Considerations for transfer ownership of house to irrevocable trust?

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neurosphere
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Considerations for transfer ownership of house to irrevocable trust?

Post by neurosphere » Fri Sep 27, 2019 1:11 pm

Summary: I'm taking the first steps in educating myself about the process of transferring ownership of a home into an irrevocable trust. What happens to the mortgage? Is a refinance of an existing mortgage (currently in the name of the beneficiary) required? If the trust owns the home, whose "credit" is used? Can the beneficiary of the trust, become a co-signer of sorts? Is it a difficult process to transfer ownership? I've been reading about quitclaim deeds and other such "new to me" terms. Note that I intend to spend a lot of time on google, and gets some insights here, so that I can make future discussions with a lawyer more productive and also serve as a resource to the family. [Can you tell I'm anticipating "what does your lawyer say" comments already? :) ]

Some details...

I am the trustee on an irrevocable trust which was created for an adult family member with issues (manic depressive episodes is the best analogy) to place assets outside of his direct control. At the time of creation, the beneficiary voluntarily placed in the trust his share of a small rental property (primary reason to create the trust. He owned a home, and I suggested to beneficiary and his immediate family (who manage his finances) to consider also placing the home in the trust. But there was no equity in the house at "risk", which combined with the administrative friction led to deferring the decision.

Now, however, there is substantial enough equity that there is money to be "lost" should another episode occur. In addition, he now has a 5 year old son via his ex-wife, who would inherit the house. He is not on great terms with the ex (I've seen a lot worse though!) and neither he nor his parents wish to see the house essentially end up under the control of the ex-wife should he die. His parents essentially pay his mortgage, and are increasingly reluctant to do so knowing the house/cash might leave the "family" (despite the grandson of course being family).

As an aside, the best thing to do would be to simply sell the house and move this person into an apartment.There is no one in the family (heirs or otherwise) who would want/need this house, and the equity is better used to help pay current/future bills. There is no interest in that move by his parents (even though he would just as soon live in an apartment and not in his own house).

Any insights, warnings, etc. are appreciated!

HomeStretch
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Re: Considerations for transfer ownership of house to irrevocable trust?

Post by HomeStretch » Fri Sep 27, 2019 1:50 pm

I have not transferred real estate to an irrevocable trust. But I have heard if you do you need to update the homeowner policy to reflect the trust as a “named insured.”

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Re: Considerations for transfer ownership of house to irrevocable trust?

Post by neurosphere » Fri Sep 27, 2019 1:56 pm

HomeStretch wrote:
Fri Sep 27, 2019 1:50 pm
I have not transferred real estate to an irrevocable trust. But I have heard if you do you need to update the homeowner policy to reflect the trust as a “named insured.”
Ah! Insurance considerations are not something I had previously thought of. Thanks.

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Re: Considerations for transfer ownership of house to irrevocable trust?

Post by ChrisC » Fri Sep 27, 2019 2:15 pm

Hmmmmm, sounds like overkill to place the house in an irrevocable trust (just to place assets outside of the control of the owner) when other less restrictive measures might have been available -- sure some creative lawyer could have thought of something. If this is a non grantor, irrevocable trust, then you should have a separate tax id for this trust, have to file a 1041 tax return if there is over $600 in gross income, and you might have to pay income tax on any "gain" from the sale of property at the trust tax rates.

Are you sure this is an "irrevocable trust" rather than a revocable trust?

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Re: Considerations for transfer ownership of house to irrevocable trust?

Post by bluebolt » Fri Sep 27, 2019 2:38 pm

neurosphere wrote:
Fri Sep 27, 2019 1:56 pm
HomeStretch wrote:
Fri Sep 27, 2019 1:50 pm
I have not transferred real estate to an irrevocable trust. But I have heard if you do you need to update the homeowner policy to reflect the trust as a “named insured.”
Ah! Insurance considerations are not something I had previously thought of. Thanks.
I had to pay a small additional premium ($30) for my homeowner's insurance since it was held in trust.

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Re: Considerations for transfer ownership of house to irrevocable trust?

Post by neurosphere » Fri Sep 27, 2019 2:43 pm

ChrisC wrote:
Fri Sep 27, 2019 2:15 pm
Hmmmmm, sounds like overkill to place the house in an irrevocable trust (just to place assets outside of the control of the owner) when other less restrictive measures might have been available -- sure some creative lawyer could have thought of something. If this is a non grantor, irrevocable trust, then you should have a separate tax id for this trust, have to file a 1041 tax return if there is over $600 in gross income, and you might have to pay income tax on any "gain" from the sale of property at the trust tax rates.

