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How Should My Home be Owned: In Trust or Out of Trust?

A Handout for Couples

Six ways to own your home:

(a)  in a revocable trust with both spouses as beneficiaries (there is no protection from creditors)

(b)  in an irrevocable trust (there could be protection from creditors)

(c)  in a land trust  with both spouses as beneficiaries (there is no protection from creditors if you are both sued – but if only one spouse is sued, then there can be protection by the land trust document stating that the beneficial interests are owned as Tenants by the Entirety – unless you owe the IRS)

(d)  as joint tenants (joint tenants with right of survivorship)

(e)  as tenants by the entirety (which is only available for a husband and wife, and only as to their principal residence – provides a lot of protection from creditors if one spouse owes money, unless it is owed to the IRS)

(f)  as tenants in common (but then the property doesn’t automatically to the survivor if one dies)

(g)  a separate trust for the spouse who is less likely to be sued

(i)  in the individual name of the spouse who is less likely to be sued

(j)  in a land trust with the sole beneficiary being the spouse who is less likely tobe sued

 

1.  What is a revocable living trust?

          A revocable living trust is a trust set up during your lifetime, which you can change or cancel as you desire.  (“Revocable” means that you can amend or terminate the trust.)  For most people, the main advantage of establishing a revocable trust is to avoid probate of the client’s assets (in other words, to allow the client’s assets to be distributed to the client’s designated beneficiaries without court involvement).  Assets owned by the trust aren’t subject to going through probate at your death.  Some people also like the idea that the trust is more private than a will.  A original will must be filed with the probate court after a person’s death, whereas a trust document doesn’t have to be filed with the court.  (Please note that a revocable trust doesn’t provide any protection if you enter a nursing home and seek Medicaid benefits.  Please also be aware that if your home is in a revocable trust, there is no protection if you are sued and lose a lawsuit.)

2.  What is an irrevocable trust?

          An irrevocable trust is a trust that either cannot be changed, or can be changed only in minimal ways (such as changing the trustee).  A common type of irrevocable trust is an irrevocable life insurance trust (established so that the life insurance proceeds paid at the client’s death are not considered a part of his/her estate for inheritance tax purposes).  If your assets (counting life insurance proceeds) aren’t over $1 million, then you don’t need to even consider an irrevocable life insurance trust. 

3.  What is a land trust?

          A land trust is a trust that can only “own” land.  A land trust cannot own bank accounts, investment accounts, stocks, bonds, or other assets.  Land trusts are allowed in Illinois, Florida, and a few other states (but not in most states).  Often a bank or trust company is the trustee, but individuals can also serve as trustees of a land trust.  You can serve as trustee of your own land trust (or have a family member serve as the trustee).  Two advantages of a land trust are: (a)  having the property in a land trust will avoid probate if the client dies, (b) a land trust can provide some measure of privacy as compared to a living trust (especially if when you purchase the property a bank is the trustee from the beginning). 

4.  Advantages of Owning the Home in a Revocable Living Trust

1.  You are sure to avoid probate of the home.

2.  Compared to a land trust, the revocable living trust can own various types of assets.  (A land trust can only own real estate.)

5.  Disadvantages of Owning the Home in Revocable Living Trust

1.  You don’t have the protection that tenants by the entirety gives you in case one of you is sued (but not the other spouse).  {In Illinois, a husband and wife can own their principal residence as “Tenants by the Entirety”.  If one of them is sued, and not the other, then by having the home owned as tenants by the entirety there is protection for the spouse who is not sued, unless it is the IRS that is suing the couple.}

          2.  If you put your home into a revocable living trust (after you have initially purchased the property), then your title insurance coverage may not extend to the trust.  In other words, when you bought the home, you were given a title insurance policy to protect you in case any of the following were to occur: (a) the seller didn’t own part or all of the property, (b) there were any liens against the property because of something the seller did.  {You can contact the title insurance company that prepared your title insurance policy, and for a fee, it will probably issue you a new title insurance policy to protect the property in the revocable living trust.  If you recently bought the property, you might desire to pay for a new title insurance policy.  If you have owned the property for 20 or 30 years, then you may not want to consider spending money on a title insurance policy.}

6.  Advantages of Owning the Home in a Land Trust

1.  You are sure to avoid probate of the home

2.  You can continue to have the tenants by the entirety protection (which a revocable living trust cannot provide)

          3.  You may be able to gain some measure of privacy compared to having the property owned in your name or in a revocable living trust. 

