Buying and Selling Real Estate with Trusts
- Phoenix S. Ayotte, Esq.
- 7 days ago
- 7 min read
So, you've set up your asset protection trust and sealed the deal on your estate plan- recently, or some time ago. OR, you are a Trustee of a trust. OR, perhaps you are a realtor, and property is held in a family or other trust. What happens when you want to sell?
Whether you're a homeowner, trustee, or real estate agent, understanding how a trust impacts a real estate transaction is essential for avoiding delays, legal issues, and tax pitfalls.
This blog explores the benefits, required steps, tax implications, and common mistakes to avoid when dealing with trust-owned property. We also highlight special considerations for real estate agents handling these transactions
What Is a Trust and What Does It Mean to Hold Property in One?
A trust is a legal entity that holds assets—such as real estate—on behalf of beneficiaries. The person who creates the trust (the “grantor” or “settlor”) appoints a trustee to manage the assets according to the trust’s terms. The trustee can be the grantor, a trusted individual, or a professional fiduciary.
When real estate is placed in a trust, the trust becomes the legal owner of the property. This means the trustee must act according to the instructions in the trust document and within the bounds of state and federal law. Property held in trust can still be lived in, sold, rented, or refinanced, but the process involves more documentation and compliance steps than a typical individually-owned property.
Trusts are used for many purposes, including probate avoidance, incapacity planning, tax planning, and asset protection. The type of trust—revocable or irrevocable—affects how the property is managed and what tax benefits or burdens may apply.
Are you a Trustee? Here is a checklist for Trustees selling real estate!
To help streamline the process, here’s a quick checklist trustees can use when preparing to sell real estate held in trust:
✅ Confirm title is held in the trust's name
✅ Review the trust document for sale provisions
✅ Obtain a Certificate of Trust or Trust Affidavit
✅ Notify all beneficiaries (if required)
✅ Hire professionals: real estate attorney, agent, CPA
✅ Prepare the property for sale (repairs, staging, disclosures)
✅ Sign required documents (Trustee’s Deed, settlement statement)
✅ Maintain accounting and recordkeeping for beneficiaries
✅ Distribute proceeds according to the trust’s terms
Advantages of Using a Trust in Real Estate
1. Avoiding Probate and Maintaining Privacy
Holding real estate in a trust allows for the seamless transfer of property after the owner's death, without requiring probate. This not only saves time and money, but also keeps property details and beneficiaries out of the public record. A living trust (revocable trust) is particularly effective for this purpose.
2. Streamlined Asset Management
With a trust, a successor trustee can step in immediately upon incapacity or death of the grantor, ensuring continuous management of real estate assets—especially important for income-producing properties.
3. Estate and Tax Planning
Certain trusts can help mitigate estate tax exposure, provide creditor protection, and establish clear succession plans. The trust can also dictate how sale proceeds are distributed, which helps prevent disputes among beneficiaries.
Key Legal and Transactional Steps
1. Proper Titling
For a trust to control the property, it must be properly titled in the trust's name. This means executing and recording a deed transferring the property from the individual into the trust. The deed should include the trust name, date, and trustee’s name(s).
2. Trustee Authority and Documentation
The trustee must have clear authority to sell, purchase, or refinance the property. A Certificate of Trust or excerpts from the trust document should be provided to verify powers. In irrevocable trusts, consent from beneficiaries may be required.
3. Lender and Title Company Requirements
Lenders may scrutinize trust language—especially for refinancing or new purchases. Some require the property to be removed from the trust temporarily. Title companies may also request verification of the trustee’s authority and a copy of the trust.
4. Sale or Purchase Agreements
Trust-owned real estate sales should include disclosures about the trust, signatures from the trustee(s), and any required affidavits. The trustee may sign a Trustee’s Deed Upon Sale to finalize the transaction.
Funding a Trust with Mortgaged Property
One of the more overlooked complexities in real estate trust transactions involves mortgaged properties. When a home subject to a mortgage is placed into a trust, the lender’s approval is often required, or at least a notification. Key issues include:
Ensuring the mortgage servicer does not invoke the due-on-sale clause
Coordinating with the lender for documentation during refinance or sale
Determining whether the trustee or grantor remains liable for the loan
Trustees should consult with both legal and financial professionals before transferring mortgaged property into a trust to avoid triggering loan acceleration or losing favorable financing terms.
