Trust & Will Cody Barbo – Co-Founder of Trust & Will. Our mission is to make Estate Planning inclusive, accessible and affordable for all.
During the pandemic, there has been an unprecedented surge in home sales. A recent National Association of Realtors report revealed that since July, existing home sales have increased year over year hitting a pandemic high of over 25% in October. Mortgage rates hit all-time lows, mobilizing quarantined home buyers who craved more outdoor space and better work-from-home arrangements. Inventories hit record lows while prices hit all-time highs, and there is still a lot of activity, even as Covid-19 conditions improve.
This begs an important question: How has this past year’s surge in home sales affected estate planning?
Real Estate Activity Should Be Triggering Estate Planning Activity — But Is It?
Buying a home is one of the most common triggers for creating an estate plan. As an estate planning expert, I’m here to explain why.
In recent years, millennial home buyers have increasingly purchased homes in suburban neighborhoods. This phenomenon is called “suburbanization.” Space is a driving factor, and the buying frenzy during this pandemic has accelerated this trend.
Do these new home buyers understand the importance of estate planning? Are they using their new home purchase as an opportunity to set up a trust? In my experience, younger individuals often think that estate planning is only for wealthier, older folks. Estate planning is a mechanism to protect your assets and thus your loved ones, no matter your age or income level. Expensive, inaccessible estate planning is a thing of the past, and online platforms are modernizing the industry.
Why A New Home Purchase Should Be An Estate Planning Trigger
By placing your home into a trust, you’re ensuring that the ownership of your home will be properly and efficiently transferred to a loved one, should anything happen to you unexpectedly. If your home isn’t included in your estate plan, it will go through probate. This means the rightful beneficiary won’t gain ownership of the house until it clears probate. Although probate laws vary from state to state, the process takes about two years on average.
Let’s use California as an example. In this state, the asset value cap to avoid probate court is $166,250, and most homes exceed this value. In probate proceedings, it’s the full market value of the house that counts. So, if you own a $1 million home with an $800,000 mortgage on it, your probate estate is the $1 million, and not the $200,000 equity. If your house isn’t properly placed in a trust, you can bet your bottom dollar that it’ll have to go through probate.
By placing your home into a trust, you can avoid the probate process, or at least get through it more quickly. This means that if anything were to happen to you, your home would go to your rightful trustee right away, rather than having to deal with legal complications from several months to several years.
However, it’s important to keep in mind the potential pitfalls of a trust, such as:
1. Purchasing a trust if you really only need a will. If you have less than $150,000 in assets and you don’t own a home, a trust likely isn’t really necessary for you.
2. Assuming you automatically have asset protection. While a trust can help people avoid the probate process, an irrevocable trust may be the right option for people who want true asset protection.
3. Not taking trust administration tasks into account. The trustee has to do these after the death of the trust creator. These aren’t terribly different from what an executor does in many ways, but can be an extra set of admin tasks.
‘I Already Have A Trust, What Should I Do?’
“I just bought a home, but I already have a trust. Is there anything else I need to do?” I get this question from second-time home buyers.
If you already have an estate plan, I commend you. As a rule of thumb, I recommend reviewing your estate planning documents every three to five years. Outside this schedule, buying a house should trigger you to revisit your documents.
When performing a review, take a look at the provisions of your trust. Do you have your old house referenced by address in your trust? Do you say you give the house to your spouse, for example? If your answer is “yes” to either of these questions, then you need to update your trust.
Homes are often identified by address in estate plans, meaning you need to update the referenced address. Because you sold your prior house, you no longer have legal ownership of it and cannot give it to someone. If you don’t update your trust when you buy a new home, your gift will fail.
Mortgages And Estate Plans
Most mortgages have a “due on sale” clause, which means that if you terminate your ownership of your home, you have to immediately pay back the mortgage proceeds to the bank. By placing your home in a revocable trust, it allows you to smoothly transfer ownership to your beneficiary. This prevents the bank from demanding payment under the “due on sale” clause. Your beneficiary would continue making the mortgage payments after you’re gone. Another option is to set up a life insurance policy, or other liquid assets through your estate plan, as a means to lift financial burden off your beneficiaries’ shoulders.
If a lender gives you any trouble by saying you can’t transfer ownership of your house into your trust, know that federal law says you can. There are a few rules, but most homes generally qualify. Most lenders require the property’s mortgage to go into your individual name first. Once the deed is put in your name, you have to take the extra step to transfer the deed to your trust to properly fund your trust.
If you bought a home during the pandemic and haven’t yet placed it in a trust, consider setting up your estate plan sooner than later. That way, you can have peace of mind knowing your loved ones will get their rightful ownership of your home should anything unexpected happen. These turbulent times have been an important reminder to expect the unexpected.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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Credit: Original article published here.