Selling a trust-held home before the founder’s passing can offer significant benefits.
For instance, selling a property in an irrevocable trust can protect the proceeds from creditors while simplifying asset distribution for beneficiaries.
And a living trust can minimize the potential tax burden.
But the process can often raise pressing questions.
Who has the authority to sell if the owner has not passed away?
How does selling a house in an irrevocable trust differ from selling in a living trust?
What should I know before listing the property?
And how do taxes come into play?
These questions can make an already complicated process feel even more overwhelming.
The good news?
By the time you finish reading this, you’ll know everything you need to know about selling a house in a trust before death.
Selling a house in a trust pre-death (irrevocable vs. living)
The type of trust holding the property’s title significantly shapes the steps and complexities involved in selling.
Here’s how irrevocable and living trusts influence the process prior to the passing of the trust’s creator.
Selling in an irrevocable trust
Selling a house in an irrevocable trust before death can be complex because the grantor — the trust’s founder — is still alive but no longer in control.
This limitation can add hurdles to the selling process.
Here’s what you need to know.
Who has the authority to sell?
The trustee has the authority to sell a property in an irrevocable trust, but it’s not always a solo decision.
In many cases, beneficiary approval is needed.
And sometimes the grantor may have a say if the trust agreement grants them specific rights.
The agreement should spell out whether the sale of the home is allowed and under what conditions.
Potential challenges
Listing a home held in an irrevocable trust can present unique hurdles.
Here’s a breakdown of the most common challenges and what you should be prepared for.
Legal oversight: Selling property in an irrevocable trust often involves additional legal scrutiny. Trustees must provide documentation to verify their authority and ensure the sale aligns with the trust’s terms. Any misstep in compliance can lead to delays or complications, making legal precision critical throughout the process.
Beneficiary disputes: Beneficiaries sometimes disagree with selling the property, particularly if they have concerns about how the proceeds will be managed or distributed. These objections can create roadblocks, leading to delays or even legal disputes.
Grantor-trustee tensions: Disagreements between the grantor and trustee can arise, especially if the trustee decides to sell the property against the grantor’s wishes. In an irrevocable trust, the trustee holds decision-making power, and the grantor typically has no legal authority to intervene unless specific rights were outlined in the trust agreement. This dynamic can lead to tension or conflict, particularly in family trusts.
Minimal flexibility: Unlike living trusts, irrevocable trusts are rigid by design. The trustee must strictly follow the trust’s terms, which can limit options during the sale, even if unforeseen challenges arise.
What you should do
Start by reviewing the irrevocable trust agreement to confirm that selling the property is allowed and to identify any specific conditions.
These might include:
- Verifying who the beneficiaries are.
- Confirming whether the proceeds will be distributed in one lump sum or as monthly installments.
- Checking for beneficiary approval or any special rights for the grantor.
Early conversations with beneficiaries are also crucial.
Clear communication can help set expectations and reduce the chance of disagreements.
If approvals are required, get them in writing to avoid misunderstandings and keep everyone aligned.
Even though the grantor may not have legal authority in an irrevocable trust, keeping them informed about the sale is a smart move.
Transparency fosters trust and helps maintain good relationships, especially in family situations.
Unexpected disputes with beneficiaries or restrictive trust terms can sometimes arise.
If they do, address them promptly rather than delaying.
Tackling these challenges early reduces stress and ensures the sale of the property stays on track.
Finally, consult an attorney if the trust agreement is unclear or disputes occur.
They can help resolve ambiguities, mediate conflicts, and ensure the sale is legally compliant.
Selling in a living trust
Selling property held in a living trust before death is generally more straightforward than selling in an irrevocable trust.
The process often mirrors a standard home sale –– but there are still key considerations to keep in mind.
Let’s break them down.
Who has the authority to sell?
The authority to sell a home in a living trust pre-death usually rests with the grantor.
As both the trustor and trustee, the grantor has full control over the trust’s assets and can sell the property just like any other personal asset.
This is especially relevant if you’re selling your parents’ house before they pass –– because their intentions and trust terms often dictate the process.
In some cases, there may be co-trustees involved (e.g., a spouse).
If so, the trust agreement will outline whether all trustees must approve the sale or if one trustee can act independently.
If the grantor becomes incapacitated, a successor trustee takes over.
The successor trustee is responsible for managing the trust’s assets, including selling the property.
They must also ensure all actions comply with the trust’s terms.
Potential challenges
Challenges can still arise when the trust-held home is being sold while the grantor is still alive.
Co-trustee coordination: If the trust has co-trustees, disagreements about the sale can occur. Trust agreements often require all trustees to approve major decisions, like selling property, which can delay the process if there’s a lack of alignment (a common issue in divorce selling situations).
Outdated trust agreement: Living trust agreements are often outdated, which can lead to confusion. Vague or unclear language may create uncertainty about permissions to sell the home or conditions tied to the sale.
Family concerns: Beneficiaries, while not typically required to approve the sale, might still express opinions or concerns. This can create tension, especially if the sale impacts their expectations for future distributions.
Administrative details: Certain steps, like transferring the title out of the trust to finalize the sale, might come as a surprise. While these tasks are relatively simple, they add an extra layer to the process of selling property in a trust.
What you should do
Go through the living trust agreement carefully.
Make sure the sale is allowed and check if there are any specific stipulations, like needing approval from a co-trustee.
If you find anything unclear or outdated, consult the attorney who drafted the trust.
It’s better to address questions now than run into issues later.
If co-trustees are involved, have a conversation early in the process to get everyone on the same page.
Next, gather all necessary paperwork.
