Can You Take a Property Out of a Trust​?

Taking property out of a trust is a common concern for many individuals who have established trusts as part of their estate planning. Whether you’re a trustee looking to manage trust assets or a beneficiary wondering about accessing property held in trust, understanding the process and implications is crucial. This article will explain the possibilities, procedures, and considerations when removing property from different types of trusts in New York.

Removing Property From a Trust

Yes, it is possible to remove property from a trust, but the process depends on the type of trust you have established. The two main categories of trusts—revocable and irrevocable—have different rules governing property removal.

For revocable trusts (also called living trusts), the process is relatively straightforward. As the name suggests, these trusts can be changed or revoked entirely by the grantor (the person who created the trust) during their lifetime. If you are the grantor of a revocable trust, you maintain control over the assets and can remove property at your discretion.

To remove property from a revocable trust, you generally need to execute a deed or title transfer document that transfers the property from the trust back to your individual name. This document should clearly identify the property being removed and should be signed with the same formalities as the original transfer into the trust.

Steps to Remove Property From a Revocable Trust

The process typically involves several specific steps that must be followed carefully to ensure the property is legally transferred out of the trust. First, review your trust document to confirm there are no special provisions limiting your ability to remove the specific property.

Next, prepare the appropriate legal document for the type of property being transferred. For real estate, this means executing a new deed. For financial accounts, you’ll need to work with the financial institution to retitle the account. For personal property without formal titles, a written assignment document may suffice.

Finally, ensure the document is properly executed according to New York state law. This may require notarization, witnesses, or recording with county offices, depending on the type of property involved.

Removing Property From an Irrevocable Trust

Irrevocable trusts present a more complex situation. By design, these trusts cannot be easily changed or revoked after they’re established. The primary purpose of an irrevocable trust is often to remove assets from the grantor’s estate for tax purposes or asset protection.

However, this doesn’t mean property can never be removed from an irrevocable trust. There are several legitimate methods that may be available, depending on the trust’s terms and New York state law.

One method involves the use of powers retained by the trustee or other individuals. Some irrevocable trusts include provisions that allow a trustee, trust protector, or other designated individual to make distributions of trust property under specific circumstances.

Another approach involves judicial modification. Under New York law, courts may authorize modifications to irrevocable trusts under certain conditions, such as changed circumstances not anticipated by the grantor or when modification would better serve the trust’s purposes.

Legal Considerations When Removing Trust Property

Before removing property from any trust, it’s essential to understand the potential legal implications. Removing property from a trust without proper authority or procedure can lead to significant legal complications.

For revocable trusts, while the process is simpler, improper documentation can create title problems that may be discovered only years later, perhaps during a property sale or after the grantor’s death. This can lead to expensive legal proceedings to clarify ownership.

For irrevocable trusts, unauthorized removal of property could constitute breach of fiduciary duty if done by a trustee, or could be challenged by beneficiaries or other interested parties. Additionally, removing property from an irrevocable trust might trigger tax consequences that were specifically avoided by placing the property in trust initially.

Tax Implications of Removing Trust Property

The tax consequences of removing property from a trust can be significant and should be carefully considered before taking action. For revocable trusts, there are typically minimal immediate tax implications since the trust is considered a disregarded entity for income tax purposes during the grantor’s lifetime.

However, for irrevocable trusts, removing property could trigger gift taxes, capital gains taxes, or affect estate tax planning. If the original purpose of the irrevocable trust was to remove assets from the grantor’s estate for estate tax purposes, taking the property back could undermine this strategy and potentially expose the property to estate taxes.

In some cases, distributions from irrevocable trusts may also have income tax consequences for the beneficiaries receiving the distributions. The specific tax implications depend on the trust’s terms, the type of property involved, and current tax laws.

When Trust Terms Prohibit Removal

Some trusts are explicitly designed to prevent the removal of assets until certain conditions are met. These restrictions are common in spendthrift trusts, trusts for minors, or trusts designed to provide for beneficiaries with special needs or substance abuse issues.

