Preserving the Homestead Exemption with Living Trusts
Revocable Living Trusts are a popular estate planning structure in Texas, but when it comes to homestead property, owners should be aware that the trust’s language can mean the difference between preserving or forfeiting a homestead’s property tax benefits.
Maintaining Homestead Tax Exemptions through a Qualifying Trust
A revocable living trust needs to contain express language specific to homestead protections prescribed by Texas law. That means that the trust document itself must state that:
- The property shall be protected against execution on a judgment as per Texas Constitution Article XVI, Section 50 and Property Code Chapters 41 and 42, and that
- Any pertinent homestead tax exemption, whether they are currently on file or not, shall also apply.
The above language ensures protection of the property not only from creditors, but also preserves property tax exemptions granted by the local taxing jurisdictions administered by appraisal districts. While these two issues can often be conflated, they are separate matters, and the trust should address both.
Similar language should also be included in the deed that transfers the property into the trust corpus. This makes it clear to the local appraisal and tax authorities that a qualifying trust has been established for the homestead.
Revocable v. Irrevocable Trusts
A qualifying trust can be either revocable or irrevocable. But if someone wants to create an irrevocable trust instead of a revocable one, the settlor or the beneficiary must retain use and occupancy of the home as their principal residence, and at no cost. As a result, it is common for appraisal districts to require that the trust or deed conveying the property contain a provision that the settlor may continue living in the property without paying rent or other fees. Property Code Sec. 41.0021.
Conclusion
Before transferring any homestead property into a trust, make sure the drafting attorney includes the above language in both the trust document and the attached deeds.
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