What Happens to a House in Trust After Death in New York City

After the person who established the trust dies, what happens next depends on the terms of the trust document.

• If the trust says to transfer the house to the beneficiaries, the trustee has to transfer the house to the beneficiaries.
• If the trust says to sell the house and distribute the proceeds, the trustee has to do that.
• If the trust says to keep the house in the trust for now, then the trustee does not have to do anything just yet.
• If the trust is not clear about what happens to the house after the death, then the trustee should get an agreement in writing from the beneficiaries on what they want him to do. If one or more of the beneficiaries refuses to agree, the trustee has to get a determination from the court on what to do with the property.

How Title Passes Through a Trust at Death

The whole point of putting a house into a trust is that title does not need to pass through probate at the owner's death. The house is owned by the trust during the settlor's lifetime, and after death the trustee continues to hold title until the trust directs what to do with it. There is no Surrogate's Court proceeding, no waiting for letters testamentary, no notice to distributees, and no published filings. The trustee simply follows the document and takes the actions it requires.

For this to work in practice, the deed transferring the house into the trust must have been recorded during the settlor's lifetime in the office of the City Register (in the five boroughs) or the County Clerk (in other counties). A house that the settlor intended to transfer to the trust but never actually deeded over is not in the trust. It is part of the settlor's probate estate and has to be administered through the Surrogate's Court like any other probate asset. This is the most common drafting/funding error we see, and it defeats much of the planning.

The Trustee's Immediate Tasks at Death

The first job after the settlor dies is for the trustee to confirm that the house is, in fact, titled in the name of the trust. The successor trustee should obtain a copy of the recorded deed showing the trust as the owner. Once that is confirmed, the successor trustee should obtain a Certificate of Death and a Certification of Trust (a short summary of the trust that establishes the successor trustee's authority without disclosing the full terms). These are the documents that title insurers, lenders, utility companies, and county clerks will ask for.

The trustee should also secure the property. Locks may need to be changed. Homeowner's insurance should be reviewed to make sure the carrier is informed that the settlor has died and the property is now vacant or occupied differently. A vacant house is a different insurance risk than an occupied one, and most policies have specific vacancy provisions that activate after thirty or sixty days. Mortgages, property taxes, and utility bills should be reviewed and continued.

If the Trust Says to Transfer the House to the Beneficiaries

When the trust directs an outright distribution of the house to one or more named beneficiaries, the trustee executes a trustee's deed transferring title from the trust to the beneficiaries. The deed is recorded in the same office where the original transfer into the trust was recorded. A real property transfer tax form is filed at the recording office, and a Real Property Transfer Report (form RP-5217) is included with most New York filings.

If there are multiple beneficiaries, they will hold the house as tenants in common unless they elect otherwise. The trustee should make sure the beneficiaries understand the consequences of joint ownership before the deed goes out – including the risk of a future partition action if they cannot agree on what to do with the house.

If the Trust Says to Sell the House

When the trust directs sale, the trustee acts as the seller. The trustee retains a broker, lists the property, accepts an offer, signs the contract, and signs the closing documents. The buyer's title insurance company will require a Certification of Trust and may require additional documentation. The proceeds are deposited into a trust account and distributed in accordance with the trust.

The trustee has fiduciary duties throughout. The sale price has to be fair – the trustee cannot sell to himself, a relative, or a related entity below market value. Multiple offers and a written record of the marketing effort help the trustee defend the price if it is questioned later by a beneficiary.

If the Trust Says to Hold the House

Many trusts created for surviving spouses or for minor or young-adult children direct the trustee to hold the house in trust for a period of time. The trustee then has to manage the property as a fiduciary – pay taxes, insurance, and maintenance from trust funds, deal with tenants if there are any, and make decisions about repairs. The trustee should keep a careful accounting of all receipts and disbursements related to the property because the beneficiaries are entitled to that information.

One question that comes up often: can the beneficiary live in the house rent-free? The trust may explicitly allow this, or may require the beneficiary to pay rent at fair market value, or may be silent. If the trust is silent, the trustee should get written guidance from all interested parties or seek court instructions before allowing one beneficiary to occupy the property without paying rent. Otherwise, the trustee could be surcharged later for failing to collect rent that should have been collected.

When Beneficiaries Disagree

If the trust is unclear or gives the trustee discretion and the beneficiaries cannot agree, the trustee has options. A written agreement among the beneficiaries works for amicable situations – the trustee gets all interested parties to sign a settlement agreement directing a specific course of action. For situations where the beneficiaries are at war, the trustee can file a petition under SCPA Article 22 for advice and instructions from the Surrogate's Court. The court will review the document, hear from the parties, and issue an order telling the trustee what to do.

A petition for instructions protects the trustee from later claims that they should have done something different. Trustees who try to navigate beneficiary disputes informally sometimes find themselves accused of favoring one side, and a court order is the safest answer.

Tax Considerations

The trust may or may not get a step-up in basis when the settlor dies, depending on how the trust was structured. A revocable trust where the settlor retained the right to revoke and was treated as the grantor for tax purposes generally receives a step-up to the fair market value of the house as of the date of death. An irrevocable trust where the settlor relinquished sufficient control may not. This affects the capital gains tax owed by the trust or the beneficiary if the house is later sold.

New York City and New York State Real Property Transfer Tax applies to transfers from a trust in some situations. Transfers to a beneficiary in accordance with the trust are generally exempt, but the exemption depends on the specific facts. The transfer tax forms have to be filed correctly even when no tax is owed.

Property tax exemptions like STAR, SCRIE, and senior citizen exemptions are tied to the occupant and the title. The trust generally inherits the property's tax assessment, but exemptions tied to the settlor's age or income status do not automatically transfer to the trustee or the beneficiaries. The new owner may need to apply for exemptions in their own name.

Mortgages and Liens

A mortgage on a house in trust does not disappear at the settlor's death. The trustee or the receiving beneficiary takes the property subject to the mortgage. Federal law (the Garn-St. Germain Act) generally prevents lenders from invoking due-on-sale clauses when residential property held in a revocable trust passes at the settlor's death to a beneficiary who occupies the property. But the lender should be notified, and the new owner may need to assume the loan or refinance.

Existing liens for unpaid taxes, judgments, or HOA assessments stay with the property. The trustee should review the title before any transfer or sale and clear up any encumbrances that should have been resolved during the settlor's lifetime.

Talk to a New York Trust Administration Attorney

If you have issues regarding a house that is in a trust and you need legal representation, we at the Law Offices of Albert Goodwin are here for you. We are located in Midtown Manhattan in New York City. You can call us at 212-233-1233 or send us an email at [email protected].