Revocable Trusts
Placing a home into a revocable living trust is a popular strategy to avoid probate. However, since you are technically transferring the home’s title from yourself as an individual to the trust as a separate legal entity, the transfer may void the homestead exemption in some states. The exemption is often tied to an individual’s personal ownership of their primary residence, which you no longer have under a trust.
To account for this legal technicality, in many states a well-drafted trust can explicitly state that the original owner retains the right to live on the property, control it, and remove the property from the trust. This so-called present possessory interest may be enough to satisfy the requirements for a homestead exemption in a particular state. Texas law, for example, has specific provisions allowing the homestead exemption to continue for a home held in a qualifying trust.[1]
Irrevocable Trusts
As discussed above, most states allow homestead protection to continue after a primary residence has been transferred to a revocable trust. The reasoning is that the individual who creates the trust (i.e., the grantor) usually retains the ability to amend, revoke, or terminate the trust, therefore retaining an ownership-like interest in the property and, with it, the right to claim the homestead exemption.
The law is less flexible when an irrevocable trust is used. Transferring ownership to an irrevocable trust is a more-permanent move than a transfer to a revocable trust. Unless the trust specifically reserves certain rights, such as the grantor’s ability to occupy or use the property, it will likely result in loss of the homestead exemption. Essentially, since the very nature of an irrevocable trust is that the grantor cannot take the property back or change the trust’s terms, most states conclude that the grantor no longer has a present possessory interest as an owner, and the homestead exemption is therefore jeopardized.
While there are some exceptions (e.g., in Texas and Florida, a carefully drafted irrevocable trust may let the owner or a beneficiary continue to occupy the property as a primary residence and preserve the homestead exemption), an irrevocable trust is typically chosen for other benefits, such as better tax advantages and stronger asset protection, in a trade-off for the homestead exemption.
[1] Tex. Prop. Code § 41.0021.
