Selling a house in a trust has its benefits.
But selling a trust-held property can also introduce potential hurdles, especially when the trust’s founder is still alive.
The two most common obstacles?
Unexpected legal and financial challenges.
You can navigate these challenges more effectively if you know what to expect when selling a house in a trust before the founder’s death.
That’s exactly what this guide will help you accomplish.
Here’s what you’ll learn about in this guide:
- Different trusts and their impact on home sales
- Who can legally sell a house in a trust prior to the grantor’s passing
- Tax implications of selling trust-held property
- Steps for selling a home in a trust.
Whether you’re a trustee, a beneficiary, the grantor, or have power of attorney, these insights will help you sell your trust property with confidence.
Let’s jump in.
Types of trusts and their home sale implications
How you can sell a trust property depends on the type of trust established.
While many types of trusts exist, only a few typically impact the sale of a house.
Revocable living trusts
Revocable living trusts, also known as revocable trusts, offer the grantor — the trust’s creator — the ability to make changes at any time.
The grantor manages the trust’s assets until their death and typically serves as the trustee.
This means that a property held in a revocable living trust remains under the grantor’s control until they pass away.
Which is the primary reason why the process of selling property held in a living trust before death is straightforward.
Irrevocable living trusts
An irrevocable living trust passes control to the trustee immediately upon execution.
This type of trust is a form of immediate real estate divestment for the trust’s creator (the grantor).
Once established, the grantor cannot alter the terms of the trust or reclaim ownership of the assets without the beneficiaries’ consent.
That means selling a house in an irrevocable trust can present significant challenges.
Because the beneficiaries have control over the trust’s assets –– including decisions about selling the house –– not the grantor.
The primary advantage of this type of trust is its ability to reduce or even eliminate estate taxes for the beneficiaries while protecting the trust’s assets from creditors.
And it’s important to know that all revocable trusts become irrevocable once the grantor passes away.
Testamentary trusts
A testamentary trusts only takes effect after the grantor’s death and is set up through a will –– but they’re worth mentioning because they’re distinct.
These trusts manage and distribute assets to beneficiaries, such as minors, and offer creditor protection.
But testamentary trusts do not influence the sale of property prior to the grantor’s passing.
And unlike revocable and irrevocable living trusts, testamentary trusts need to go through the probate process.
Who can sell a house in a trust before death?
Whether the grantor/trustee is still alive is the primary factor in determining who can sell a home held in a trust.
Defining who has the legal authority to initiate the process of selling a house after death is clear.
That’s because all trusts become irrevocable at that point.
But the scenario is more complex when attempting to sell a house in a trust before the grantor’s death.
Here’s how it works in each situation:
- Who can sell a house in a revocable trust? As long as they are alive, the grantor, who typically also serves as the trustee, can sell a house in a living trust at any time. They simply need to transfer the title from the trust back to their name (more on this in a bit). Beneficiaries can only sell a house in a revocable trust before the grantor’s death if they’ve been granted a real estate power of attorney.
- Who can sell a house in an irrevocable trust? In a trust that’s irrevocable, the authority to sell the house typically rests with the named trustee. Beneficiaries do not directly control the sale but benefit from it as specified in the trust. Unlike in revocable trusts, the grantor cannot unilaterally decide to sell the property or change the terms of the trust after it’s been established; any changes would require the consent of all beneficiaries, and even then, might need court approval depending on the state’s laws.
- Who can sell a house in a testamentary trust? The grantor can sell a property in a testamentary trust as long as they’re alive. Once the grantor passes away and the trust is activated, the trustee appointed in the will then takes control of the assets (including real estate) and has the authority to sell the house as dictated by the terms of the will and the trust.
Tax implications of selling property in a trust
One of the biggest concerns surrounding the sale of trust property is the tax hit.
The potential impact on taxes significantly depends on the type of trust and the timing of the sale.
Here’s a breakdown of the key taxes to consider when selling a house held in a trust:
Capital gains tax
You’re typically subject to a capital gains tax when you sell a property for more than you bought it for.
But there are valuable IRS exemptions that can reduce your taxes when that property is your primary residence.
Primary residence exemption: Under current IRS rules, individual taxpayers are exempt from taxes on the first $250,000 in capital gains on their primary residence if they’ve owned and lived there for at least two of the previous five years.
This is known as the residency and ownership test. Married couples can claim up to a $500,000 exemption.
Calculating gains: Capital gains are calculated against your basis — the initial purchase price of the house plus any investments in property improvements and qualified selling expenses like closing costs, certain upgrades, or real estate agent fees.
For example, if you bought a house for $300,000, added a new roof for $10,000, and incurred $18,000 in agent fees and $6,000 in closing costs during the sale, your total basis would be $334,000.
If you sell the house for $584,000 (or $834,000 if married), you won’t pay any capital gains taxes.
Gains exceeding this threshold would be taxed according to the long-term capital gains tax rate for your tax bracket.
