We’ve recently received some questions about trust issues that we suspect might be relevant to our general readership.
Q: My mother has sold a rental home that is in a trust account. Do I report the sale on her personal taxes or her trust account’s tax return?
A: You didn’t mention the type of trust your mom used to hold and own the property. So, we’ll have to give you a qualified answer.
If your mother held the property in a living trust, she will likely have to report the sale on her personal income tax return. The type of trust matters here. Sometimes, certain trusts have their own federal taxpayer identification number and file their own tax returns. For these types of trusts, the income and expenses of the trust are separate from the finances of the individual.
We suspect your mom used a personal revocable trust and the trust did not require its own taxpayer identification number or was required to file its own tax return. In this situation, you could say that the tax affairs of the trust were one and the same with your mom’s tax dealings.
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You did, however, mention your mom’s personal tax return or her trust tax return. Does your mom file a tax return for the trust? If she does, it would seem that the trust would have to file the return showing the sale of the investment property. You should talk to the person that assists you with your mom’s tax returns or a tax specialist for more information.
Q: In a recent article, you advised someone with a home titled in a trust that they may have the option to finance their home renovation with a home equity line of credit. In 2020, as part of our estate planning, we put our house title in a revocable living trust. Later, we were told by a big box lender that we could not take a home equity line of credit on a home held by a trust. We did not really need to, but that contradicts your advice. Or, is the big box lender unique in that regard? My wife and I are the trustees, so it seems like a dumb policy if it’s true.
A: There are some lenders that won’t give either a first mortgage or an equity line of credit to a homeowner when their home is held by their living trust. But many other lenders have no problem providing the loans.
Sam has worked through this problem in the past with some of his borrowers. In some cases, his clients have taken the property out of the living trust to close on the loan only to then put the property back in the living trust after the loan closing.
With the lenders that allow borrowers to finance or refinance property that is titled in the name of their living trusts, those lenders may require some additional paperwork and some additional signatures. We don’t know why some lenders have issues with living trusts while others don’t.
Many homeowners hold title to their homes in living trusts. It seems to us that lenders should — and would want to — accommodate these homeowners with all of their home loan products.
A living trust is a means of estate planning that allows a homeowner to transfer ownership of a property without going through probate. If you own the property in your own name, when you die, your heirs usually would have to open up a case with the probate court to handle the affairs of the estate. One of the things the executor of the estate would handle is transferring ownership of the home to the designated person listed in the will.
When a home is titled in a living trust, there is no need to go through probate. The trust would name a successor trustee and a successor beneficiary and the new trustee could transfer the ownership of the home to the new beneficiary. It’s fairly simple and avoids the legal expense of the probate process.
That said, lenders usually need the trustee and the beneficiary of the trust — the trust owner — to sign off on the loan documents. With most living trusts, the trustee and the beneficiary are one and the same person. In some situations, some lenders will want the person that established the trust, the trustee and the beneficiary to sign the note and mortgage. Here again, in most situations, the person that created the trust, the trustee and the beneficiary are one and the same.
The next time you’re trying to get a mortgage or equity line of credit, talk to several lenders. Some will make the process easy and others will be more difficult to work with. It’s up to you to decide who will get your business.
We’d love hearing from lenders who say they are unable to provide financing to homeowners that hold title to their homes in a living trust. We’ll share those letters (anonymously, if that’s a concern), so our readers will better understand the situation going forward.
(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through their website, bestmoneymoves.com.)