.
When you transfer a property title to the trust, you execute a deed as if you were selling it. However, instead of deeding the property to a buyer, you transfer the ownership to your trust. For instance, Bob and Susie Parent might deed the property to the Bob and Susie Parent Living Trust. You can use a quitclaim deed to transfer the property into the trust or a warranty deed. Quitclaim deeds are quick-and-dirty ways to transfer property while warranty deeds contain a promise (or warranty) that you actually own the property that you're transferring. Your children don't come into play on the deed. Instead, they're named in the trust agreement. It's kind of like how when you buy something online, you don't get the doodad from the merchant -- you actually get it from the shipping company. The trust is like the shipping company -- it's an intermediary that handles the nitty-gritty of moving the property into the trust.
Garn-St. Germain Act
If you owe money on your property, deeding it to a trust for your children could become more complicated. The Garn-St. Germain Depository Institutions Regulation Act of 1982 set forth bank reform laws, including rules on when a lender could call back a mortgage that had a due-on-sale clause. Due-on-sale clauses allow the lender to make you pay back the mortgage if you sell or transfer your property. If you transfer your home into a living trust, your lender shouldn't be able to do anything about it. However, this protection might not apply if you transfer it into an irrevocable trust or if you transfer property that isn't your home. In those instances, the lender could call the loan, or demand full repayment, so you may be best served by talking to an attorney before doing anything.
- Estate Street Partners LLC: Revocable Trusts vs. Irrevocable Trusts
- IRS: In 2014, Various Tax Benefits Increase Due to Inflation Adjustments
- Nolo: What Will Happen if Medicaid Says I Transferred My Assets to Qualify for Benefits?
- USA.gov: Understanding Trusts
- Living Trust Network: Transferring Real Property to a Living Trust
- Chicago Tribune: Six Situations Where the Lender Can't Call Your Mortgage
- Stockbyte/Stockbyte/Getty Images