Should You Use a Trust to Hold Residential Real Estate in Texas?

Owning residential real estate is one of the most significant investments many people make in their lifetime. As property owners in Texas consider the best ways to protect, transfer, and manage their assets, the use of trusts is an increasingly popular option. But is holding residential real estate in a trust the right move for everyone? In this article, we'll explore the advantages and potential drawbacks of using a trust to hold property in Texas.

Advantages of Using a Trust for Real Estate

1. Privacy Protection

When a property is titled in your name, details about the ownership become part of the public record. Anyone can easily access information about what you own, which might not be desirable for those who value discretion. In contrast, placing your home in a trust can shield ownership details from public scrutiny. This protection was exactly what a prominent Fort Worth family desired when they transferred their primary residence into a revocable living trust. The trust allowed them to keep the property's ownership private while retaining control over it during their lifetime.

2. Avoiding Probate

One of the key benefits of a trust is its ability to bypass the probate process. Upon the death of the trust creator (known as the grantor), the property held in the trust can be transferred to beneficiaries without the need for lengthy court proceedings. For instance, a Dallas couple placed their second home into a trust with the goal of simplifying the inheritance process for their children. When one spouse unexpectedly passed away, the property was seamlessly transferred to their children without the delays or costs typically associated with probate.

3. Asset Protection

Some property owners use trusts to protect their real estate from creditors or legal judgments. While revocable trusts don't generally offer this protection, irrevocable trusts may shield assets under certain circumstances. A Houston real estate investor, facing potential lawsuits related to a separate business venture, transferred several rental properties into an irrevocable trust. This move helped protect those properties from being targeted by creditors, while also ensuring they would be preserved for future generations.

4. Tax Benefits

Although Texas doesn't have an estate tax, property owners may still benefit from tax advantages when using a trust. For example, married couples can take advantage of bypass trusts to maximize their estate tax exemptions at the federal level. Additionally, property held in a trust may qualify for certain step-up basis rules upon death, potentially reducing capital gains tax liabilities for beneficiaries. It's worth noting that these step-up basis rules generally apply to both trust-held and individually-held property upon death. A ranch owner in West Texas used a trust not only to ensure his land stayed within the family but also to minimize the potential tax burdens on his heirs.

Drawbacks and Considerations

While there are many reasons to consider using a trust, it's not without its challenges. For some property owners, the disadvantages may outweigh the benefits.

1. Cost and Complexity

Setting up a trust is not as simple as retitling a property in someone else's name. Trusts involve legal fees, and their ongoing administration requires careful attention. For example, one Austin homeowner initially placed her home in a trust for estate planning purposes but found the ongoing costs and administrative requirements too cumbersome. After consulting with her financial advisor, she decided to revoke the trust and simplify her estate plan through other means.

2. Potential Tax Implications

Although trusts can provide tax advantages, they can also trigger unintended tax consequences if not structured properly. A San Antonio couple discovered this when they attempted to transfer their vacation home into an irrevocable trust. Without proper planning, they incurred higher property taxes due to the change in ownership structure and the loss of certain exemptions they previously qualified for, such as the homestead exemption.

3. Loss of Control in Irrevocable Trusts

While irrevocable trusts offer asset protection, they come with a significant drawback: once the property is transferred into the trust, the original owner relinquishes control over it. This loss of control is not ideal for everyone. A real estate developer in Galveston experienced this limitation when he placed several development properties into an irrevocable trust to shield them from potential creditors. As market conditions changed, he was unable to sell or leverage the properties without the trustee's approval, which significantly hampered his business operations.

4. Legal Limitations Under Texas Law

Texas law imposes certain restrictions on how trusts can be used, particularly when it comes to homestead property. For example, if you transfer your homestead into an irrevocable trust, you may lose your homestead protections under Texas law. These protections include important tax breaks and creditor protections, such as protection from forced sale to satisfy creditors' claims and property tax exemptions for primary residences. This scenario was the case for a widow in Lubbock who unknowingly gave up her homestead exemption after transferring her home into a trust, leading to higher property taxes.

5. Impact on Mortgages and Refinancing

It's important to consider how placing your property in a trust might affect your ability to obtain a mortgage or refinance an existing one. Some lenders may have specific requirements or limitations when it comes to trust-held properties, which could potentially complicate your financing options.

Final Thoughts

Using a trust to hold residential real estate in Texas can offer significant benefits, including privacy, ease of transfer, asset protection, and potential tax advantages. However, it’s essential to weigh these benefits against the potential drawbacks, such as administrative costs, tax implications, and the loss of control in certain types of trusts.

Trusts are powerful legal tools, but they are not one-size-fits-all solutions. Every property owner’s situation is unique, and what works for one person may not be the best strategy for another. For this reason, it’s important to seek legal and financial advice before making any decisions about transferring property into a trust.

With the right guidance from qualified professionals, you can determine the best estate planning strategy to meet your goals, protect your assets, and secure your property for future generations. Consider consulting with a Texas-licensed attorney specializing in estate planning and real estate law to explore whether a trust is the right choice for your residential property holdings.