Common Pitfalls to Avoid
1. Unfunded Trusts
A trust with no property titled into it provides no protection or probate benefit. If the deed into the trust is never recorded, the property remains in the grantor’s name and subject to probate.
2. Outdated or Ambiguous Trust Terms
Trusts should be reviewed regularly to ensure clarity and legal compliance. Unclear language about the trustee’s authority or outdated references can derail a transaction.
3. Failure to Coordinate with Professionals
Real estate attorneys, CPAs, and title professionals should be involved early. Missteps in titling, trust language, or beneficiary notifications can cause delays or litigation.
4. Refinancing Issues
Refinancing a trust-owned home may require the title to be temporarily transferred back to the individual. Lenders and underwriters may have specific requirements that should be clarified in advance.
Considerations for Property Held in Trust During Divorce
Divorce can complicate the ownership of real estate held in trust, particularly if one spouse is a trustee or beneficiary. Key factors to consider include:
Whether the property was funded into the trust before or after the marriage
Whether community or separate property was used to improve or maintain the home
Whether the trust document includes provisions excluding marital claims
In community property states or those recognizing marital equity, a spouse may attempt to assert a claim against the trust’s interest in the property. Trustees and legal counsel must work together to clarify ownership status and ensure that the trust’s assets are properly protected or partitioned.
Tax and Legal Considerations
1. Trust Type Matters
Revocable Trusts: Property sales are treated as if the grantor owns the property directly. The grantor may still qualify for the $250,000/$500,000 capital gains exemption on the sale of a primary residence.
Irrevocable Trusts: Typically more restrictive. These trusts may not allow the grantor to claim personal exemptions. Capital gains may be taxed at higher trust tax rates.
2. Step-Up in Basis
When a trust-owned property is inherited, heirs may benefit from a step-up in basis to the fair market value at the date of death. This can minimize capital gains if they sell soon after.
3. Distribution of Proceeds
Sale proceeds remain in the trust unless distributed according to its terms. Trustees must ensure proper accounting and adherence to the distribution clauses.
Understanding the Role of the Successor Trustee
The successor trustee plays a vital role in managing and facilitating real estate transactions after the original trustee has passed away or is incapacitated. This person must step into their fiduciary role with full awareness of the trust's provisions, including:
The authority to sell or distribute real estate
Obligations to notify and communicate with beneficiaries
The responsibility to maintain and secure the property during the transition period
It’s essential for the successor trustee to consult legal counsel to avoid breaching fiduciary duties and ensure compliance with trust and state law. Delays in recognizing or documenting this transition can stall a sale, especially when closing timelines are tight.
Are You a Real Estate Agent? Here's What You Need to Know
Understand the Type of Trust
Agents should clarify whether the property is in a revocable or irrevocable trust. This impacts who has authority to act and what consents are needed.
Verify Trustee Authority Early
Before listing a trust-owned home, obtain the trust certification or relevant documents showing trustee authority. Confirm who can sign the listing and sale documents.
Know the Title and Lender Landscape
Some title companies or lenders have unique processes for dealing with trusts. Agents should anticipate potential delays and communicate with escrow and lenders early.
Manage Expectations
Set realistic timelines with the seller, especially when multiple beneficiaries are involved or additional legal documents must be reviewed.
Highlight Benefits in Marketing
Trust-owned homes often involve planned estates or well-maintained properties. Use this in your marketing while being transparent about the trust structure.
Are you buying or selling a property through a trust?
Trusts are powerful tools for managing and transferring real estate, but the legal and transactional landscape requires diligence. Whether you’re a homeowner considering placing property into a trust, a trustee tasked with selling, or a real estate agent listing such a property, the key is preparation, clear documentation, and professional guidance.
Our firm works with trustees, beneficiaries, and real estate professionals to structure, execute, and close real estate transactions involving trusts smoothly and legally. We’re here to make sure your transaction is done right—from funding the trust to distributing proceeds.
Need Expert Guidance?
If you’re in Virginia, Maryland, or Washington, D.C. (DMV) and need legal support for a real estate transaction with a trust, Phoenix S. Ayotte, Esq. of Future Counsel is here to help! Whether you're placing property into a trust, serving as a trustee, or navigating a sale involving trust-owned real estate, we provide legal guidance to ensure every step is handled properly. From deed preparation and trust funding to sale documentation and tax considerations, we’ll help you protect your interests.
