There are many reasons for transferring Texas real estate into a living trust or other revocable or irrevocable trust. The most common reason is to avoid Texas probate. Transferring Texas real estate to a living trust removes the real estate from the transferor’s probate estate and bypasses the Texas probate process.
Property transferred to a valid living trust can continue to qualify for Texas homestead exemption, as long as certain requirements are satisfied. Specifically, homestead status can only be maintained if the trust that owns the property must be a qualifying trust. The definition of a qualifying trust for asset protection purposes differs slightly from the definition of qualifying trust for property tax purposes.
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What is a Qualifying Trust for Asset Protection Purposes?
For asset protection purposes, the definition of qualifying trust is found in Section 41.0021 of the Texas Property Code. That Section requires the trust agreement or court order creating the express trust to give a settlor or beneficiary of the trust the right to:
- revoke the trust without the consent of another person;
- exercise a lifetime general power of appointment over the property that qualifies for the homestead exemption; or
- use and occupy the residential property as the settlor’s or beneficiary’s principal residence at no cost to the settlor or beneficiary, other than payment of taxes and other costs and expenses specified in the instrument or court order:
- for the life of the settlor or beneficiary;
- for the shorter of the life of the settlor or beneficiary or a term of years specified in the instrument or court order; or
- until the date the trust is revoked or terminated by an instrument or court order recorded in the real property records of the county in which the property is located and that describes the property with sufficient certainty to identify the property.
The trustee of the trust must also acquire the real estate in an instrument of title (like a deed) or court order that uses a legally-sufficient legal description and is recorded in the real property records of the county in which the property is located.
What is a Qualifying Trust for Tax Purposes?
For tax purposes, “qualifying trust” is defined by Section 11.13(j)(3) to mean a trust in which the terms of the trust, the deed transferring property into the trust, or other agreement binding on the trustee allows the trust creator or beneficiary the right to use and occupy residential property as a principal residence.
The trust creator or beneficiary must be allowed to use the property rent free and without charges except for taxes and other costs and expenses specified in the instrument or court order. The trust creator or beneficiary’s right to use the property must be:
- for life;
- for the lesser of life or a term of years; or
- until the date the trust is revoked or terminated by an instrument or court order that includes a proper legal description and is recorded in the real property records of the county in which the property is located.
The deed or other document transferring the property to the trust must also include a proper legal description and be recorded in the real property records of the county in which the property is located.
Other Practical Steps for Retaining Homestead Exemption in a Living Trust
Once a deed to a trust is recorded, the county clerk may not know that the trust meets the definition of a qualifying trust for Texas homestead purposes. It is good practice to re-file for Texas homestead exemption once the deed is recorded.
Although requirements can differ from county to county, most county clerks will require—in addition to the deed and application for homestead exemption—some evidence that the trust meets the definition of a qualifying trust. The clerk will usually want to see a certificate of trust and a section of the trust that states that the beneficiaries or trust creator may continue to live in the home.