Are you sure this is an "irrevocable trust" rather than a revocable trust?
Yes, this is an irrevocable trust which has been filing taxes since the outset. Placing the house in the trust would have the dual purpose of having a trust/trustee for his child should his child inherit the home as a minor.

Currently the trust only has income from a property which does not distribute the cash but rather remains as equity in the a partnership. Income is passed out of the trust onto the beneficiaries taxes. You bring up a very good point. What would be the cost basis of the home, and if there are gains, does the trust have an exclusion of gains similar to an individual? Have to research. Also, I assume his family will hopefully get some good advice when they meet with a lawyer, regarding other mechanisms to achieve similar goals.

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Re: Considerations for transfer ownership of house to irrevocable trust?

Post by neurosphere » Fri Sep 27, 2019 3:18 pm

ChrisC wrote:
Fri Sep 27, 2019 2:15 pm
If this is a non grantor, irrevocable trust, then you should have a separate tax id for this trust, have to file a 1041 tax return if there is over $600 in gross income, and you might have to pay income tax on any "gain" from the sale of property at the trust tax rates.
Googling has taught me that assets put into a non-grantor irrevocable trust do not receive a stepped-up basis. Also, gains upon sale of the property are treated as added to the corpus (i.e. principal) of the trust, so capital gains taxes will apply.

If the home appreciates much, "unnecessary" taxes will be paid. If the home does not (or declines) there is no real reason for it to be in the trust (if no value, nothing to protect). On the third hand, if the home appreciates from here, being in the trust protects it from having the current owner betting the home in a poker game (or a cash-out refinance with the same net outcome).

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Re: Considerations for transfer ownership of house to irrevocable trust?

Post by neurosphere » Sun Sep 29, 2019 2:23 pm

neurosphere wrote:
Fri Sep 27, 2019 3:18 pm
ChrisC wrote:
Fri Sep 27, 2019 2:15 pm
If this is a non grantor, irrevocable trust, then you should have a separate tax id for this trust, have to file a 1041 tax return if there is over $600 in gross income, and you might have to pay income tax on any "gain" from the sale of property at the trust tax rates.
Googling has taught me that assets put into a non-grantor irrevocable trust do not receive a stepped-up basis. Also, gains upon sale of the property are treated as added to the corpus (i.e. principal) of the trust, so capital gains taxes will apply.

If the home appreciates much, "unnecessary" taxes will be paid. If the home does not (or declines) there is no real reason for it to be in the trust (if no value, nothing to protect). On the third hand, if the home appreciates from here, being in the trust protects it from having the current owner betting the home in a poker game (or a cash-out refinance with the same net outcome).
Turns out the house has very little chance of ever having gains. Purchase price $280,000. Appraisal last year for a refinance $220,000, and no substantial maintenance is likely to be performed. Now the question is, can an irrevocable trust deduct losses on a property transferred into the trust? Off to research! Because if so, that creates an additional incentive to place the house in the trust, in addition to the liability. Despite the fact that the home is worth less than the purchase price, there is equity, so there is some value to shielding that. (perhaps).
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Re: Considerations for transfer ownership of house to irrevocable trust?

Post by celia » Mon Sep 30, 2019 12:53 am

Not sure this would help you, but our revocable (living) trust in California owned the house when we decided to re-finance. We had to take the house out of the trust, get a new loan, then put the house back in the trust. This was likely the lender’s requirement, since the individuals had income, but not the trust (at least not enough to make monthly mortgage payments).

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Re: Considerations for transfer ownership of house to irrevocable trust?

Post by crre » Mon Sep 30, 2019 3:17 am

celia wrote:
Mon Sep 30, 2019 12:53 am
Not sure this would help you, but our revocable (living) trust in California owned the house when we decided to re-finance. We had to take the house out of the trust, get a new loan, then put the house back in the trust. This was likely the lender’s requirement, since the individuals had income, but not the trust (at least not enough to make monthly mortgage payments).
i had to do something similar with the house lived in by my sister, and owned by a trust for her benefit. this worked for a few years, but at some point the lender rejected the insurance on the house, because the name on the insurance was the name on the deed (the trust), which did not match the name on the loan (an individual). the lender took out their own very expensive insurance at our expense, at which point i had the trust buy the home outright to get the lender out of the picture.

bottom line: mixing mortgages and trusts can be tricky, and expensive.

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Re: Considerations for transfer ownership of house to irrevocable trust?