7.  Disadvantages of Owning the Home in a Land Trust:

1.  If a bank or trust company is the trustee, then you will pay a annual fee to the trustee.  (You need not use a bank or trust company as trustee.  A person, such as yourself, your adult child, or even your attorney could serve as the trustee.) 

          2.  When you want to sell the property, the bank will have to be contacted to prepare the deed (and there may be an additional fee for such service). 

 

Questions and Answers:

1.  Do I continue to get the homestead exemption (for real estate tax purposes) if the property is in a revocable living trust or a land trust?

          Yes, you continue to get the homestead exemption (as long as you continue to reside in the property as your principal residence). 

2.  Do seniors continue to get the senior citizen homestead exemption (for real estate tax purposes) if the property is in a revocable living trust or a land trust?

          Yes, seniors continue to get the senior citizen homestead exemption.

3.  Do I get the $250,000 exclusion ($500,000 exclusion in the case of couples) for capital gains taxes if I sell the home and the home is in a revocable living trust or a land trust?

          Yes, the IRS stated so regarding revocable living trusts in private letter ruling 199912026 issued by IRS in 1999. 

4.  Does my title insurance coverage continue if I transfer the property into a revocable living trust or a land trust?

          No, the title insurance coverage probably doesn’t continue.  However, you can contact the title insurance company that provided you with title insurance coverage when you bought your home, and for an additional fee, they will issue you a policy to cover the home in a trust. 

5.  What if I presently have a mortgage against my home?  Will transferring the home to a revocable living trust or a land trust allow the lender to call the loan due (meaning that the lender can demand full immediate payment of the loan)?

          A 1982 federal law (the Garn/St. Germain Depository Institutions Act of 1982 – 12 U.S.C. section 1701j-3) states that you may transfer your principal residence to a trust and you will not have to pay off the loan as long as (a) you continue to reside in the home as your principal residence, (b) you are the beneficiary of the trust.

6.  What if I presently have a mortgage against the property which is not my principal residence (such as a vacant lot, commercial real estate, or a rental property), and I transfer the property into a trust?  Can the lender demand that I pay off the loan?

          If you transfer property to your trust which isn’t your principal residence, then hypothetically the lender can demand full payment.  I haven’t heard of this happening so far, but it is a possibility.  If you desire, you can contact the lender and explain what you plan to do, and ask the lender to sign a document stating that the lender won’t demand full payment if you transfer the property into a revocable trust (or a land trust). 

7.  What if we decide to refinance and the property is in a revocable living trust or a land trust?

          If you refinance, the lender will probably want you to take the property out of trust before you refinance – which is done by you signing a deed and recording the deed with the county recorder.  Then after you complete the refinance, you can put the property back into trust by signing another deed and recording that deed.  This of course does cost some money to have the deeds prepared and record the deeds. 

8.  What if we want to sell the house while it is in a revocable living trust?

          There is no problem selling your home while it is in trust.  The deed is prepared for you to sign as trustees.  The title company providing title insurance to the buyer will want to see a copy of the trust (and probably also want to make a copy for their file).

9.  What if we sell the home while it is in a land trust?

          (a)  If a bank or other institution is the trustee, then that trustee must be instructed to prepare the deed for you.  There will probably be a fee for preparation of the deed. 

          (b)  If you are the trustee/s, or some other person (relative, friend, etc.) is the trustee, then such trustee/s sign the deed that is prepared. 

10.  What if we owe money, are sued, or must go bankrupt?

          Neither a revocable living trust nor a land trust provides protection from your creditors. 

