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. For more on this strategy, see Owning a Home in a Revocable Living Trust.
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. Learn more in Family Loans.
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. For related information, see Home in a Revocable Living Trust.
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. Learn more in Home in a Revocable Living Trust. For assistance with trust planning, contact Tarleton Law Firm.
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. For more details, see Home in a Revocable Living 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 – Home in a Revocable Living 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.kinsta.cloud 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.
Common Questions
Should I put my house in a revocable living trust in Texas?
Putting a home in a revocable living trust can make sense if you (1) own real estate in multiple states (avoiding multiple probates), (2) want privacy at death (probate is public; trusts are private), (3) want continuity if you become incapacitated, or (4) have blended families or special-needs beneficiaries needing structured distribution. For simple Texas-only estates, a properly drafted will plus Transfer on Death Deed often achieves similar outcomes at lower cost.
Does putting a home in a revocable trust affect property taxes in Texas?
Properly executed transfers of a Texas homestead into a revocable living trust generally do not trigger property tax reassessment or affect the homestead exemption, as long as the trustor remains a beneficiary. Texas Tax Code §11.13 specifically preserves the homestead exemption for property held in a qualifying revocable trust. Title insurance and mortgage company notifications should still be addressed before transfer.
Can I refinance a home that’s in a revocable trust?
Yes, but most lenders require the home to be transferred out of the trust temporarily during refinancing because Texas mortgage law treats individual borrowers differently than trustee borrowers. After refinancing closes, the homeowner re-deeds the home back into the trust. Working with a Texas real estate or estate planning attorney for the deed paperwork ensures the transfer and re-transfer are clean.
About the Author
Allan Tarleton is the founding attorney of Tarleton Firm, a Texas estate planning and probate law firm with offices in Dallas and Terrell. Allan is Board Certified in Estate Planning and Probate Law by the Texas Board of Legal Specialization, a distinction held by fewer than 1% of Texas attorneys. He has over 16 years of experience guiding Texas families and business owners through estate plans, wills, trusts, probate administration, and business succession planning.
