Should you really agree to give up control of your assets? There are some good reasons to get this type of trust, but there are some major drawbacks as well.
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Despite what you may have heard, you probably do not need (or want) an irrevocable trust. When you create an irrevocable trust you are creating a document you cannot change easily, and the property you transfer to the trust is no longer in your control.
When would someone give up control of their own assets and let someone else handle their money? You should only think about making an irrevocable trust if you want to: (1) lower your estate taxes; (2) get into government programs; or (3) keep your assets safe from your creditors. If none of these situations applies, you should not have an irrevocable trust.
Hey there! I’ve been researching estate planning options lately and I keep running into this big question that many homeowners face should you put your house in an irrevocable trust? It’s a major decision that impacts how you own control, and eventually pass on what’s probably your biggest asset. Let me break down everything I’ve learned so you can decide if this is the right move for your situation.
What Exactly Is an Irrevocable Trust?
First things first: we need to know what we’re up against. A legal arrangement in which you (the grantor) permanently give assets to a trust is called an irrevocable trust. The key word here is permanent. After putting your home in this kind of trust, you no longer own or control it.
The trust becomes its own legal entity, separate from you. It’s managed by a trustee (who could be someone else or sometimes you with limitations) for the benefit of your chosen beneficiaries. The terms are generally fixed and can’t be changed without the consent of all beneficiaries and the trustee.
This is totally different from a revocable trust, which you can change or cancel whenever you want. With an irrevocable trust, you’re making a decision that’s difficult to reverse
The Only 3 Legitimate Reasons to Consider an Irrevocable Trust
Experts in money say there are only three good reasons to think about putting your home in an irrevocable trust.
- To minimize estate taxes (if you have a very large estate)
- To become eligible for government programs like Medicaid
- To protect your assets from creditors and lawsuits
If not any of these situations describe you, an irrevocable trust might not be the best choice for you. Let’s dig deeper into each reason.
1. Estate Tax Minimization
If your estate is valued above $12. 06 million per person (or $24. The federal estate tax will be $12 million per married couple starting in 2022. You may be worried about this. By giving your house to an irrevocable trust, you take it out of your taxable estate. This could help your heirs pay less in taxes after you die.
But let’s be real – this only matters if you’re quite wealthy. Most people don’t need to worry about federal estate taxes. However, be aware that state estate tax thresholds can be much lower.
2. Qualifying for Medicaid and Other Government Benefits
If you anticipate needing Medicaid to cover long-term care costs, an irrevocable trust might help. Medicaid has strict asset limits, and your home counts against these limits. By transferring your home to an irrevocable “Medicaid trust,” you might become eligible for benefits.
BUT – there’s a big catch. Medicaid has a “look-back period” (typically five years) during which they review asset transfers. If you transfer your home within this period, you could face a penalty delay in eligibility.
Also, these trusts usually limit you to receiving only income, not principal. So if you don’t end up needing Medicaid, your principal is still locked up.
3. Asset Protection from Creditors
For people who face higher lawsuit risks (like doctors, architects, or real estate developers), an irrevocable trust can provide asset protection. Since you no longer own the house, creditors generally can’t go after it to satisfy claims against you.
However, courts can reclaim assets if they determine you transferred them to avoid a specific lawsuit. Most states require that funds be in the trust for one or two years before they’re protected.
The Process: How to Put Your House in an Irrevocable Trust
If you decide this is right for you, here’s what the process looks like:
- Create the trust document with the help of an attorney
- Prepare and execute a new deed transferring the property title from you to the trust
- Record the deed with your local county recorder or clerk’s office
- Update insurance policies to reflect the new ownership structure
- Notify your mortgage company (if applicable)
The last step can be tricky. Some mortgage companies might consider transferring ownership to a trust as a “due on sale” trigger, potentially requiring you to pay off the mortgage. Always check with your lender first.
The Big Downsides You Need to Know About
Before jumping in, consider these significant drawbacks:
Loss of Control is MAJOR
This is probably the biggest downside. Once your house is in the trust:
- You can’t sell it without the trustee’s approval
- You can’t refinance easily
- You can’t change beneficiaries if your family situation changes
- You can’t take the house back if your circumstances change
As one expert bluntly puts it: “Has your youngest child ticked you off? Too bad, he is permanently a beneficiary.”
Tax Implications Can Be Complicated
While the trust might save on estate taxes, there are other tax considerations:
- You might lose the capital gains tax exclusion for primary residences
- The trust typically requires filing a separate income tax return
- Beneficiaries might not get the “step-up in basis” that normally occurs when inheriting property directly
Additional Costs
Setting up and maintaining an irrevocable trust isn’t cheap:
- Attorney fees for creating the trust (often several thousand dollars)
- Trustee fees if you use a professional trustee
- Annual accounting fees for trust tax returns
- Possible additional property insurance costs
Who Should Consider This Option?
After all this research, I’ve found that an irrevocable trust for your home makes the most sense if:
- Your estate exceeds the estate tax threshold
- You’re planning for Medicaid eligibility at least five years in advance
- You work in a high-liability profession and want asset protection
- You’re comfortable permanently giving up control of your home
Who Should Probably Avoid This Option?
