DISCLAIMER: As a friendly reminder, this blog post is meant to be used for educational purposes only, not legal or tax advice. If you need assistance navigating the legalities or tax implications of selling a house in an irrevocable trust, HomeLight always encourages you to reach out to your own advisor.
You’re ready to sell your house, but there’s one small detail: It’s held in an irrevocable trust. You may be wondering how this will affect the process of listing and selling the property — or if it’s even possible to sell at all.
In this guide, we’ll take a deep dive into how to go about selling a house that’s in an irrevocable trust — the parties involved, the steps required, the pros and cons, mistakes to avoid, and the benefits of partnering with an experienced real estate agent.
Keep in mind that these are just guidelines. Your trust agreement, which is a document created by the creator of the trust, will ultimately dictate the specific terms of your process.
What is an irrevocable trust?
Jennifer Spinelli, founder and CEO of Watson Buys, is a real estate investor and investment advisor based in Denver, Colorado. She defines an irrevocable trust as a legal arrangement in which the trustee (usually the settlor, or creator of the trust) cannot make changes to the trust — nor can they dissolve it — without the permission of the beneficiaries.
This type of trust is often used to protect assets from future creditors, minimize estate taxes, or expand access to government benefits.
Who are the parties involved in an irrevocable trust?
For every irrevocable trust, these three important parties are always involved:
- Settlor/grantor: This is the person who sets up the trust and moves the assets — namely, the property in question — into that trust. At the time that an irrevocable trust is established, the settlor no longer has any rights to or ownership of the property.
- Trustee: The trustee is the person or company that the settlor chooses to oversee and manage the trust. This person’s core role is to protect the best interests of the beneficiaries named in the trust.
- Beneficiary or beneficiaries: When the settlor creates the trust, he or she names one or more beneficiaries who will ultimately receive the assets that are placed in trust.
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Are there different types of irrevocable trusts?
It’s important to understand what type of irrevocable trust you’re dealing with because this will determine what steps you’ll need to take to sell the house. Regardless of the type of trust, the trustee is responsible for managing all of the assets, staying up to date with tax payments, and maintaining all records related to the trust and the assets it contains.
There are two main types of irrevocable trusts:
- Living irrevocable trust: This type of trust is irrevocable — meaning it cannot be changed, modified, or dissolved — when the settlor is alive as well as after the settlor has died. By giving up any claims of ownership of the assets, the settlor can reap multiple tax benefits. After the settlor’s death, the trustee is tasked with paying off any outstanding debts and allocating the assets to all beneficiaries as outlined in the trust agreement.
- Trust that is irrevocable upon death: This type of trust can be modified or revoked by the settlor as long as they are alive, but once the settlor dies, it becomes irrevocable. This way, the assets cannot be seized by creditors and can be allocated to the beneficiaries without having to go through the long, drawn-out, and often costly process of going through probate court.
What are the steps to sell a house that’s in an irrevocable trust?
Although every trust is different and has its own agreement with its own specific terms, selling a home that’s in an irrevocable trust generally follows a sequence of events similar to those outlined below.
“Assuming the trustee(s) has the authority under the particular document, which they typically do, then the trustee(s) can sell the property similarly to how an individual would and retain a broker to do so,” says Christian G. Zebicoff, Esq., partner and manager of the trust and estates law practice group at Romer Debbas LLP in New York City.
Step 1: The trustee reviews the purposes of the trust
Zebicoff says it’s important for the trustee(s) to thoroughly review the purposes of the trust to make sure the sale fits the trust’s purposes and is allowable. “They should have trust counsel who can advise them concerning their fiduciary duty and whether such a sale is appropriate,” he adds.
Step 2: The trustee contacts a real estate agent
Partnering with a trusted real estate agent will always give you an edge when selling any property, but it’s particularly important when the house is in an irrevocable trust. The trustee should find a suitable real estate agent to help prep and list the home.
“Although it’s not typically a requirement to enlist the services of an agent, it’s advisable if the trustee is attempting to sell at the highest price, which is the trustee’s fiduciary duty,” says Zebicoff.
Step 3: The trustee files all paperwork for the sale
Once an offer has been accepted, the trustee will need to file all of the necessary paperwork with the court to verify that the property has been sold and that all proceeds have been moved into the trust. At that point, ownership of the property is transferred to the buyer. However, Joel Efosa, CEO of Fire Cash Buyers, points out that there may be some additional steps involved if the property is subject to probate.
“Probate is the legal process by which a deceased person’s assets are distributed,” Efosa explains. “If the property is held in an irrevocable trust, it may not be subject to probate. However, if the trustee is also the executor of the estate, they may need to obtain a court order before selling the property.”
Step 4: The assets in the trust are distributed and taxes are paid
After the sale is complete, the trustee is responsible for making sure all proceeds from the sale are distributed to the beneficiaries named in the trust. Depending on the terms in the trust document, this may be distributed in a lump sum payment or in multiple payments over time.
Depending on how the proceeds are going to be handled, the trust can pay any taxes due. If the trust transfers the proceeds to beneficiaries, the beneficiaries may have to report the income on their individual tax returns and pay any applicable taxes.
Step 5: The trustee files Form 1041
The U.S. Form 1041, the “Income Tax Return for Estates and Trusts,” must be filed with the IRS when selling a property held in a trust. Per the IRS, this form collects the following information:
- The income, deductions, gains, losses, etc. of the estate or trust
- The income that is either accumulated or held for future distribution or distributed currently to the beneficiaries
- Any income tax liability of the estate or trust
- Employment taxes on wages paid to household employees
What are the tax implications of selling a property in an irrevocable trust?
