Zillow, an online real estate search engine, estimates that approximately one-third of homeowners are free and clear of debt. If you belong to the unfortunate two-thirds who have one or more mortgages on your house and are thinking about including a mortgaged home in your estate plan, you may be wondering if you can transfer mortgaged property into a living trust.
In order to avoid probate, give beneficiaries more control over how this asset is distributed, and offer additional asset protection from creditors, mortgaged property may be moved into a living trust. Mortgaged property needs extra consideration before being placed in a trust, unlike property that the grantor owns free and clear of encumbrances.
First, the procedure for moving mortgaged property into a living trust is the same as the procedure for moving property between people. By signing a quitclaim deed or warranty from the current owners to the trust, a grantor can transfer a mortgaged house into a living trust. In this instance, the living trust would be named as the grantee in the deed, which would be recorded similarly to any other transfer of property. Although legally transferring mortgaged property to a living trust is relatively simple, there are some important things to keep in mind.
Understanding the Process and Considerations
Many individuals consider creating a trust as part of their estate planning strategy. Trusts offer numerous benefits, including asset management during your lifetime and the distribution of your assets to your beneficiaries after your passing. However, one common question arises: can you put your house in a trust if you still have a mortgage?
The answer is yes, you can place your house in a trust even with a mortgage. However, there are certain considerations and steps involved in this process.
Understanding Trusts and Mortgages
Before delving into the specifics, let’s clarify the nature of trusts and mortgages.
Trusts: A trust is a legal entity that holds assets on behalf of beneficiaries. You, as the grantor, transfer ownership of your assets to the trust, and a trustee manages those assets according to the terms outlined in the trust document. Trusts offer numerous benefits, including asset protection, tax advantages, and control over how your assets are distributed after your death.
Mortgages: A mortgage is a loan secured by a property. The borrower receives funds from the lender to purchase the property, and the property serves as collateral for the loan. The borrower is obligated to make regular payments to the lender, and if they default, the lender has the right to foreclose on the property.
Transferring a Mortgaged Property to a Trust
While you can transfer your house to a trust even with a mortgage, it’s crucial to understand the implications and follow the proper steps.
1. Consult with Your Lender:
Before transferring your property to a trust, it’s essential to consult with your mortgage lender. Lenders have specific requirements and procedures for such transfers. They may require additional documentation, consent forms, or even a reassessment of your loan terms.
2. Understand the Trust’s Role:
When you transfer your house to a trust, the trust becomes the legal owner of the property. However, you can still reside in the house and enjoy the benefits of homeownership. The trust will hold the title, and the trustee will manage the property according to the terms of the trust document.
3. Consider Refinancing:
If you’re planning to refinance your mortgage after transferring the property to a trust, you’ll need to discuss this with your lender. Some lenders may require the property to be transferred back to your name before refinancing, while others may allow the refinance to proceed with the trust as the owner.
4. Be Aware of Potential Tax Implications:
There may be tax implications associated with transferring your house to a trust. It’s advisable to consult with a tax advisor to understand the potential tax consequences and ensure you’re making informed decisions.
Benefits of Putting Your House in a Trust
Even with a mortgage, there are several benefits to putting your house in a trust:
- Asset Protection: A trust can provide some asset protection against creditors or lawsuits.
- Estate Planning: Trusts can help you avoid probate and ensure your wishes are followed regarding the distribution of your assets.
- Tax Advantages: Depending on the type of trust you create, there may be tax advantages associated with holding your house in a trust.
- Control Over Distribution: You can specify in the trust document how you want your house to be distributed after your passing.
Putting your house in a trust with a mortgage is possible, but it’s essential to understand the process, implications, and potential benefits. By consulting with your lender, a legal professional, and a tax advisor, you can make informed decisions and ensure that transferring your house to a trust aligns with your estate planning goals.
In conclusion, even if your home is mortgaged, it is acceptable to place it in a revocable trust in order to avoid probate.
