Overlooked estate planning moves: A look at revocable trusts & personal residence exclusion

Estate planning goes beyond drafting a will or setting up a trust. A well-structured plan helps transfer wealth efficiently while reducing tax burdens and legal complications for heirs. Many people assume their estate plan is airtight, but small oversights can lead to unexpected costs, delays, and legal headaches for their loved ones.

One commonly misunderstood area is real estate ownership, specifically how placing a home in a revocable trust affects tax benefits like the personal residence exclusion. If not structured correctly, even a well-intended estate plan can create unintended tax consequences.

This article (Part 1 of 2) breaks down common misconceptions, overlooked tax liabilities, and strategic steps you can take to help keep your estate plan on track.

The Truth About Revocable Trusts & the Personal Residence Exclusion

A common myth in estate planning is that placing your primary residence in a revocable trust disqualifies you from the $250,000 (single) or $500,000 (married) capital gains exclusion under Section 121 of the tax code. This is not true.

How It Actually Works:

• If your primary residence is held in a revocable trust, the IRS treats the trust as an extension of the individual owner.
• As long as the owner meets the two-year ownership and use requirement, the trust is eligible for the exclusion.
• The sale or exchange of the residence by the trust will be treated as if the taxpayer sold it directly (Regs at 1.121-1(c)(3)).

This means you can still benefit from the capital gains exclusion while also enjoying the estate planning benefits of holding the home in a trust—namely, avoiding probate delays and administrative burdens for your heirs.

Tip: If you are considering selling your primary residence before you pass, a revocable trust does not disqualify you from tax benefits.

The Probate Problem: Why Revocable Trusts Matter

If your primary residence is not held in a trust, it will go through probate—a time-consuming legal process that can delay asset distribution and create unnecessary costs.

How Probate Impacts Your Heirs:

• Delays: Probate can take months (or even years) to settle.
• Costs: Court fees, attorney fees, and administrative expenses reduce the estate’s value.
• Public Record: Unlike trusts, which keep estate details private, probate proceedings are public.

A revocable trust allows you to:

• Avoid probate—assets transfer directly to heirs without court involvement.
• Specify inheritance terms—determine how the property is used, maintained, or sold.
• Protect vulnerable heirs—restrict access to funds/assets if needed.

Tip: If you want your heirs to avoid probate hassles, a revocable trust is a key estate planning tool.

Estate Planning Next Steps: What to Do Now

Given the complexity of modern estate planning, here are three key steps to keep your plan solid and effective:

Review Your Revocable Trust & Real Estate Holdings

• Confirm your primary residence is properly titled to avoid probate.
• Verify your trust language supports Section 121 capital gains exclusion eligibility.

Prepare for the Future of Multigenerational Wealth

• Review your estate plan at least every 3-5 years to adapt to tax law changes.

We Can Help

Your estate plan is only as strong as its weakest link. Don’t leave money on the table—or create unnecessary challenges for your heirs. Take proactive steps today to avoid costly mistakes tomorrow.

Whether you’re updating an existing estate plan or creating one for the first time, your strategy should align with current tax laws and help keep your assets protected for the future. Our team at Elliott Davis can help you identify potential risks, refine your estate plan, and support a smooth transfer of wealth to your heirs.

Connect with us today for an estate plan that works for your family.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.