11.  What if one of us must enter a nursing home and our home is in a revocable living trust or a land trust?

          Generally speaking, neither a revocable living trust nor a land trust provides protection from nursing home expenses.  However, if one spouse must go into a nursing home, it is advisable that the following be done (a) the nursing home resident transfer his/her interest in the home to the healthier spouse {called the “community spouse”, meaning the spouse residing in the home}, (b) then the community spouse should consider owning the home in a revocable trust or a land trust so that there is no probate when the community spouse dies.  In some states (such as New York, Ohio, Pennsylvania, and Wisconsin), there have been court cases when a will was used to pass assets to the children (rather than the nursing home resident spouse).  In those cases, the community spouse died before the nursing home resident spouse, and the community spouse’s will gave little or nothing to the nursing home resident spouse (the children were named as the beneficiaries of the will).  Those states then informed the nursing home resident spouse (or his/her guardian or agent under power of attorney) that the state’s law gave the surviving spouse the right to claim a percentage of the assets passing through the deceased spouse’s will (and those states basically forced the nursing home resident to take such percentage of assets and use them for nursing home expenses, which meant that the children got less assets).  Illinois has not yet taken such approach, but the possibility exists and thus a revocable living trust or a land trust would be advisable when compared to just using a will (because a surviving spouse has no legal rights under Illinois law to take a percentage of what passes through a revocable living trust or a land trust). 

12.  If the property is not in trust, and we die, what happens?  Is there going to be probate?

          (a)  If you own the property as either joint tenants or tenants by the entirety, and one of you dies, then the property automatically becomes owned 100% by the surviving spouse.

          (b)  If you both die, then there may be probate if

(i)  the last of you to die is a resident of Illinois and you have more than $50,000 of personal assets {not counting the value of the real estate} in your individual name that does not pass by beneficiary form.

(ii)  any of the beneficiaries of your will (not contingent beneficiaries who actually don’t receive anything) or your heirs are either minors or incompetent.  {“Heirs” means the persons who would inherit under state law if you did not have a valid will.}

13.  What are the similarities and differences between joint tenants, tenants by the entirety, and tenants in common?

          (a)  Joint Tenants:  The property will pass to the surviving joint tenant(s) automatically when one joint tenant dies.  Any joint tenant can individually sign a deed to transfer/sell/gift his/her part of the property (and the signature of other joint tenants is not required).  More than two people can own property as joint tenants.

          (b)  Tenants by the Entirety:  In Illinois, only a husband and wife can own property as tenants by the entirety.  And the only property that can be owned that way is the principal residence (not a vacant lot, not a rental property, not commercial property).  When one spouse dies, the property passes to the surviving spouse automatically.  The signatures of both spouses are required to transfer/sell/gift any part of the property (one spouse alone cannot transfer/sell/gift any part of the property).  Of course, if one spouse is incompetent, then the other spouse can transfer/sell/gift the home with a valid power of attorney signed by the incompetent spouse or by a valid court order.  Tenants by the entirety provides some protection in case one of the spouses is sued but not the other.  {See the next question below for further information.}

          (c)  Tenants in Common:  More than one person can own property as tenants in common.  When one owner dies, his/her interest doesn’t automatically pass to the other owners.  Instead, the deceased owner’s interest would pass according to his/her will (or by state law if the deceased person did not have a valid will). Any of the owners can individually sign a deed to transfer/sell/gift his/her part of the property (and the signature of other owners is not required).

14.  What if we (husband & wife) own the home as tenants by the entirety, and one or both of us is sued?

          (a)  If one of you is sued and a court enters a judgment against that spouse, then the home should be protected for the “innocent spouse” (the one not sued).  However, if the innocent spouse dies, then the home will be at risk if any money is still owed to the plaintiff (the one who sued the surviving spouse). 

          (b)  If one of you is sued by the IRS, then the situation is different.  In a 2002 Supreme Court case (United States v. Craft), the court ruled that the IRS can place a lien on a home even though the taxpayer and his wife owned the home as tenants by the entirety.  {In that case, the husband owed the IRS about $500,000 in income taxes.  The home was owned by husband and wife as tenants by the entirety.  The husband then transferred his interest in the home to his wife for one dollar so that she owned the home 100%.  When the wife later sold the home, the IRS claimed that it was due one-half of the money, and the Supreme Court agreed with the IRS in a 9 to 0 vote.} 

          (c)  If both of you are sued and a court enters a judgment against both of you, then there is no protection by owning the home as tenants by the entirety. 

 

Copyright 2008 Ronald Runkle

Law Office of Ronald Runkle & Associates, P.C.
236 Center Street - Grayslake, IL 60030
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email:ron@ronrunkle.com