Why own a home in a Revocable Living Trust?

If you own real estate in your personal name at death, some form of probate in the state where the property is located will be required to transfer the property to your heirs or beneficiaries.  In order to avoid or minimize probate (especially for individuals who own real estate or mineral interests in multiple states), clients sometimes include a Revocable Living Trust in their estate planning since assets in the trust pass outside of probate.

If your estate plan includes a Revocable Living Trust (“RLT”), it is important to understand not only the terms of your trust but also the laws that govern the transfer of your real estate to the trust.

Signing the Trust Agreement is Only the Start.

When you sign the trust agreement for your Revocable Living Trust, you have only taken the first step in creating a thorough trust-based plan. Once the agreement is executed, the next step is for you to title your assets into the name of your trust.  This process is referred to as the “funding” of the trust.  Generally, in order to have the RLT arrangement serve you well, all or most of your assets should be placed into the name of your trust.

Upon your death, if all or the majority of your “estate” is held by your RLT, your estate may then avoid probate since the trustee of your RLT will not need court approval to distribute the assets to the beneficiaries.   The trustee may execute and record a deed transferring the home from your RLT into the name of the new owner (i.e, the beneficiary or beneficiaries under your trust agreement).  Any assets you retain in your personal name and not in the name of your RLT, however, will require the probate process to transfer those assets (those held in your personal name), which can add expense and delay to the administration of your estate.

Common Concerns:

> Will I lose my Texas homestead exemption for property taxes?

> Can the bank force me to pay my mortgage in full if I put my home into my trust?

Concern No. 1: Do I Keep My Homestead Exemption?

First, what is a homestead?  There is more than one meaning for the term “homestead” under Texas law, but for purposes of this article the focus is on a homestead for property taxes (also known as ad valorem taxes).  In order for a home to qualify as a homestead (and be able to obtain a homestead exemption), the home (including a manufactured home) must be the principal residence of the owner applying for the exemption, and the included land may not exceed twenty acres.

Homes not occupied by the owner as his or her principal residence do not qualify for the exemption, and you may only have one homestead in Texas.  If you are age 65 or older, are disabled, or are a disabled veteran (or surviving spouse or child of a disabled veteran), there are similar homestead exemptions. For more on exemptions, see the state Comptroller office here: https://comptroller.texas.gov/taxes/property-tax/exemptions/

So, can I keep my homestead exemption?  Texas law allows you to transfer your homestead to a “qualifying trust” and retain your homestead exemption on the home.  In order for a trust to be a “qualifying trust” the trust must allow the trust creator (or beneficiary) to have the present right to use and occupy the home that is held in the trust as his or her principal residence at no cost and rent free.

The complete definition for a qualifying trust is found in Texas Tax Code Section 11.13(j)(3) which states that a “qualifying trust” means a trust that:

grants the trust creator (or beneficiary) in the trust agreement (or Will or court order) the right to use and occupy the home as such trust creator’s (or such beneficiary’s) principal residence;

grants use and occupancy of the home rent free and at no cost except for taxes and costs required by the trust agreement (or Will or court order);

grants the right to use and occupy the home for life, for the lesser of life or a term of years, or until the trust is revoked; and

acquires the home in a recorded deed that clearly describes the home and the ownership rights.

In the case of a Revocable Living Trust agreement, the agreement should include language that mirrors the above requirements of the Texas Tax Code so that the appraisal district will be satisfied that the trust agreement creates a qualifying trust.

Don’t forget to reapply for exemptions with the appraisal district.  After the grantor’s home is transferred to the trust (by a deed), it is also necessary to reapply for the homestead exemption in the name of the trust.  The county appraisal district will want to see a copy of the language in the trust agreement that allows the trust to be a “qualifying trust”.  Your attorney can review your trust to determine if it is drafted to grant this right, and help you with preparing the necessary paperwork.

Concern No. 2:  What Happens to My Mortgage?

In addition to keeping important property tax exemptions, the other worry most clients have is avoiding issues with a mortgage when transferring a homestead to the RLT.  Almost all mortgages allow the lender to have a right to be paid in full immediately if the property is transferred, known as a “due-on-sale” provision. This right is regulated by Federal law (the Garn-St. Germain Act of 1982), which provides that a transfer of a residence (including a manufactured home) containing one to four dwelling units from the owner to the owner’s RLT will not trigger the “due on sale” clause.  Federal law also requires that the grantor (creator) of the RLT remains a beneficiary of the RLT, and that transferring the home into the RLT will not result in a transfer of ownership or occupancy of the home. Generally, as long as such requirements are met, you may transfer your home to your RLT and maintain your current mortgage.

For commercial properties, residential properties containing five or more units, or properties not occupied by the owner, you should obtain the lender’s permission to transfer property to a revocable living trust.  Although the loans again such properties may also contain a due-on-sale clause, it is possible with sufficient explanation that the lender will agree to not exercise the right to accelerate the debt depending on the lender’s relationship with the client and the type of property involved.

Revocable Living Trusts can be very useful as an estate planning tool to avoid probate and simplify distribution of an estate, particularly when holding an interest in real estate.  You should consult with your attorney to ensure that the exemption and mortgage requirements will be satisfied by the trust agreement, deed, and overall structure of the transfer.

What Now?

For more information, contact us at info@tarletonfirm.com or at (214) 935-9004.  We are located in Dallas, but serve clients all over Texas.

This article is intended for general information purposes only. It does not constitute legal advice or create an attorney-client relationship.