Moving real estate into an irrevocable trust can be a smart move depending on your assets, creditors, beneficiaries and other circumstances surrounding your estate. An irrevocable trust can provide anonymity, avoid probate, and provide creditor protection. While there are some good reasons to move real estate into an irrevocable trust, there are cons that you should know about:
- Attorney required for lawsuits – If you move your property into an irrevocable trust, then you will need an attorney to represent your trust in court. You can no longer represent yourself pro se (without an attorney) in lawsuits. For instance, you can no longer prosecute evictions pro se. With a trust, you can technically file the eviction pro se with the trustee’s written authorization, but if the tenant responds, or a hearing is required for any reason, you must hire an attorney to appear in court on the trust’s behalf.
- Insurance – You will likely have to obtain a new property insurance policy since the insured’s name is changed. You may no longer be able to obtain liability insurance coverage that is coupled with hazard insurance coverage. Separate liability coverage may be more expensive. You also may need a new title insurance policy.
- Taxes – Your tax liability may increase. You will likely need to apply for a separate tax id for your irrevocable trust. You should consult a tax professional before moving real estate into an irrevocable trust.
- Property taxes – A change in ownership of your real property may affect your property taxes, especially if the property is your homestead. You might not be able to retain your homestead status if you transfer your property to an irrevocable trust. Speak with an attorney about maintaining your property’s homestead status if you plan to transfer your property to an irrevocable trust. You can contact your county property appraiser to inquire about how the valuation of your property might be impacted by moving your property into an irrevocable trust.
- Loss of control – With transferring your real estate to an irrevocable trust, you will lose day-to-day control over the management of the property. You can no longer sign the listing agreements, leases, permit applications, or contracts for work to be conducted on the property. All of that will be signed instead by the trustee. This means that all documents regarding the property must be sent to the trustee with written direction as to what to do with them before they can be executed.
- Tenant reluctance – Placing real estate in an irrevocable trust that does not include your name may lead to reluctance of tenants to enter a lease and pay you. A tenant may not trust that you are the owner of the property because they do not see your name in the public record as the owner.
- Documentary stamp tax – If the property is encumbered by a mortgage, the transfer to an irrevocable trust may require payment of documentary stamp taxes.
- Mortgage issues – If the property is encumbered by a mortgage, the property’s transfer to an irrevocable trust could trigger the “due on sale” clause in the mortgage. This means that, once the lender discovers that the property is no longer in their borrower’s name, they have the right to first demand that you put it back into your name. If you refuse or fail to do so, then they may accelerate your loan and require that you pay off the entire amount of the outstanding mortgage. If you do not pay off the entire outstanding balance of the mortgage, then they can foreclose the mortgage.
- Homestead – Moving your homestead property into an irrevocable trust could result in you losing all homestead tax exemptions and protections against creditors. The homestead protections are more powerful than those provided under an irrevocable trust. Therefore, in general, it is not recommended to move homestead property into an irrevocable trust unless you can maintain your homestead benefit or you have a compelling reason.
- Obtaining a mortgage – It will become more difficult to obtain a mortgage and you will likely have a higher interest rate. Lenders are generally more reluctant to lend to an irrevocable trust and you cannot obtain a conventional FannieMae or FreddieMac mortgage.