On the flip side, an irrevocable trust is likely NOT a good choice if:
- Your estate is below the estate tax threshold
- You want to maintain control over your property
- You might need to sell or refinance your home in the future
- You’re not concerned about creditor protection
- You want to keep your options open as life circumstances change
Better Alternatives to Consider
If an irrevocable trust doesn’t seem right for you, there are other options:
- Revocable living trust: Provides probate avoidance and privacy while allowing you to maintain control
- Transfer on death deed: Available in many states, this allows you to transfer your home to beneficiaries upon your death while maintaining complete control during your lifetime
- Joint ownership: Adding a family member as joint tenant with right of survivorship can avoid probate
- Homestead exemptions: Many states offer protection for your primary residence from certain creditors
Final Thoughts: Is It Worth It?
The decision to place your home in an irrevocable trust should never be taken lightly. For most average homeowners, the significant loss of control and flexibility probably outweighs the potential benefits.
As one expert says, “Do not create an irrevocable trust unless you need estate tax savings, government benefits or creditor protection, and make sure you will want to continue this benefit for the rest of your life.”
If you’re considering this option, I absolutely recommend consulting with an estate planning attorney AND a financial advisor who can analyze your specific situation. This isn’t a DIY project!
Remember that estate planning isn’t one-size-fits-all. The right solution depends on your unique financial situation, family dynamics, and long-term goals.
Have you considered putting your house in a trust? What concerns do you have about it? I’d love to hear your thoughts in the comments!
Quick Reference Table: Pros and Cons
| Pros | Cons |
|---|---|
| Estate tax reduction | Loss of control over your property |
| Medicaid eligibility planning | Can’t easily change beneficiaries |
| Asset protection from creditors | Difficult to sell or refinance |
| Probate avoidance | May lose residential tax benefits |
| Privacy in property transfers | Additional ongoing costs |
| Legacy planning | Permanent decision that’s hard to undo |
FAQs About Putting Your House in an Irrevocable Trust
Can I still live in my house if it’s in an irrevocable trust?
Yes, you can typically continue living in your home through specific provisions in the trust, such as a retained life estate.
Will I still need to pay property taxes?
Yes, property taxes still need to be paid, though they may be paid from trust assets rather than personally.
Can I make changes to the house, like renovations?
This depends on the trust terms. You may need trustee approval for significant changes.
What happens to my mortgage if I transfer my house to a trust?
Some lenders may consider this a “due on sale” event. Always check with your mortgage company first.
How much does it cost to set up an irrevocable trust?
Typically several thousand dollars, plus ongoing maintenance costs for accounting and possibly trustee fees.
Remember, the right estate planning strategy for your home is a personal decision based on your unique circumstances. Get professional advice before making any major moves!
The Bad: The Many Negatives of Irrevocable Trusts
If you are not wealthy, there is no reason to put money into an irrevocable trust with life insurance, set up a charitable remainder trust, or give away a lot of property to avoid paying estate taxes when you die. Since there is no federal estate tax below $12. 06 million per spouse, or $24. 12 million per couple, in 2022, few people currently need an irrevocable trust for estate tax savings. (Although note that state estate tax limits can be much lower than federal. ) So, these actions only make sense if your estate will be sizable.
If you do not plan on qualifying for Medicaid (Medicaid benefits are not particularly lavish) there is no reason to have the majority of your assets transferred to an irrevocable trust and controlled by a trustee who may deny you use of the funds in the trust. Also, Medicaid trusts usually only let you get income and not the principal. This means that even if you don’t get Medicaid, your principal is still locked up.
An irrevocable trust may protect your assets from creditors, but a court can reclaim these assets when it feels you unjustly transferred funds to the trust in contemplation of a lawsuit. Most states want the trust to own the money for at least one or two years before it can protect it. This means that assets put into an asset protection trust might not be protected from recent accidents. And you don’t need an irrevocable trust to protect your beneficiaries from their creditors, since a carefully drafted revocable trust protects every beneficiary except you and your spouse (and even then, in certain circumstances your spouse may be protected by a revocable trust). Plus, these trusts usually require an independent individual located in the administering state to manage trust assets. If you sense there is little chance of you being sued, or that the person you would name as trustee is less responsible than you, asset protection trusts may not be a good option.
If you’re thinking about an irrevocable trust to avoid probate and protect your privacy, you could probably be just as well-served with a revocable trust instead. Since trusts act as a substitute to wills, all trusts avoid probate unless the will “pours-over” to the trust, since the court needs to know who the ultimate recipient is under the will. So almost all revocable trusts avoid probate. Ditto regarding privacy: Revocable trusts are just as private as irrevocable trusts.
Finally, irrevocable trusts often have worse income tax treatment than revocable trusts if income is not distributed to the beneficiaries. Irrevocable trusts usually have to pay an accountant to file a separate income tax return for the trust. Plus, you often need a third party to act as trustee of an irrevocable trust, so while you would serve as your own trustee of your revocable trust for free (since the trust’s money is your money anyway) a third party trustee of an irrevocable trust is going to want to be paid.
Some Background on Trusts and What They Accomplish
Whether they are revocable or irrevocable, all trusts have three parties: