Can I Sell My House If It’s in an Irrevocable Trust? Yes, But There’s a Process

Placing your home in an irrevocable trust can be a smart estate planning move but what happens when you want to sell that property? The good news is yes you can sell a house that’s in an irrevocable trust – but there are specific procedures and considerations you’ll need to navigate.

I’ve helped clients go through this process, and I can tell you it’s not as easy as a normal home sale. The power of the trustee, the tax consequences, and the terms of the trust all have a big impact on how the sale goes.

Let’s go over everything you need to know to sell a house from an irrevocable trust. This way, you can avoid common problems and make the process go as smoothly as possible.

Understanding Irrevocable Trusts and Property Sales

A grantor (that’s you if you set up the trust) gives assets, like your home, to be managed by a trustee for your beneficiaries. This is called an irrevocable trust. The word “irrevocable” means that you can’t change your mind or get back control of the assets after you’ve made the will.

This type of trust offers several benefits:

• Protection from creditors
• Reduced estate taxes
• Potential eligibility for government assistance programs
• Avoiding the probate process

When a house is placed in an irrevocable trust, it’s no longer considered your personal property – it belongs to the trust itself. This distinction is crucial when selling the property.

Who Has the Authority to Sell?

The trustee is the main person who can sell a house in an irrevocable trust. But this power isn’t given automatically; it has to be made clear in the trust agreement.

The first step in any potential sale is for the trustee to review the trust document for

• Clauses that permit or restrict the sale of real estate
• Any specific conditions that must be met before selling
• Requirements for beneficiary approval

If the trust document doesn’t specifically address property sales, state laws often provide default powers. Many jurisdictions have statutes that grant trustees the authority to sell trust assets as part of their management duties, provided the trust doesn’t expressly forbid it.

Remember that trustees have a fiduciary duty to act in the best financial interests of the beneficiaries. When selling, they must ensure:

• The price reflects fair market value
• The transaction aligns with the trust’s purpose
• There’s no self-dealing or conflicts of interest

The Step-by-Step Process of Selling a House in an Irrevocable Trust

Let’s walk through the typical process of selling a home that’s held in an irrevocable trust:

1. Review the Trust Agreement with an Attorney

The first crucial step is consulting with an estate planning attorney to review the trust agreement. You’ll need to verify:

• The trustee’s authority to sell
• Any specific requirements or restrictions
• Potential tax implications

Attorney Wayne Patton notes, “If you’re creating your trust, you can get specific with the rules that you want to incorporate.” But if you’re dealing with an existing trust, you’ll need to work within its established parameters.

2. Hire a Real Estate Agent (Recommended)

While not strictly required, working with a real estate agent experienced in trust sales can be invaluable. They can help:

• Determine fair market value
• Market the property effectively
• Navigate the complexities of a trust sale

Real estate advisor Stephen Michalakos recommends finding “a real estate agent that hasn’t only done this before but who has proven results of working multiple probate sales successfully.”

3. Gather Necessary Documentation

You’ll need several important documents for the sale:

• Certificate of Trust (summarizes key trust information)
• Copy of the trust agreement
• Trust’s Tax ID number
• Government-issued photo ID for the trustee
• Original death certificate (if a prior trustee has passed away)

4. List and Market the Property

The actual listing and marketing process is similar to a traditional home sale, with the trustee acting as the seller on behalf of the trust. The trustee will:

• Sign the listing agreement
• Approve marketing materials
• Review and respond to offers

5. Accept an Offer and Sign Contracts

When an acceptable offer comes in, the trustee signs all related contracts as “Trustee of [Trust Name],” not in their personal capacity. This includes:

• Purchase agreement
• Closing disclosures
• Transfer documents

6. Complete the Closing Process

At closing, the trustee will need to provide the title company with documentation proving their authority to sell. Once the sale is complete, the proceeds are not paid to the trustee personally but must be deposited into a bank account held in the trust’s name.