Impact of trusts on capital gains:
- A grantor selling their home from a trust before death would pay normal capital gains taxes based on their basis, with the first $250,000 ($500,000 if married) exempt if they meet the residency and ownership test.
- Beneficiaries can only sell a home before death if it’s held in an irrevocable trust, which does not qualify for the stepped-up basis benefit. This means their basis is the original purchase price, not the value at the grantor’s death.
For example…
Let’s say you inherit a home from an irrevocable trust purchased by your parents for $400,000 that is now worth $1 million, and you sell it for $1.1 million.
You’d owe capital gains taxes on $700,000 — after deducting the original cost and any improvements.
But now let’s say you inherited the home through a revocable trust.
Your basis would be the home’s fair market value at the time of the grantor’s death.
So selling the same house would mean paying capital gains on just $100,000, reflecting the difference from the stepped-up basis.
Key takeaway: The choice between selling a house in a revocable and an irrevocable trust has significant capital gains tax implications.
So you should weigh these implications carefully if you’re considering transferring trust property before the grantor’s death.
Estate tax
Estate taxes are levied only after the grantor’s death.
This means they do not affect the sale of a home before the grantor passes away.
And the potential tax hit only applies to assets over $13.61 million in 2024.
Irrevocable trust benefits: Your estate won’t face any estate taxes on the sale of the home if it’s held in an irrevocable trust.
Revocable trust considerations: It’s important to weigh the tax implications of selling your home now versus leaving it in the trust for your beneficiaries. The tax consequences can differ greatly between these options.
Why consider the timing of the home sale?
- Selling before death: You might incur minimal capital gains taxes.
- Leaving to heirs: Your heirs could face both estate taxes and capital gains taxes upon selling the home after you pass. Additionally, some states impose their own estate taxes, which could further complicate the financial impact.
Given the complexities, it’s advisable to consult with a tax advisor.
Inheritance tax
Inheritance taxes are applicable in just six states and are not imposed at the federal level.
And similar to estate taxes, they’re not levied before the grantor passes away.
Inheritance tax could affect your beneficiaries if you reside in Iowa, Kentucky, Maryland, Nebraska, New Jersey, or Pennsylvania.
So it’s important to weigh the implications of inheritance taxes in these states when deciding the timing of selling your property — before or after your death.
How to sell a house in a trust
Understanding the different types of trusts, who is authorized to sell trust assets, and the associated tax implications lays the groundwork for selling a house owned by a trust.
But knowing how the selling process works is the last key piece to the puzzle.
Here are the steps you should follow to successfully sell a trust property before the grantor’s death.
1. Discuss the sale with all relevant parties
Talking about the sale of a trust-held home with all relevant parties is critical.
Why?
Because making decisions unilaterally can contravene legal stipulations and damage relationships among beneficiaries and trustees.
This includes discussing plans with beneficiaries if you’re the grantor/trustor of a revocable trust, even though you’re not legally required to.
Clarifying topics such as whether the sale proceeds will remain within the trust or be distributed to you can prevent misunderstandings.
For an irrevocable trust, these discussions are not just beneficial — they’re required.
You need permission from all beneficiaries before reclaiming property ownership to proceed with the sale if you’re the grantor/trustor.
What if you’re the trustee of an irrevocable trust?
You must ensure that the proceeds from the sale are distributed according to the terms of the trust agreement.
Confirming that all parties are on the same page is vital when selling a property held in a trust before the death of the grantor/trustor.
So don’t shy away from a potential uncomfortable conversation.
And make sure you keep written records of all discussions as they can help secure transparency and legal compliance.
2. Choose a good agent with trust sale experience
A real estate agent is a critical ally for selling a house in a trust.
But the key is choosing the best agent.
Because the best real estate agent will secure the ideal outcome and maximize the net proceeds for everyone involved.
How do you find the best agent to sell your trust-owned property?
Look for all four of these critical features when choosing a realtor to sell your home:
- Relevant experience: The right agent will have experience with selling homes similar to yours in your area and price range, as well as with liquidating real estate under a trust. Consider these the “bare minimum requirements.”
- A low dual-agency rate: A trustworthy real estate agent will have a history of primarily representing only the seller in the homes they sell (and not the seller and the buyer in the same sale). The agents you should avoid are the ones who have a higher-than-average percentage of acting as a dual real estate agent –– because they are more likely to put their interests before yours.
- Stellar reviews: Browse an agent’s online reviews from other sellers so you can get feedback from past clients. Pay attention to the specific verbiage used and how detailed the reviews are.
- No contract commitment: The exclusive listing agreement you sign with an agent when selling guarantees the agent’s commission as long as your home sells. That’s because you’re locked in for an extended period of time (usually six months). Make sure your agent will let you cancel at any time, without owing any commissions. This flexibility keeps your agent motivated and reduces the chances of them overpromising to earn your business.
All four of these are key, which is why we ensure each in our no-cost service when vetting and matching agents for home sellers.
