When it comes to estate planning, many homeowners want to make smart decisions to protect their assets and ensure a smooth transfer to loved ones. One frequently discussed strategy is putting the family home into a trust, often with the assumption that it will result in significant tax savings.
But here’s the reality: while trusts can play a valuable role in estate planning, they’re not always the tax-saving tool people expect. In fact, depending on your situation, transferring your home to a trust may offer little to no tax benefit and could even introduce added complexity or cost.
At PAX Financial, our San Antonio CFPs® can help you through this type of situation so you can make smart, informed decisions that can impact your financial situation.
In this article, we’ll clarify common trust-related misconceptions, highlight what actually works in tax-efficient estate planning, and offer smarter alternatives tailored to your long-term goals.
Myth: Trusts Automatically Reduce Taxes
One of the most common misconceptions is that placing real estate, especially your primary residence, into a trust will help avoid capital gains taxes or minimize estate taxes for heirs.
This belief often stems from confusion around how different trusts are taxed and what they actually do.
For example, revocable living trusts, which are widely used in basic estate planning, do not offer any tax benefits during your lifetime. These trusts are considered “grantor trusts” by the IRS, meaning the person who creates the trust retains control and is still treated as the legal owner for income tax purposes.
As a result:
- Your home’s appreciation is still subject to capital gains tax if sold during your lifetime.
- You continue to report income, deductions, and gains associated with the property on your tax return.
- The property remains part of your taxable estate.
Revocable trusts are valuable for reasons we’ll explore later, but reducing taxes typically isn’t one of them. A CFP ® in San Antonio can provide more clarification, if needed.
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What Actually Helps: The Stepped-Up Cost Basis
If your primary concern is minimizing taxes for your heirs, the stepped-up cost basis may be the most powerful tool available. The good news is that it usually applies without needing to place the home in a trust.
Here’s how it works:
- Let’s say you purchased your home for $200,000 in 1995.
- At the time of your death, the property is worth $800,000.
- Your child inherits the property, and their new cost is $800,000.
- If they sell the home shortly after inheriting it for $805,000, they would only owe capital gains tax on $5,000, not $605,000.
This step-up in basis helps eliminate significant unrealized gains and can save your heirs thousands in taxes. Importantly, this tax treatment is not dependent on a trust; in most cases, it applies so long as the property is included in your taxable estate at death.
A Common Mistake: Gifting the Home During Your Lifetime
Some individuals consider gifting their home outright to children or other heirs during their lifetime in an attempt to “get ahead” of estate planning. However, this approach can lead to unintended tax consequences.
When you gift a property while you’re alive:
- The recipient assumes your original cost basis (e.g., $200,000 in our example).
- If they later sell the property for $800,000, they may owe capital gains tax on $600,000 or more.
This strategy forfeits the stepped-up basis and can create a large and avoidable tax liability. Holding the property until death usually provides a far more favorable outcome for your heirs.
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Alternatives to Trusts for Passing Real Estate
If your primary goals are to ensure your home is passed on smoothly and avoid probate, there are effective estate planning tools that don’t require a trust. Two of the most commonly used:
1. A last will and testament lets you specify who should receive your home after passing. While the will goes through the probate process, it provides legally binding instructions that guide the distribution of your assets.
- Pros: Simple, relatively inexpensive to draft, and allows you to designate who inherits your property.
- Cons: Probate may delay distribution or incur costs depending on your state’s laws.
2. In many states, a Transfer-on-Death (TOD) deed, also known as a beneficiary deed, lets you name a beneficiary who will automatically receive the property upon your death.
- Pros: Avoids probate, retains full control of the property during your lifetime, and allows for a stepped-up cost basis at death.
- Cons: It is not available in all states and may have restrictions based on local laws.
These tools can often meet your goals more efficiently than a trust, particularly when estate complexity is minimal.
When a Trust Does Make Sense
Although trusts may not always provide tax savings, they are crucial to many estate plans. In particular, revocable living trusts can provide meaningful benefits such as:
✅ Avoiding Probate: Assets in a properly funded trust can bypass the court-supervised probate process, reducing delays and legal costs.
✅ Privacy: Unlike wills, which become part of the public record during probate, trusts are private documents.
✅ Incapacity Planning: If you cannot manage your affairs, the trustee can manage assets without court involvement.
✅ Distribution Control: A trust allows you to specify how and when your heirs receive assets, which can be useful for minors, spendthrifts, or complex family situations.
These features can be especially beneficial if you are looking for privacy, efficiency, or specific control over the distribution of your estate.
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Start with the End in Mind
Before choosing tools like trusts, wills, or deeds, it’s critical to step back and define what you want your estate plan to accomplish. Common goals include:
- Reducing taxes
- Ensuring smooth asset transfer
- Providing for minor children or special needs beneficiaries
- Maintaining privacy
- Protecting assets from creditors or remarriage
Once you’ve clarified your intentions, work with a qualified financial advisor in San Antonio and an estate attorney who can help design and implement the best strategy for your unique situation. Your San Antonio financial advisor can evaluate trade-offs, explain complex terminology, and help coordinate your plan across legal, tax, and investment disciplines. Final Thoughts: Don’t Assume a Trust Is Always the Best Answer
There’s no one-size-fits-all answer. Your family’s needs, state laws, and long-term intentions all matter. A trust may still make sense for many reasons, but make sure it’s the right tool for your specific goals. If you’re unsure whether your estate plan aligns with your goals, or if you’ve been told you “need a trust” but aren’t sure why, it’s worth getting a second opinion.
As a financial advisor in San Antonio, I help you simplify these decisions and ensure your estate strategy is effective and efficient. Whether you’re exploring your options or already have a plan, I can work with your estate attorney to help ensure everything is aligned and working as intended.
Let’s schedule a time to talk. Your future self (and your heirs) will thank you.
