When you put a property into a revocable trust, you remain the owner of the trust and control the trust entirely. There is no difference in how the IRS views your ownership of the property or how most governmental agencies view the property. Furthermore, you can always take the property out of the trust and do just about whatever you want with the property.
On the other hand, an irrevocable trust takes the property out of your estate and somewhat out of your control. With an irrevocable trust, you no longer own the property. The trust owns the property and the trust controls the destiny of the property. You, as the former owner, would have no ability to take the property out of the trust, sell it or do as you wish with the property. The beneficiaries of the trust are the ones that control the future of the trust.
There are quite a few types of irrevocable trusts, and each has a different purpose. You’d need to talk to your attorney to figure out why your attorney feels that an irrevocable trust is right for you. However, when it comes to individuals with higher net worth, placing a personal residence into a certain type of irrevocable trust can work well for estate planning purposes.
Let’s say you have a home worth $3 million and you have other assets worth $10 million. If you were to die today, under current federal tax law, your estate would owe some federal estate taxes; and, depending on what state you live in, you may also owe state estate taxes. However, if your home was in a type of trust that conveyed the home to your children and was set up properly, the home would not be considered part of your estate and the value of the property would not get taxed as part of your estate.
As we mentioned, most irrevocable trusts are set up for estate and federal estate tax purposes, while revocable trusts (also known as living trusts) are set up to avoid probate issues but have no effect on your estate income or federal income taxes.
Sit down with your attorney to learn why an irrevocable trust is or is not recommended. Once the attorney explains the reasons behind it, you can decide what will be best for you and your children.
Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through her website, ThinkGlink.com.