While the process may seem like a heavy undertaking, transferring a mortgaged home into a trust is a necessary component of any estate planning, asset protection, or probate avoidance plan.
A trust is a legal arrangement that transfers the ownership of your property to an appointed entity or person (the trustee) for the benefit of a beneficiary. Guilty minds use trusts to direct what happens to their assets after they die.
Why Consider Transferring Your Mortgaged Home to a Trust?
Avoiding Probate
Probate is costly and can take years to complete. When your home is in a trust, ownership passes automatically to the beneficiaries on your death without going through probate.
Asset Protection
The laws surrounding trusts can serve to protect your property from creditors. In an irrevocable trust, for example, the property is no longer yours, so it’s safe from creditors.
Tax Implications
Certain types of trusts can also help reduce taxes, but whether and how this works depends on a given local tax system and the type of trust. Consulting a tax professional or attorney for specifics is recommended.
04 Dec Common Misconceptions About Mortgages and Trusts
- Myth: Placing a house in a trust cancels the mortgage.
- Truth: That mortgage still exists. The trust will be responsible for the property but you are still responsible for payments.
- Myth: You have to pay off your mortgage before transferring your house into a trust.
- Truth: You need lender approval, but you don’t need to pay off the mortgage before you can transfer the home into a trust.
- Also read (deed of house)
Things to Keep In Mind Before Transferring Ownership
Lender Approval
Generally, lenders have the due-on-sale concern; that means they can demand full repayment if the property is transferred. But most lenders permit transfers to revocable trusts without invoking that clause. Here’s what you need to do:
Learn About the Due-on-Sale Clause:
Read through your mortgage agreement to determine if this provision applies.
Communicate with Your Lender:
Inform your lender about your plan to put the property into a trust. So make sure you have written approval to move forward.
Types of Trusts
The two main types of trusts you will want to consider, and what each is for, include:
Revocable Trust
- Lets you retain complete control of the property while you are alive.
- Can be changed or cancelled at any moment.
- Does not offer much asset protection, but avoids probate.
Irrevocable Trust
- Gives ownership permanently to the trust with more assets protection.
- Not revocable or modifiable without beneficiary consent.
- Commonly utilized for Medicaid planning or tax efficiency.
Which Trust Is Best?
- If you’d like more flexibility and control over your assets in your lifetime, choose a revocable trust.
- Choose an irrevocable trust for more complex estate planning needs like protecting assets from creditors.
Legal and Tax Implications
- Probate Avoidance: A trust allows your property to skip probate court and the associated time and lawyer fees.
- Taxes: There may be property tax, inheritance tax or capital gains tax implications, depending on the type of trust. [Note that what follows is not tax advice. Always consult a tax professional.]
How to Put a House with a Mortgage in a Trust: Step by Step Process
Here’s a step-by-step breakdown of the process:
1. Review Your Mortgage Agreement
- Look for due-on-sale clauses or transfer of ownership restrictions.
- Check to see if your lender permits revocable trusts to be transferred penalty-free.
Consult Your Lender
- Reach out to your lender to request approval for that transfer.
- Provide documentation of the trust and your intention to continue making mortgage payments.
Choose the Right Trust
Choose between a revocable and an irrevocable trust according to your goals.
Draft the Trust Document
Draft a trust agreement with an attorney. This document specifies:
- Beneficiaries
- Trustees
- Managing the property — possibly with the terms
Transfer the Deed
Transfer the property to the trust with a quitclaim deed or grant deed. This is a legal change of the title of the property.
Record the Deed
To finalize the transfer, file the new deed with your local county recorder’s office.
Update Insurance and Title
Inform your homeowner’s insurance company and update the title insurance to show the trust as the new owner.
Potential Issues and their Solutions
Lender Resistance
- Solution: Emphasize to your lender that the trust is revocable and doesn’t impact mortgage payments.
- Another: You may want to refinance the mortgage if the lender requires it.
Tax and Legal Pitfalls
- Capital Gains Taxes: Make sure the transfer doesn’t trigger unnecessary taxes.
- Beneficiary Disputes: Clearly define financial terms in the trust document so there are no resounding conflicts.
Ongoing Maintenance
The trust is also responsible for payment and guarantee; the mortgage, tax, and insurance should be paid as usual to comply with lender regulations.
Frequently Asked Questions About Putting a House in Trust With a Mortgage
Q: Will my mortgage payments be affected by a trust?
A: Nope, you will keep paying as you always have.
Q: Can you refinance a property that is in a trust?
A: Yes, though you might have to take the property out of the trust temporarily.
Q: Do all trusts avoid probate?
A: Only if the entire ownership of the property has passed to the trust.
Q: Is it possible to sell a trust property?
A: Yes, although the trustee has to handle the sale and comply with the trust’s terms.
Conclusion
Transferring a home with a mortgage into a trust is a powerful option for estate planning, asset protection, and probate avoidance. Although the process takes careful planning and lender cooperation, it can pay off handsomely in the years to come.
If you’re thinking of placing a house in a trust, work with an attorney or financial adviser to make sure the trust is set up correctly and satisfies legal requirements. Doing this will not only secure your home for generations to come, but peace of mind as well!
Also read (frontier housing corporation)