Post by neurosphere » Tue Oct 01, 2019 9:39 am

celia wrote:
Mon Sep 30, 2019 12:53 am
Not sure this would help you, but our revocable (living) trust in California owned the house when we decided to re-finance. We had to take the house out of the trust, get a new loan, then put the house back in the trust. This was likely the lender’s requirement, since the individuals had income, but not the trust (at least not enough to make monthly mortgage payments).
Thanks. I was wondering how/who would need to be on a mortgage if the house is in trust. The trust has some assets and income but probably not enough, but not sure how the trust could be the mortgage holder (or perhaps, that happens all the time). Wondering if there would need to be a co-signer (the beneficiary?) on the mortgage.

The fact that this is a non-grantor irrevocable trust (I assume) makes moving the home in and out problematic. I suspect if there is to be any refinance it would happen before the home goes into the trust. The parents are in their 80s and smart but get easily weary with logistics and administrative proceedings, and the trust beneficiary is an unmotivated 40s with little capacity to help with such things. Meaning, what may be easy/trivial to do for some, is likely to be a big big chore for this family.

I'm looking ahead to when the parents die and the trust inherits their assets, which won't quite be enough to care for him lifelong with his medical needs and inability to work. And also what happens when parents die and loses a stabilizing force. He certainly has the potential of calling one of those "we buy ugly homes" and handing over the house for a check, the money from which would then be gone, fast.

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Re: Considerations for transfer ownership of house to irrevocable trust?

Post by hand » Tue Oct 01, 2019 9:46 am

Two thoughts:

1) Not sure the assumption that gains on the property are unlikely is a good one - there are several cases in the medium to long term where value of an unmaintained property can increase (structural change to the community making it more desireable, high inflation)

2) If parents are currently paying the mortgage, why not simply deed the house to them in the short term (they control, get step up in basis when they pass?) and leave to a trust on their passing.

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Re: Considerations for transfer ownership of house to irrevocable trust?

Post by neurosphere » Tue Oct 01, 2019 9:49 am

crre wrote:
Mon Sep 30, 2019 3:17 am
bottom line: mixing mortgages and trusts can be tricky, and expensive.
Thanks for sharing your experience!

I think I've put in as much time as I can afford to on this, and now simply have to tell the family to discuss this with an appropriate attorney. All things equal, it seems like putting the house in the trust has the potential to mitigate some risk. But whether it's worth the time/effort of the family to research and pursue is unclear at this point.

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Re: Considerations for transfer ownership of house to irrevocable trust?

Post by neurosphere » Tue Oct 01, 2019 9:59 am

hand wrote:
Tue Oct 01, 2019 9:46 am
Two thoughts:

1) Not sure the assumption that gains on the property are unlikely is a good one - there are several cases in the medium to long term where value of an unmaintained property can increase (structural change to the community making it more desireable, high inflation)

2) If parents are currently paying the mortgage, why not simply deed the house to them in the short term (they control, get step up in basis when they pass?) and leave to a trust on their passing.
1) Re: gains. Agreed. The neighborhood certainly has the potential to rapidly become popular. His lot is big and would be the perfect tear-down. :) It's very unlikely he'd be in the house long enough to see substantial enough gains that the taxes would be enough to worry about, but of course it's possible.

2) Hey, that's a very good idea. Definitely something to think about. The son MAY be willing to do that, if he was otherwise willing to put the house in the trust anyway.

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Re: Considerations for transfer ownership of house to irrevocable trust?

Post by bsteiner » Tue Oct 01, 2019 7:17 pm

neurosphere wrote:
Fri Sep 27, 2019 2:43 pm
...
Yes, this is an irrevocable trust which has been filing taxes since the outset. Placing the house in the trust would have the dual purpose of having a trust/trustee for his child should his child inherit the home as a minor.

Currently the trust only has income from a property which does not distribute the cash but rather remains as equity in the a partnership. Income is passed out of the trust onto the beneficiaries taxes. You bring up a very good point. What would be the cost basis of the home, and if there are gains, does the trust have an exclusion of gains similar to an individual? Have to research. Also, I assume his family will hopefully get some good advice when they meet with a lawyer, regarding other mechanisms to achieve similar goals.
If the facts are as you describe, you're making it more complicated than it is.

If the person contributes his home or other assets to a trust for his own benefit, it would probably be a grantor trust for income tax purposes. In other words, he would be treated as the owner of the trust assets and its income for income tax purposes. He would get the exclusion. The trust probably wouldn't file tax returns (though some trustees prefer the old method of filing blank returns with an attached sheet showing the income taxable to the grantor).

With regard to the mortgage, see the Garn-St. Germain Act: https://www.law.cornell.edu/uscode/text ... %E2%80%933.

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