When selling a home in a traditional sale, you generally don’t have to worry about paying capital gains taxes unless you’ve lived in the house for less than two years, it’s a second home or investment property, or you’ve earned a profit of more than $250,000 on the sale ($500,000 for married couples filing jointly). But what about selling a house in an irrevocable trust? Will the seller be on the hook for capital gains taxes?
“If the property is held in an irrevocable trust, the capital gains may be sheltered from taxation,” Spinelli says. “This can be a significant advantage if you have a large amount of equity in the property.”
But what about the tax basis for the home? The tax basis refers to the value of a property for tax purposes. When the home is sold, the total profit or loss is typically calculated based on the following equation:
Sale price – amount of basis + any sales expenses
(including real estate commissions)
“Unlike revocable trusts, assets in irrevocable trusts are generally not subject to tax or step-up basis,” says Kevin Bazazzadeh, founder of Brilliant Day Homes, who has managed multiple sales of homes in trusts. “The taxable gains of the grantor are passed on to the beneficiaries when the grantor dies and the assets are sold.”
It’s important to consult your professional advisor to identify the tax implications involved in your selling situation.
5 common mistakes sellers make when selling a house in an irrevocable trust
Any home sale will come with its share of hiccups, but when selling from a trust, the potential for missteps is increased. Be on the lookout for these common mistakes.
1. Not getting professional help when needed
Bazazzadeh stresses how important it is for trustees to consult with an attorney or tax advisor before taking any action that could have tax consequences. Otherwise, they could end up owing taxes on the sale.
2. Not understanding the terms of the trust
Every trust has its own specific requirements, and it’s essential that the trustee fully understands all of the provisions of the trust document before taking any action. “This will help them avoid making any mistakes that could jeopardize the validity of the trust,” notes Bazazzadeh. “For example, if the trust states that the property must be sold within a specific time frame, the trustee must take action within that time frame.”
3. Not keeping good records
“The trustee should keep detailed records of all transactions related to the sale of the property,” says Bazazzadeh. “This will help them prove that they followed all of the appropriate procedures and will help them avoid any disputes with the beneficiaries.”
Greg Clark, a high-volume real estate agent in Texas, once had a client whose parents were about to go into long-term care. He wanted to sell his parents’ house, which was in a trust. The very next week, in an unforeseen and tragic twist, both parents died within three days of one another. At that point, Clark learned that his client did not have any of the documents for the trust, which also didn’t exist digitally. This caused significant delays and hassles as they hunted down the retired attorney who had long ago drawn up the trust.
“If he had kept the trust documents and records, it would have been a much easier process,” Clark says.
4. Failing to follow state laws
Trustees must make sure they are following all state and federal laws when selling trust property, cautions Bazazzadeh. This includes paying any taxes that may be due.
5. Selling the property for less than it’s worth
The trustee has a fiduciary duty to get the best possible price for the property, Bazazzadeh points out. “If they sell it for less than it’s worth, they could be held liable for any losses incurred by the beneficiaries,” he says.
Pros and cons of selling a home in an irrevocable trust
If you’ve inherited a home in a trust and are on the fence about whether to keep it or list it, it may be helpful to weigh the pros and cons of selling.
Pros:
- Spinelli explains that the main advantage of selling a house in an irrevocable trust is that it can help protect your proceeds from creditors or estate taxes. This can be helpful in the event that the property owner is going through bankruptcy or other financial struggles.
- The settlor won’t have to pay capital gain taxes. “Proceeds from the sale of the house go back into the trust account and the trust pays the capital gain tax,” says Alex Mitchell, an Atlanta tax attorney with Cumberland Law Group. (Additionally, because assets held in the trust are not a part of an estate, estate taxes are typically not paid on that asset.)
- If a property is held in an irrevocable trust, it can bypass probate and go directly to the beneficiaries of the trust, notes Bazazzadeh.
- Zebicoff points out that if the house is sold, there is typically less investment risk because the proceeds are conservatively invested if they are not paid out to the beneficiary. “The trustee has a fiduciary duty to invest the assets prudently, and there is typically more market risk with a piece of real property than if the property were sold and held in a balanced portfolio of bonds, conservative stocks, and/or cash,” he explains.
Cons:
- You may not get full market value. “The disadvantage is that you may not be able to sell the property for its full market value if you need to sell it quickly,” cautions Spinelli.
- Mitchell points out that if proceeds from the sale are paid out from an irrevocable trust, the beneficiary will have to pay taxes, as the money is taxable and treated as income. If the proceeds are not paid out, the trust is required to pay the capital gains tax.
- Bazazzadeh cautions that once the property has been transferred into the trust, it can be hard to change who the beneficiaries are or how the assets will be distributed.
Do you need a real estate agent to sell a house in an irrevocable trust?
While it may not be a requirement, partnering with an experienced real estate agent has been shown to increase the sale price of any home, including one held in an irrevocable trust.
According to research from the 2021 NAR Profile of Home Buyers and Sellers, homes sold directly by the owner (FSBOs) typically sell for less than the selling price of other homes, with a median sale price of $260,000 compared to $318,000 for homes sold via agents.
Efosa points out that some trust agreements explicitly state that the seller should use a real estate agent to sell the property — most likely to ensure the highest possible sale price. “However, if the trust does not mandate the use of an agent, the seller may have more flexibility in how they choose to sell the property,” he says.
Another key consideration is the market conditions in the area where the property is located, Efosa notes. “In some markets, it may be difficult to sell a property without the assistance of a real estate agent,” he explains. “Ultimately, it is important to consult with an attorney or other professional advisor to determine what will work best in your particular situation.”
Bazazzadeh agrees that working with a real estate agent can help ensure a smoother sale, no matter what selling circumstances you might be facing. An agent can assist you with finding a buyer who is willing to work with the terms of the trust, finding a title company willing to insure the property, and getting the property appraised for the correct value.
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