Occasionally clients ask for assistance in removing their house from their trust. They do so to facilitate refinancing the house, the client wants to add a relative to the title, to ensure the home is considered a residence for Medicaid purposes or some other similar issue. There are a number of issues to consider before doing so as the recent nj.com article entitled “I want to revoke a trust on my house. What do I do?” points out. Whether it is a good idea to remove your home from your trust and actually doing so will require the assistance of an experienced estate planning attorney.
The answer to a question about how to get a house out of your trust is going to be in the trust terms themselves. However, if the terms of the trust are silent, the answer may be found in the trust laws in the state statutes. If answering the question in general terms, the primary concern is whether the trust is revocable or irrevocable.
The first step is to determine whether the trust is revocable. Most clients use revocable trusts, so assuming it is a revocable trust, the trustor (person who set up the trust) has the right to remove the house from the trust. The trustee (probably the same person) can execute a deed conveying the property from the trust to the trustor. That takes the property out of the trust.
In the majority of cases, this will solve the problem. Also, if the property was removed to refinance, you can safely convey it back to the trust once the refinance is done. Similarly, if a client wants to add someone to title to change where the property goes at death, it is often better to just change the trust terms to leave the residence to the beneficiary. This is often better for taxes as well.
If the trust is irrevocable, it means that the house can’t be removed from the trust unless the terms of the trust permit it. There are exceptions, such as asking a Court’s permission to revoke the trust or remove the property, or in some cases, terminating the trust with agreement of the trustee and beneficiaries, but these are more difficult options and not guaranteed.
Next, let’s look at the reason why the home was initially put in a trust. It is important to keep these ideas in mind as removing the property from the trust may negate important benefits. See here for the benefits https://www.galliganmanning.com/category/trusts/page/6/ There may be alternatives which accomplish the same goals as well.
If the purpose was to lower estate taxes, it may make sense to remove the house from the trust. This is especially the case if the property is in a state that doesn’t have state estate taxes. Very few states still do. An estate rarely meets the threshold for federal estate taxes, so clients actually save taxes by removing the property from trust.
If the property is owned by an irrevocable trust for asset protection in long-term care planning, it might make sense to keep the property in the trust. However, if you are using a revocable trust and want to consider asset protection in long-term care planning, it is often better to keep the property in your name. This is because Medicaid may exempt your residence if you own it personally. In our office, we prepare “Lady Bird deeds” for Texas residences which allow a client to own the residence personally, and transfer it to the trust automatically when they pass away. This works with both asset protection planning and probate planning.
If the trust owned the property for probate avoidance, the property often will be put back into the trust or conveyed at death to the trust such as with the Lady Bird deed.
In sum, there are some reasons to remove property from a trust, but doing so should always involve an experienced estate planning to preserve the benefits of the trust and to ensure your goals are met.
Reference: nj.com (Feb. 4, 2020) “I want to revoke a trust on my house. What do I do?”