Having the trust agreement, trustee certification, and any amendments ready will simplify the process with the title company and other parties involved.
Tax implications of selling a house in a trust before death
There are unique tax considerations when selling a home in a trust before the grantor’s passing.
Living trusts tend to offer more flexibility, while irrevocable trusts often have stricter rules.
Understanding these tax implications ahead of time can help you plan smarter and sidestep surprises.
How capital gains are affected when selling a trust-held home pre-death
There’s a significant difference in how selling a trust-held property impacts capital gains depending on whether it’s held in an irrevocable trust or a living trust.
For living trusts, there typically isn’t a notable impact.
The seller (grantor) may qualify for the primary residence exemption, which lets individuals exclude up to $250,000 of gains — or $500,000 for married couples filing jointly.
Irrevocable trusts are more restrictive.
Since assets in an irrevocable trust aren’t part of the taxable estate, the grantor usually does not qualify for the primary residence exemption.
Instead, the sale is taxed based on the property’s original purchase price (or basis), plus any improvements or selling costs.
This can significantly increase the taxable amount.
Not being able to claim the primary residence exemption is a major drawback to selling a home in an irrevocable trust before death.
Pre-death tax deductions
You can reduce your pre-death taxable gain from selling the property by leveraging available deductions.
Selling costs: Expenses directly related to the sale can be deducted from your taxable gain. This includes real estate agent commissions, escrow and closing fees, legal fees, and marketing expenses like staging or professional photography. These deductions lower the profit you report to the IRS, ultimately reducing your tax liability.
Home improvements: Qualifying capital improvements that increase the property’s value — such as upgraded flooring, new appliances, or energy-efficient upgrades — can be added to the property’s cost basis. The cost basis is the original purchase price plus eligible improvements. A higher basis reduces the taxable gain.
How taxable gain is calculated: Subtract the property’s cost basis and selling costs from the sale price. The remaining amount is your taxable gain, which determines how much tax you’ll owe.
Example: If the home sold for $800,000, had a basis of $550,000, and incurred $50,000 in selling costs, the taxable gain would be $200,000.
Here’s what to keep in mind after your transaction closes…
You’ll receive a final settlement statement from the escrow company, which details your selling price and closing costs.
Be sure to keep this document for when you share your tax records with your tax professional.
It’s also important to save receipts for all eligible repair and selling expenses.
These records will help you claim any tax deductions and reduce your taxable gain.
Unique tax planning opportunities when selling before death
There are strategies to help preserve more of the proceeds when selling a house in a trust before the grantor is deceased.
Here are a few tax planning opportunities worth exploring.
Timing the sale: If the grantor’s annual income is lower in a particular year, the sale may fall into a more favorable tax bracket. This could reduce the long-term capital gains tax rate, potentially saving a significant amount in taxes.
Gifting partial ownership: A revocable living trust typically allows the grantor to gift fractional ownership of the property to beneficiaries before the sale. This approach can spread the tax liability across multiple parties, especially if beneficiaries are in lower tax brackets.
Offsetting capital gains: Losses from other investments — such as stocks, bonds, or real estate — can be used to offset gains from the trust property sale. This strategy can help reduce the taxable amount and overall tax liability.
Charitable contributions: Selling the home and donating part of the proceeds to a qualified charity can lower taxable income. Depending on the donation amount, this may also qualify the grantor or trust for additional tax deductions.
Seeking expert advice: Tax planning for trust-held property sales is complex. Consulting with a tax advisor experienced in trust sales can help you identify personalized strategies to maximize savings and ensure compliance with all IRS regulations.
Who pays taxes? The trust, grantor, or beneficiaries?
The tax responsibility for the sale of a trust-held home depends on the type of trust and how the proceeds are distributed.
Living trust (revocable trust)
For living trusts, the grantor typically retains control of the assets and is responsible for reporting and paying capital gains taxes. Most grantors will need to file a Federal Capital Gains and Losses Schedule D (IRS Form 1040 or 1040-SR) and any applicable state tax forms.
Irrevocable trust
With an irrevocable trust, the trust itself is often treated as a separate legal entity. Taxes on the sale proceeds are generally paid by the trust, especially if the funds remain within it. However, if the proceeds are distributed to beneficiaries, they may be responsible for a portion of the taxes, depending on how the distribution is structured and the applicable tax rules.
Partner with the right real estate agent for your pre-death trust sale
Selling a trust-held property adds a layer of complexity to an already detailed process.
The key to a successful sale?
Partnering with the right listing agent.
Here’s what to look for when choosing an agent…
Relevant selling experience: Your agent should have a proven track record of selling similar properties in your area and, ideally, experience with trust-held properties. Familiarity with trust sales means they can handle the nuances of trust documentation and requirements with ease.
Top-rated performance: Choose an agent who consistently earns glowing reviews from their selling clients. This often reflects strong communication skills and a history of meeting or exceeding expectations.
Low dual agent rate: Agents who primarily represent the seller in a real estate transaction (and not the seller and buyer in the same sale) are much more likely to get you a higher sale price. Their track record demonstrates they’re focused on your interests, not on earning two commissions from one sale.
No contract commitment: If an agent who doesn’t lock you into a long-term contract, it shows they have confidence in their performance. This flexibility gives you peace of mind while keeping your agent motivated to deliver.
Finding an agent who checks all these boxes can feel overwhelming.
But that’s where we can help (this is our bread and butter).
Our no-cost matching service takes the stress out of finding the perfect Realtor.
We vet local agents based on these exact criteria so you can sell with confidence.
Learn how SoldNest works to connect with a top local agent.
