When a loved one passes away, managing their estate can feel overwhelming, especially when property is held in a trust. Unlike assets that go through probate, property in a trust follows a different legal process for transfer to beneficiaries. Understanding the necessary steps—such as gathering trust documents, notifying relevant parties, and executing the trustee’s duties—can help ensure a smooth transition of ownership. Whether you’re a trustee navigating this responsibility or a beneficiary awaiting your inheritance, knowing the legal and procedural requirements can make the process more efficient and less stressful.
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How to Transfer Property Out of a Trust After Death
Transferring property out of a trust is the trustee’s job. Generally, after the trustor passes away, the trustee notifies the trust’s beneficiaries, enacts the trust’s conditions and the beneficiaries receive the assets.
In addition, the grantor’s death makes the trust irrevocable. As a result, the trust’s provisions become permanent, and beneficiaries must abide by them to receive any assets. So, the beneficiaries must fulfill specific requirements, such as reaching adulthood, to inherit property from the trust. Likewise, the trustee has a role to play, with the following steps to take.
1. Transfer the Deed to the Beneficiary
The deed to a property confers ownership, so transferring the deed to the beneficiary is the vital first step. Specifically, you’ll need a quitclaim or grant deed for the transfer. The rules for filling out such documentation vary by state, so it’s recommended to work with an attorney to ensure the deed is free of errors.
2. Provide Deed Information
As the trustee, you are responsible for the transfer deed containing the correct information. First, the deed should state that the beneficiary isn’t purchasing the property. In addition, because the transfer is not a property sale, the beneficiary will not pay transfer tax.
Then, the deed should declare what type of ownership the beneficiary will take. The beneficiary’s marital status and financial circumstances will determine how they will own the property.
Remember, some states require other documents to transfer the property. In addition, they might impose limitations on property ownership for beneficiaries. As a result, check your state’s regulations to understand what deed information the transfer needs to be valid.
3. Identify Mortgages
An outstanding mortgage on the property usually means the beneficiary receives the financial burden along with the property. For example, if $50,000 is left on the mortgage of a home, the beneficiary becomes responsible for repaying the loan. Therefore, the beneficiary must communicate with the mortgage lender and find out if they require refinancing when the original owner passes away.
However, outstanding mortgages might not become the beneficiary’s problem in some cases. Specifically, the trustor might have set the conditions of the trust to pay the rest of the mortgage upon the trustor’s death. Therefore, the trustee needs to examine the trust documents to see what happens to the mortgage after the trustor passes away.
4. File the Deed
Once you obtain the necessary signatures and notarization for the deed, you’ll file it with the city or county government entity overseeing real estate transfers. For instance, depending on the state, you might file with the register of deeds, deeds office or county clerk. Filing generally costs a nominal fee.
What to Do When You Inherit Property from a Trust
When you receive property from a trust, you have three primary options: occupy the home, sell it or rent it out. Each choice has its pros and cons. For example, if you receive a home without a mortgage, it could be financially advantageous to sell your current home and move into the one from the trust. However, the home might need repairs or not be the right size for the number of occupants.
If moving in isn’t feasible or desirable, selling the property can bring in considerable cash. Plus, you’ll rid yourself of the responsibility of paying property taxes and keeping the home in good condition. However, an existing mortgage and necessary repairs can diminish the profits from selling.
Thirdly, renting the home to tenants can bring in monthly income and confer tax breaks specific to landlords, such as repair and utility cost deductions. That said, managing rental properties can be expensive and time-consuming, so collecting rent might be a headache instead of easy passive income.
Tax Implications of Inherited Property from a Trust
Inheriting property typically doesn’t incur specific tax breaks or expenses at the time. Instead, what you do with the property has tax implications down the road. The absence of a federal inheritance tax makes inheriting property free in most cases.
However, six states charge inheritance tax to siblings, aunts, uncles and in-laws. Pennsylvania and Nebraska impose inheritance tax on children and grandchildren. As a result, the less related you are to the trustor, the more likely you are to pay state inheritance tax.
Likewise, selling the home might not have significant tax consequences because of the IRS’s step-up rule. When you receive a property, you “step up” its value to the current market. For example, say your grandparents bought a house for $50,000 and passed it down to you after they died. The house appraises for $300,000 when you receive it, but since this value is stepped up, you won’t pay capital gains taxes for the $250,000 increase. You can also delay the step-up assessment by six months if you think the value will increase steeply in that period.
Remember Capital Gains
However, you will pay capital gains taxes if you sell the home at a price higher than its step-up value. Using the above example, if you sold the home for $350,000, you would be liable for capital gains taxes for the additional $50,000. Fortunately, the IRS will exclude up to $500,000 of capital gains taxes for couples and $250,000 for individuals in situations like this if the home was your primary residence for at least two out of five years.
Remember, renting out the home can confer tax advantages as well. For instance, you can deduct costs to improve the home and get a tax break for property value depreciation. Similarly, if you decide to live in the home and not sell it, you can enjoy the tax benefits of homeownership, such as deductions for property taxes or working in a home office.
Bottom Line
Transferring property from a trust after the trustor’s death involves completing deed documentation, addressing any mortgages, and transferring ownership to the beneficiary. While beneficiaries typically avoid tax disadvantages, they may inherit the mortgage along with the property. This means deciding whether to live in, rent, or sell the home—options that usually carry neutral or favorable tax implications due to the IRS step-up rule. However, given individual financial circumstances, understanding potential tax consequences is essential.
Tips on Transferring Property Out of a Trust
- Inheriting a home can be a financial benefit – but handling new property unwisely can cost you. Consider consulting a financial advisor to help you understand the implications of selling, renting or occupying the home. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Inherited property can be valuable. If you don’t need a second home, selling the home can help you achieve your financial goals. To make the most of the opportunity, use this guide to selling inherited property.
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