It is possible to include mortgaged real estate in a revocable living trust. That is, in fact, quite common. After all, most people don’t own their homes outright when they create living trusts. In order to avoid probate, give beneficiaries more control over how this asset is distributed, and offer additional asset protection from creditors, mortgaged property may be moved into a living trust. However, putting real estate into a trust does not release you from the need to make mortgage payments; if you default, the lender has the right to reclaim the property. Additionally, the lender might ask you to remove the house from the trust in order to obtain a new loan and then return it if you decide to refinance at a later date.
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The legal and financial ramifications of this estate planning strategy should be carefully considered by seeking the advice of an estate planning specialist due to the intricate laws governing the transfer of mortgaged property into trusts.
The 1980s saw the enactment of federal legislation stating that the transfer of real estate into a revocable living trust does not activate a mortgage’s “due on sale” clause, which would have allowed the lender to demand repayment of the loan in full as though you had sold the property to a new owner.
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A “due on sale clause” in some mortgage agreements, which enables the mortgage holder to demand full repayment of the loan upon a transfer of interest, is another potential issue. Due on sale clauses are used when an owner sells their house because, understandably, the lender will demand payment from the seller when the property is transferred to the buyer. But homeowners whose mortgage has a due on sale clause are protected by The Garn St. when the property is moved into a living trust. Germain Act, a federal statute that establishes a number of exclusions from the lender’s ability to enforce the “due on sale” clause The Garn St. When property is moved into a living trust with the borrower as a beneficiary, homeowners are released from Germain Act Garn’s due on sale clause. The Garn St. The Germain Act does not specify whether a residential property must be owner-occupied and is applicable to one to four family homes.
Lender resistance may present some challenges for homeowners who wish to refinance the loan on their property. But the law says nothing about whether or not real estate held in a living trust can be refinanced. If a lender permits you to refinance, they might ask for a copy of the trust agreement. In the worst situation, the property may be returned to the grantor by the trustee until the refinance is finished, at which point it may be returned to the trust.
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There will be no restrictions on the ability of property owners to sell mortgaged property held in a trust. That being said, the property owner might have to retitle the property in her name before it can be sold.
When mortgaged property is transferred to a trust, certain title insurance policies may encounter issues. An owner can lower the chance of title insurance-related problems before transferring property to a trust by notifying their insurance company of the change. The insurance company will frequently permit the policy to continue in effect. If not, a new policy incorporating the most recent data will have to be started.
The legal and financial ramifications of this estate planning strategy should be carefully considered by seeking the advice of an estate planning specialist due to the intricate laws governing the transfer of mortgaged property into trusts.
How to Put Mortgaged Property Into a Trust
FAQ
Can a mortgage be transferred to a trust?
Can you put a house with a mortgage in an irrevocable trust?
How does a trust affect a mortgage?
Can I put my home in a trust if a mortgage exists?
One of the questions that I get with some regularity concerns whether an individual or couple can put your home in a trust if a mortgage exists on the property. The answer is yes, but there are a few considerations to pay attention to before making a transfer. Today, every mortgage contains a “due on sale clause”.
Does a house have to be paid off to put in a trust?
No, your house does not have to be paid off to put it in a trust. You can transfer a house with a mortgage into a trust. However, it’s important to inform your mortgage lender about the transfer. Some mortgages have clauses that could be affected.
Should I put my home in a trust?
Let’s look specifically at some of the pros and cons of choosing this option. The main benefit of putting your home into a trust is avoiding probate. Placing your home in a trust also keeps some of the details of your estate private. The probate process is a matter of public record, but the passing of a trust from a grantor to a beneficiary is not.
Can you transfer a house with a mortgage into a trust?
You can transfer a house with a mortgage into a trust. However, it’s important to inform your mortgage lender about the transfer. Some mortgages have clauses that could be affected. Additionally, be sure to continue making mortgage payments after the transfer to keep the property in good standing within the trust.