Can I Save Money on Taxes With My Primary Residence in a Trust?
For most people, putting their primary residences into a trust won’t help them save money on their taxes. A revocable trust, the most common type, has no tax benefits for the grantor.
Although irrevocable trusts can help you save money on estate taxes, this savings only applies to people who have a high-value estate. The federal estate tax threshold is $12.92 million for a single person. If your estate is worth less than this figure, you won’t receive any financial benefits for putting your home in a trust.
However, consider putting your residence into an irrevocable trust if you have a high-value estate. Think about a situation where you’re single with a $15 million estate, including a home worth $3 million. If you place the house into an irrevocable estate, that amount no longer qualifies for estate tax. With a remaining estate value of $12 million, you narrowly avoid paying any estate taxes.
Even if your estate is worth much more than the threshold, placing your home into the trust would still reduce your taxable estate by the home’s value.
Tax Benefits for Beneficiaries
The one tax benefit you can get from a standard revocable trust applies to the beneficiary, not the grantor. The Section 121 exclusion allows people to take an exclusion on capital gains from selling their primary residence. It excludes up to $250,000 for individuals and $500,000 for couples. Section 121 (d)(9)(C) stipulates that the exclusion also applies if a trust sells a property where the grantor or the heir uses the home as the primary residence.
Establishing a primary residence involves living in a home for two out of the five years before its sale. If a grantor lived in a house for two years out of the five years before the individual’s death, an heir could sell the home and take advantage of the Section 121 tax exclusion. You can also combine occupancy periods from the grantor and the beneficiary to meet the residency requirement. For example, if you lived in a home for one year of the five years, and your heir moves in for a year, your heir can receive the exemption.
Setting Up Your Trust
Even though the tax benefits of putting your home in a trust are limited, you still have plenty of reasons to consider a trust as part of your estate planning. If you’re a private person, placing your home into a trust can keep your name out of public records. When you designate a third party as the trustee of your home, the name of the trust goes on public documents instead of your name. You can privately transfer properties in and out of the estate with an irrevocable trust.
A trust can also provide peace of mind, reassuring you that your beneficiaries will gain ownership of their inheritance. And while someone can challenge a trust in court, it’s much more difficult to contest a trust than a will. For revocable trusts especially, the ongoing involvement of the grantor provides hard evidence of the assets’ intended distribution.
Consulting with a professional can give you insight into your unique situation if you’re curious whether setting up a trust is right for you and your estate. Our team at Anderson Advisors can review details such as asset protection, the probate process, and potential tax implications for your estate. Schedule an estate planning consultation today.