What Happens to a House That Is in a Living Trust When the Owner Dies?

A living trust is set up when a property owner wishes his heirs to avoid the costs and hassle of probate after he dies. Both titled property like houses and personal property like jewelry can be included in the living trust, and if it is set up properly, you will be able to freely move assets into and out of the trust during your lifetime.

A living trust is an alternative to a will, and is set up in a similar fashion with legal documentation. It is growing more common for property owners to place all property of real value in a living trust instead of writing a will, mostly due to the simplicity of administering a living trust as well as its significant tax advantages. Living trusts cost more in time and money to set up than a will, but this time and cost is usually more than offset by the later time and tax savings.

Dozens of types of living trusts are used, but a few are designed specifically for end-of-life planning. A revocable living trust is the most common -- a simple trust that can be revoked at any time by the owner. A legacy or dynasty trust holds family possessions, such as heirloom jewelry and homes, in such a way as to avoid estate taxes when property is passed to children. A credit shelter trust ensures both husband and wife owners of a property can fully utilize the estate tax sheltering of a trust. Though these living trusts have slightly different functions, they all work in basically the same way: by placing ownership of your most precious possessions in the hands of a third party to insulate them from probate issues.

When you place your house in a living trust, you are still able to treat it exactly the same way you did before, though it will have to be removed from the trust if you want to sell it. If you hold your home jointly with a spouse, it is protected from inheritance taxes if one of you dies; however, many lawyers recommend it be placed in an existing trust anyway, as it will then be protected if both of you pass together.

Your living trust specifies what disposition is to be made of your home when you die, but it can be contested. However, it is much harder to contest a living trust. It is wise to think carefully about what you want done with your property before consigning its disposition to a trustee.

A living trust does not go through probate. While any outstanding debts owed on an estate must be paid from the trust and other death benefits, the cost and time involved in probate are not required for a living trust's settlement. A living trust is a private rather than public document, allowing owners to avoid public scrutiny. If the owner becomes disabled, property in a living trust can easily be administered on his behalf by a trustee with little further legal hassle. Possibly most importantly, many types of living trusts avoid estate taxes when the property is passed on to heirs, as property within a trust is treated as a legal transfer and not an inheritance. While heirs may have to pay income tax on some property, the sometimes-crushing burden of the "death tax" may be avoided with a living trust arrangement.