3. Gather your trust documents
You’re going to need two key trust documents before you complete the sale:
- Trust Agreement: This is the core document that outlines the terms of the trust, the powers granted to the trustee, and the rights of the beneficiaries. It’s vital for confirming the trustee’s authority to sell the property.
- Physician’s Statement on the Trustee’s Capacity: A recent statement from a physician may be required if the trust stipulates certain conditions regarding the trustee’s health or decision-making capacity. The statement proves that the trustee is competent enough to manage the sale.
These documents do two things:
- Validate the identities and entitlements of the parties involved
- Ensure the transaction adheres to the stipulated trust terms and legal requirements.
The title company involved in the sale of the home is going to request these –– so it’s ideal to get the docs you need before getting knee-deep in the process.
You’ll want to make sure you have the original trust agreement and any amendments.
Contact the attorney who set up the trust if you can’t find them.
And if you need a physician’s statement, arrange for an evaluation and secure the statement as soon as you can to prevent delays.
Organize everything after you have what you need so you have quick access throughout the home selling process.
4. Prepare to list the home
Preparing to put your trust-held home on the market is one of the most important steps.
Why?
Because the right preparation will put you in the absolute best position to get the highest sale price in the shortest amount of time.
This is another reason why hiring the right real estate professional is key.
They’ll be able to guide you with the right plan and make the process easier.
Here are several of the key things you’ll want to strategize about with your agent:
- Getting a home inspection: A pre-listing inspection can help you learn about the home’s potential issues (especially important if you haven’t been the one living there).
- Repairs and upgrades: An experienced agent will know which improvements will bring the most return on your investment.
- Listing price: An experienced agent with a reputable track record will be able to guide you on the ideal price by looking at comparable sales and factoring in local market trends.
- Staging: A staged property helps prospective buyers visualize the place as their own, which increases the chances of selling faster and for a higher price.
- Marketing plan: The best agents utilize stellar photos, video, social media, local market knowledge, and more to maximize the reach to the right buyers.
5. Review offers
Everyone involved in the trust sale is going to be anxious when receiving an offer.
But it’s important that you ensure the buyer is vetted before discussing the offer details.
Doing so can help spot red flags that may delay the sale –– or worse –– send the house back on the market.
You’re going to have to rely on your listing agent for this.
Here are the key things you want to make sure your agent verified when reviewing the offer:
Pre-approval letter: Any buyer should be pre-approved before submitting an offer. Your agent should call the buyer’s loan officer to verify the pre-approval and get an idea of how qualified the buyers are.
Down payment: What’s the buyer’s loan-to-value ratio (amount financed divided by the sales price)? Your agent should confirm that the buyer has at least enough funds for the down payment and closing costs (the more, the better).
Contingencies: Did the buyer make their offer contingent? The three most common contingencies are an inspection, loan, and appraisal. If one or more contingencies are included, confirm how many days the buyer has to release the contingency.
Seller concessions: A buyer’s offer can include a request for a monetary credit from the seller. This is usually included to help cover some or all of the buyer’s closing costs. Confirm with your agent if seller concessions are included in the offer, and if so, how much.
6. Finalize the sale of your trust-owned property
The closing process for selling a house in a trust is somewhat similar to that of a typical home sale.
The buyer’s loan officer will:
- Submit the buyer’s loan to underwriting
- Order the appraisal
- Work with the buyer to close on time.
There may be an inspection (and negotiation) if the buyer included an inspection contingency.
If this is the case, there may be repairs done on the property for any agreed-upon work.
But a request for repairs from the buyer after you accept an offer is negotiable.
The signing of the final closing documents generally occurs a few days before the closing date.
Who is required to sign depends on the type of trust.
This may be the grantor, the grantor and their spouse, the trustee, or the person holding power of attorney.
If you’re the trustee or the grantor of a living trust where you retain control, you’re going to need to transfer the title of the property from the trust to your personal name.
You’ll do this by signing a “Trustee’s Deed Upon Sale,” which will be included in the final closing documents.
7. Distribute the sale proceeds as required
The final step in handling a trust real estate sale is to distribute the net proceeds.
Funds are generally wired from the escrow company to the trust’s bank account within one business day of closing.
Who receives what depends on the terms of the trust.
The proceeds are most likely staying with you if you’re the grantor and the founder of a revocable trust.
But that’s not the case with an irrevocable trust.
Trustees are responsible for managing the distribution process to ensure each beneficiary receives their rightful share as defined by the trust.
It’s key to ensure that the distribution of the proceeds from the sale of a house in a trust are executed meticulously.
Because proper execution fulfills legal obligations and preserves harmony among the beneficiaries.
Final thoughts about selling a trust property
Selling a house in a trust can be a complicated process.
The key?
Make sure you have the right professionals guiding you at every step.
You can ensure you get a listing agent who is best-qualified to handle your trust sale by leveraging our no-cost service.
We have a unique vetting process that weeds out the real estate agents you should avoid.
Learn more about our agent screening process to discover how we can help you secure an agent experienced in selling homes in a trust, who will put your interests ahead of their own.
