How to Remove a Property from a Trust: Key Steps Explained

This content has been reviewed and edited by an Investment Advisor Representative working for Global Predictions, an SEC-registered Investment Advisor.

If you're thinking about removing a property from a trust, you're not alone. This guide will explain the main steps in a straightforward way so you can understand the process and make informed decisions.

What Is a Trust, and Why Might You Remove a Property?

A trust is a legal tool where assets, like property, are managed by someone (a trustee) for the benefit of others (beneficiaries). Trusts are often used to help with estate planning, reduce taxes, or protect assets. However, situations change, and sometimes you may need to remove a property from the trust—perhaps to sell it, refinance, or take back ownership.

Different Types of Trusts: Revocable vs. Irrevocable

• Revocable Trusts: These trusts can be easily changed or ended by the person who created them. Taking a property out of this type of trust is usually simple.
• Irrevocable Trusts: Once set up, these trusts are harder to change. Removing a property may need permission from the beneficiaries or approval from the court.

For a hypothetical example, Jane put her home in a revocable trust years ago for estate planning. Now that her financial situation is stable, she wants to sell the home and decides to remove it from the trust.

If you want a full read on revocable vs irrevocable trusts, read our full article here.

Step-by-Step Process to Remove Property from a Trust

1. Review the Trust Document: The trust document is your guide. It explains the rules about how the property can be handled. In a revocable trust, the person who created the trust usually has the power to make changes, while in an irrevocable trust, removing property might require extra steps, like getting approval from beneficiaries.
2. Consult with a Lawyer: It's a good idea to talk to a lawyer to make sure you're following the rules. Trust laws can vary by state, and a lawyer can help you avoid any legal issues or tax penalties.
3. Prepare a Deed to Transfer Ownership: To remove a property from the trust, you need a legal document called a deed. This transfers ownership from the trust back to you or someone else.
4. Sign and Notarize the Deed: Once the deed is ready, the trustee must sign it, and it needs to be notarized. This makes the document legally valid.
5. Record the Deed: The last step is to take the deed to your local county office, where it will be officially recorded. This updates public records to show the property is no longer in the trust.

Key Considerations When Removing Property from a Trust

Tax Implications

Removing a property from a trust can have tax consequences depending on the type of trust.

• Revocable Trusts: There are generally no immediate tax effects since the grantor still controls the assets. However, if the property is sold after being removed from the trust, the owner may be subject to capital gains tax, depending on the property's appreciation since its acquisition.
• Irrevocable Trusts: Removing a property from an irrevocable trust can trigger significant tax liabilities, such as gift taxes or capital gains taxes. For example, if the property has appreciated substantially, selling it may result in a taxable capital gain. Additionally, depending on the property's value and current tax laws, transferring the property out of the trust could be considered a taxable gift.

Beneficiary Consent

In irrevocable trusts, you may need to obtain consent from the beneficiaries before removing a property from the trust.

• If the beneficiaries do not agree to the removal, the process could be delayed or even prevented. In some cases, court approval may be required to modify the trust or remove a specific asset, particularly when there is disagreement among the beneficiaries or if the trust does not explicitly allow asset removal.

Mortgage Considerations

If the property has a mortgage, it’s important to notify the lender before removing the property from the trust.

• Some loan agreements contain "due-on-sale" clauses, which allow the lender to demand full repayment of the mortgage when the property is transferred out of the trust. Removing the property without consulting the lender could violate the terms of the loan, leading to an acceleration of the mortgage.