In part one, we explained how revocable living trusts and irrevocable trusts work. We also discussed the process of transferring the legal title of your home into a trust to ensure it is properly funded. Here in part two, we will outline the key advantages of using a trust to pass your home to your loved ones compared to using other estate planning strategies.
The Benefits of Putting Your Home in a Trust While both wills and trusts are the most commonly used estate planning vehicles to pass on wealth and other assets to your loved ones, putting your home in a trust has a number of distinct benefits compared to using a will.
One of the primary advantages of using a trust to pass on your home to your loved ones is the avoidance of the court process known as probate. Unlike a will, assets held in trust do not have to go through probate. During probate, the court oversees the will’s administration, ensuring your assets are distributed according to your wishes with court supervision to handle any disputes.
Probate can be a long and expensive process, which can be emotionally draining for your loved ones. Depending on the complexity of your estate, probate proceedings can drag out for months or even years. Your family may have to hire an attorney to represent them. This results in costly legal fees that can drain your estate. Probate is also open to the public, potentially exposing your personal family business to the wrong people.
Unlike a will, if your trust is properly set up and maintained, your family will not have to go through probate to inherit your home. Instead, your home will immediately pass to your loved ones upon your death without the need for any court intervention. Unlike wills, trusts remain private and are not part of the public record. Having a properly funded trust, the entire process of transferring ownership of your home can happen in the privacy of your lawyer’s office, instead of a courtroom, and on your family’s time.
Protection Against Incapacity In addition to transferring your home to your loved ones when you pass away, putting your home in a trust can also protect your home in the event you become incapacitated by serious illness or injury. In contrast, a will only goes into effect upon death. Thus, it would be ineffective at protecting your home in the event of incapacitation. If you do become incapacitated with only a will in place, your family may have to petition the court to appoint a conservator or guardian to manage your affairs related to homeownership, including paying your mortgage and property taxes, keeping up with your home’s general maintenance, and overseeing the sale of your home. Like probate, the process of petitioning the court to appoint a conservator or guardian can be costly, time-consuming, stressful, and open to the public. There is the possibility that the court could appoint a family member as a guardian that you would not want to manage your family home. Alternatively, the court might select a professional guardian, putting a total stranger in control of your family’s most precious asset and leaving it vulnerable to crooked guardians, who could potentially sell your home for their personal financial gain.
With a trust, you can include provisions in the terms of the trust that appoint someone of your choosing—not the court’s—as successor trustee to manage your home’s ownership and/or sale if you are unable to do so yourself due to incapacity. For example, your trust could authorize your successor trustee to sell your home in order to pay for the costs of long-term care should you require it. Control Over Asset Distribution Since you can include specific instructions in a trust’s terms for how and when the assets held by the trust are distributed to a beneficiary, a trust can offer greater control over how your assets are distributed compared to a will. For example, you could stipulate in the trust’s terms that the assets can only be distributed upon certain life events, such as the completion of college or marriage, or when the beneficiary reaches a certain age. In this way, you can protect your beneficiaries from running through their inheritance while offering incentives for them to demonstrate responsible behavior. Provided that the assets are held in trust, they are protected from the beneficiaries’ creditors, lawsuits, and divorce, which is something else a will does not typically provide.
Avoiding Family Conflict If you leave your home to your loved ones using a will and designate more than one person to inherit the property, there is a potential for conflict since each individual gets an undivided interest in the home. These individuals must agree on what to do with the home—keep it or sell it—and they may not see eye-to-eye. This can create unnecessary drama that may tear your family apart. For example, if one of your children wants to keep the home and live in it, but the other prefers to sell it in order to pay off their debts, the child who wants to sell could go to court in order to force their sibling to sell the property. However, this potential for conflict can be avoided by putting your home in a living trust. If you name more than one beneficiary for your home in your living trust, you can name a neutral third-party as successor trustee to carry out your wishes and manage the process regarding the disposition of your home. For example, the trustee could allow one child to live in the home, while the other could receive other estate assets of equal value, or the trustee could come up with some alternative solution to stave off the potential for conflict.
Transfer On Death Deed In some states you can use what is known as a Transfer on Death (TOD) deed to transfer ownership of your home to your loved ones without the need for probate. Initially created as an inexpensive alternative to living trusts, a TOD deed allows named beneficiaries to assume ownership of your home without undergoing probate or trust administration. TOD deeds come with some major drawbacks and may create unintended problems for your loved ones. Before you rely on a TOD deed as a cheaper alternative to passing your house via a trust, consider the following factors:
If your property is held in joint tenancy, your joint tenant becomes the sole owner upon your death and has full control of the property. This could make your TOD deed obsolete unless you both agree on the beneficiary. Once your joint tenant has full control of the property, they could change the beneficiary or do whatever they want with the property.
Unlike a living trust, a TOD deed cannot be used to manage, sell, or borrow against the property during your incapacity. This means if you become incapacitated, the beneficiary of your TOD deed would be unable to access your home to sell or refinance the property to pay for your care the way a trustee could if the home was in a trust.
If the beneficiary of the TOD deed is a minor upon your death, a court-appointed guardian will need to be named to control your property until the child reaches legal age. If your home is in a trust instead, the person you named as successor trustee can manage the property until your child reaches legal age.
Using a TOD deed to transfer ownership of your home to try and lower the value of your assets does not count as a Medicaid spend-down. Plus, depending on the state, the property may even be subject to the Medicaid Estate Recovery Program (MERP) after you pass away.
Given these potential complications, using a TOD deed to transfer ownership of your home as an alternative to a living trust is rarely a good idea. Instead, we can help you find better ways to transfer ownership of your home that will keep your family out of court and out of conflict.
Find The Solution That’s Right for Your Family Although putting your home in a living trust can be an ideal way to pass your home to your loved ones, each family’s circumstances are different. This is why we create custom documents based on what you actually need and what will be the most affordable, efficient solution for you and your family—both now and in the future—taking into consideration your family dynamics, assets and desires.
The best way for you to determine whether or not your estate plan should include a will, a trust, or some combination of the two is to meet with us for a Family Wealth Planning Session, which is the first step in our Life & Legacy Planning Process. During this process, we will take you through an analysis of your assets, discover what is most important to you, and discuss what will happen to your loved ones when you pass away or if you become incapacitated.
Sitting down with us will empower you to feel 100% confident that you have the right combination of estate planning solutions to fit with your unique asset profile, family dynamics, and budget. In fact, we see estate planning as so much more than planning for death, which is why we call it Life & Legacy Planning. It is about your life and the legacy you are creating by the choices you make today. Contact us today to learn more.
This article is a service of Reflections Life Planning LLC. We do not just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session™, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.