After a grantor passes away, becoming the trustee can be daunting, especially if you’re responsible for distributing property. Houses are among the most valuable assets in a family for financial and sentimental reasons. Therefore, it’s critical to understand how to transfer property out of a trust to the designated beneficiary. When the trust owner dies, the trustee can transfer property out of the trust by using a quitclaim or grant deed transferring ownership of the property to the beneficiary. Here are details on the process and what to do with the inherited property if you’re the beneficiary.
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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, described as follows.
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.
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.
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 home, the beneficiary becomes responsible for repaying the loan. Therefore, it’s crucial for the beneficiary to 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, it’s essential for the trustee to examine the trust documents to see what happens to the mortgage after the trustor passes away.
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 grandparent 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.
Transferring property out of a trust after the trustor’s death is a multistep process in which the trustee fills out deed documentation, identifies mortgages and transfers ownership to the beneficiary. Beneficiaries receiving property generally don’t experience tax disadvantages but may take on the mortgage along with the home. As a result, inheriting property means deciding between living in the home, renting it out or selling it. Again, these choices usually have positive or neutral tax implications thanks to the IRS step-up rule. However, because each financial situation is unique, it’s crucial to understand the tax consequences of handling inherited property.
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 qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one 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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