When trust terms specifically prohibit property removal, options become more limited. However, there may still be legal avenues available depending on the circumstances and New York state law.

One potential option is seeking judicial modification of the trust. Under New York’s Estates, Powers and Trusts Law (EPTL), courts have some authority to modify trusts when circumstances have changed in ways not anticipated by the grantor, or when modification would better serve the trust’s purposes without defeating the grantor’s original intent.

Another possibility is the use of decanting, a process where a trustee with discretionary distribution authority transfers assets from one irrevocable trust to a new irrevocable trust with different terms. New York has specific statutory provisions governing trust decanting (EPTL 10-6.6), which may provide a pathway for effectively changing trust terms that restrict property removal.

The Role of Trustees in Property Removal

Trustees play a crucial role in the process of removing property from trusts. As fiduciaries, trustees have legal obligations to administer the trust according to its terms and in the best interests of the beneficiaries.

For property removal from a revocable trust, the trustee (often the grantor) must follow proper procedures to ensure the transfer is legally effective. This includes preparing and executing appropriate documentation and ensuring all legal formalities are observed.

In irrevocable trusts, trustees must be particularly careful when considering property removal. Unauthorized distributions or transfers could constitute a breach of fiduciary duty, potentially exposing the trustee to personal liability.

Trustees should always document the reasoning behind any decision to remove property from a trust, particularly for irrevocable trusts. This documentation should show how the decision aligns with the trust’s terms and the trustee’s fiduciary duties.

Common Situations Requiring Property Removal

There are several common scenarios where removing property from a trust becomes necessary or beneficial. Understanding these situations can help trust grantors and trustees make informed decisions.

One frequent reason is the need to sell or refinance real estate held in trust. Lenders sometimes have specific requirements regarding trust ownership that may necessitate temporarily removing property from the trust to complete the transaction.

Another common situation involves changes in family circumstances, such as divorce, remarriage, or changes in relationships with beneficiaries. These life events may prompt a reevaluation of trust arrangements and potentially the removal of certain assets.

Tax law changes can also motivate property removal from trusts. As estate tax exemptions and other relevant tax provisions change over time, strategies that made sense when the trust was established may no longer be optimal.

Emergency Situations and Trust Property

In some cases, emergency circumstances may necessitate access to trust property. Medical emergencies, financial hardships, or other unexpected events can create urgent needs for beneficiaries.

Many trusts include provisions for hardship distributions that allow trustees to provide beneficiaries with access to trust assets in emergency situations. These provisions typically give trustees discretion to determine what constitutes a qualifying emergency and how much should be distributed.

If a trust lacks specific hardship provisions, but an emergency exists, it may be possible to petition the court for an emergency distribution. New York courts have some equitable powers to authorize distributions not explicitly permitted by the trust document when compelling circumstances exist.

Alternatives to Removing Property

In some situations, completely removing property from a trust may not be necessary or advisable. Several alternatives might accomplish the desired objectives while maintaining the benefits of the trust structure.

One alternative is borrowing against trust assets rather than removing them. Many trusts permit loans to beneficiaries, which can provide needed funds while keeping the assets in the trust. These loans should be properly documented with reasonable interest rates and repayment terms.

Another option is trust modification without property removal. As mentioned earlier, judicial modification or decanting may allow changes to trust terms without actually removing assets from the trust structure.

For income-producing assets, increasing distributions of income rather than distributing the asset itself may be preferable. This approach maintains the principal in the trust while providing beneficiaries with additional financial support.

Need Help With Trust Property Management?

Managing trust property requires careful attention to legal requirements, tax implications, and fiduciary responsibilities. Whether you’re considering establishing a trust, modifying an existing trust, or removing property from a trust, professional guidance is essential to avoid costly mistakes.

As estate planning attorneys in New York, we can help you navigate the complexities of trust property management.