7. Manage and Distribute the Proceeds

After the sale, the proceeds become part of the trust’s principal (corpus) and must be managed according to the trust agreement. This typically involves:

• Investing the funds appropriately
• Making distributions to beneficiaries as specified
• Maintaining detailed records of all transactions

Tax Implications When Selling a House from an Irrevocable Trust

The tax consequences of selling a home in an irrevocable trust can be significant and somewhat complex:

Capital Gains Tax

When a house in an irrevocable trust is sold, the trust itself is typically responsible for paying capital gains taxes on any profit from the sale. This is calculated as the difference between the sale price and the property’s tax basis.

The basis determination is critical:

• If the trust was irrevocable from the start, the basis is usually the original purchase price
• If the trust became irrevocable upon the grantor’s death, the property may receive a “stepped-up basis” to its fair market value at the time of death

For example, if a home was purchased for $200,000 and sold by the trust for $1,000,000, without a stepped-up basis, the trust would face capital gains tax on the $800,000 profit.

Tax Distribution

Who ultimately pays the taxes depends on how the proceeds are handled:

• If reinvested in the trust: The trust pays the taxes
• If distributed to beneficiaries: The beneficiaries may be responsible for the taxes

Recent IRS guidance (Revenue Ruling 2023-2) clarified that assets in irrevocable grantor trusts not included in the grantor’s taxable estate do not receive a stepped-up basis.

Common Mistakes to Avoid When Selling Trust Property

When selling a house from an irrevocable trust, be careful to avoid these common pitfalls:

1. Failing to Assemble the Right Team

Due to the complexity of trust sales, working with experienced professionals is crucial:

• Estate planning attorney
• Tax professional/CPA
• Real estate agent with trust sale experience

2. Not Maintaining Clear Records

Start preparing before deciding to sell by maintaining organized records of:

• Account information
• Legal documents
• Trust instructions
• Distribution plans

Estate planning attorney Rebecca Goldfarb emphasizes: “Before someone dies, the executor or successor trustee must have a comprehensive understanding of all the assets. It’s critically important to organize and know logins, passwords, insurance policy details, and contact information for beneficiaries.”

3. Poor Communication with Beneficiaries

Clear, consistent communication with beneficiaries is essential throughout the process. Many beneficiaries aren’t familiar with legal processes and might be confused or concerned about what’s happening.

As Goldfarb advises, “Receiving a large package from a law firm can make beneficiaries feel lost, scared, and nervous if they aren’t familiar with legal matters, which can hinder their ability to make good decisions.”

4. Ignoring Proper Legal Procedures

Make sure to follow all required legal steps, which may include:

• Court permissions
• Beneficiary notifications
• Proper tax filings
• Adherence to trust timelines

Pros and Cons of Selling a House in an Irrevocable Trust

Let’s weigh the advantages and disadvantages:

Pros

• Asset Protection: The home and proceeds remain protected from creditors
• Probate Avoidance: The sale doesn’t need to go through probate court
• Potential Tax Benefits: Possible reduction in estate taxes and capital gains

Cons

• Complex Process: More complicated than a standard home sale
• Limited Control: The grantor has little say in the sale if they’re not the trustee
• Potential Conflicts: Disagreements can arise among multiple beneficiaries
• Tax Complications: Capital gains taxes might be significant

Final Thoughts

Selling a house in an irrevocable trust is definitely possible, but it requires careful attention to the trust terms, proper legal procedures, and tax considerations. The trustee must follow the trust agreement while fulfilling their fiduciary duty to the beneficiaries.

Working with experienced professionals – an estate planning attorney, tax advisor, and real estate agent familiar with trust sales – will help ensure the process goes smoothly and the transaction maximizes value for the beneficiaries.

If you’re considering placing your home in an irrevocable trust or are dealing with a trust property sale, take the time to understand the full implications and requirements. This knowledge will help you navigate the process effectively and avoid potential pitfalls along the way.

Remember, every trust is unique, so what applies in one situation may not apply in another. Always consult with qualified professionals regarding your specific circumstances before making decisions about trust assets.