You can’t take it with you, so estate planning is needed. For many people, a revocable trust, also known as a living trust or an inter vivos trust, is their best option. While they are alive, they can control the assets in the trust, including removing and selling properties. Once they die, the trust becomes irrevocable, and cannot change. The assets in the trust then pass to their beneficiaries.
How a Revocable Trust Works
The grantor is the person who creates the trust and funds it with personal assets. As far as the Internal Revenue Service is concerned, trust property belongs to the grantor. The grantor names a trustee to manage the assets, but during their lifetime, most people name themselves in this position. A successor trustee is named to carry on when the grantor dies or becomes incapacitated. Children of the grantor or a financial institution often are named as successor trustees. Married couples can set up a trust in which they serve as co-grantors so that a surviving spouse can continue to handle the trust’s affairs.
Once a property is put into the trust, it is retitled in the trust’s name. For example, if you put land titled in your name into the trust, the property is then retitled with the Your Name Trust as the owner.
One advantage of a revocable trust is that it does not go through the probate process. In many states, probate can take up to a year or more. If you own real estate in more than one state, such as a vacation home, your heirs will have to go through probate in each state. With a living trust, beneficiaries receive their inheritance more quickly. Because these assets do not go through probate and thus become part of a public record, there is also an important privacy aspect to such trusts.
Property Put in a Revocable Trust
Almost any property owned by the grantor can go into a revocable trust, including real estate on which there is a mortgage. Along with mutual funds, bank accounts, stocks, bonds and similar assets, you also can place motor vehicles, boats, precious metals, art, antiques and other valuables in your revocable trust. If you own a small business, including a limited liability corporation or partnership, your portion may go into your living trust. The retitling process may prove cumbersome, but it is necessary. When you purchase new assets after initially funding your trust, you can either have them titled in the trust’s name from the beginning or transfer them.
You cannot put IRAs and other qualified retirement accounts into a trust, but you can designate the trust as your beneficiary. The same holds true for annuities and life insurance policies.
Selling Property in a Revocable Trust
As the grantor, you can sell properties in a revocable trust the same way you would sell any other property titled in your own name. You can take the property out of the trust and retitle it in your name, but that isn’t necessary. If you’re selling your primary residence, you are still subject to capital gains tax but can benefit from the exclusion. If you owned and lived in the home for at least two out of five years before the sale date, you may exclude up to $250,000 in capital gains if single and up to $500,000 if you are married and file jointly. Obviously, a trust cannot “live” in a dwelling, but as noted, the IRS considers trust property as that of the grantor for tax purposes. In most cases, you can’t claim the exclusion again if you’ve sold a primary home and took advantage of the exclusion during the two-year period prior to the current sale.