Putting a house with an existing mortgage into a living trust is a common question that comes up during estate planning. While it may seem complicated, the short answer is yes, you can put a mortgaged house into a living trust in most cases.
This article will examine the key aspects of moving a house with a mortgage into a trust document and the potential advantages and disadvantages of doing so.
Why Put a House in a Trust?
There are several potential benefits to putting your primary residence into a revocable living trust:
It avoids probate for the house, which is the court-supervised process for transferring assets after death. This can save time and legal costs for your heirs.
- It protects you if you become incapacitated since you’ve named a trustee to manage the house for your benefit.
- Since you’ve named beneficiaries in the trust, it gives you control over who inherits the house.
- It keeps the house out of your taxable estate, potentially saving estate taxes.
- It offers some protection from creditors by shielding the house from probate.
For these reasons, there can still be substantial benefits to putting your house in a trust, even if you can’t formally transfer a property with an existing mortgage until it is paid off.
Will Moving a House With a Mortgage Into Trust Have Tax Consequences?
One common concern is whether putting your house with a mortgage into a trust will trigger any tax liabilities. In most cases, transferring your property into a revocable living trust should not cause any income, gift, or estate tax consequences.
This is because you are still the property owner in the eyes of the IRS for tax purposes when transferring into a revocable trust. No change in ownership takes place from a tax standpoint. There would only be potential tax implications if you transfer property into an irrevocable trust, at which point you relinquish control, and it is considered a gift.
As long as you transfer the real property back into your personal name or your revocable trust before obtaining any new financing, there should be no adverse tax effects to worry about.
Can You Put Your House in a Trust if You Have a Reverse Mortgage?
If you currently have a reverse mortgage on your home, the waters get a little murkier when putting it into a trust. With a reverse mortgage, you slowly draw equity out of the home while still residing there.
When you originally obtained the reverse mortgage, you had to be on the note and deed of trust personally. This means that you cannot legally transfer that mortgaged property into a trust without the lender’s consent while you are still living there and holding the loan.
Upon your passing, the home with a reverse mortgage would go into your estate. At that point, the property could potentially be transferred into the previously created living or revocable trust that dictates where your assets should go. But you typically cannot put your primary home into a trust if you currently have an active reverse mortgage on the property.
How to Transfer a Mortgaged House into a Trust
While federal law prohibits lenders from calling due a mortgage just because you transfer into a trust, there are still steps you must take:
- Draft a revocable living trust with a trust lawyer, naming yourself as the trustee and beneficiary.
- Sign a new deed transferring ownership from yourself to the trust. This recorded deed makes the trust the legal owner.
- Notify your lender of the transfer to avoid any issues. Get their consent in writing if possible.
- Transfer the title insurance policy to the trust so coverage remains intact.
- File a Property Transfer Affidavit to notify the county of the change in ownership.
- Update your home insurance policy to show the trust as the insured owner.
- Record the trust agreement with the county as proof of ownership by the trust.
Will the Lender Call Due to the Mortgage?
The main concern is whether transferring into a trust will trigger the due-on-sale clause found in most mortgages. This gives lenders the right to demand full repayment if you transfer ownership without their approval. However, there are exceptions:
- Federal law allows transfer to an inter vivos trust where you remain a beneficiary. This applies to most revocable living trusts.
- Lenders rarely enforce due-on-sale clauses for transfers into living trusts as long as payments continue.
- Some states prohibit lenders from accelerating loans due to transfer into a trust.
While lenders maintain the legal right to call due the mortgage, in practice, this rarely occurs for transfers into a living trust. Notify the lender and document their consent to avoid problems.
Effect on Refinancing the Mortgage
One drawback of putting a house into a trust is that it can complicate refinancing since the lender will require the trust to be the borrower. This involves extra steps:
- The trustee must apply for the mortgage loan on behalf of the trust.
- You’ll likely need to transfer the house temporarily back to yourself personally before refinancing.
- After refinancing, you must return the house to the trust and re-file documents.
While certainly inconvenient, it’s possible to refinance a mortgage with proper planning, even with the house held in trust. Discuss the process with your lender and attorney.
Options for Transferring into a Trust
If your lender objects to transferring a mortgaged property into your revocable living trust, you have alternatives:
- Transfer the title to yourself and your spouse as joint tenants. This often does not trigger acceleration.
- Transfer only a fractional interest in the house to the trust. This leaves you and the trust as partial owners.
- Have your estate planning attorney request a waiver from the lender before transferring.
- Wait until the mortgage is paid off to transfer into the trust.
- Transfer into an irrevocable trust where you are not a beneficiary. This avoids due-on-sale issues but with less control.
Should You Seek Legal Guidance When Placing a Property into a Trust?
Determining if putting your mortgaged home into a living trust is right can be complex. Every situation is unique. Evaluating issues include tax implications, mortgage terms, property rights, and more.
Working with an experienced estate planning or trust attorney is highly advisable when considering putting a house with a mortgage into a trust. Some key steps in the process will likely include:
- Review your current mortgage terms and associated documents for any restrictions.
- Drafting the revocable living trust document and all accompanying materials.
- Formally re-titling the real property into the name of the trust once the mortgage is paid off.
- Changing the insured name on your homeowner’s insurance to the trust.
- Work with your mortgage lender to refinance after the property is transferred into the trust.
Proper legal help can guide you through the many technical details and requirements of transferring a mortgaged property into a revocable living trust. This expertise can prove invaluable in ensuring the process is done correctly.
Frequently Asked Questions:
Q: What is a revocable trust?
A: A revocable trust, also known as a living or revocable trust, is a type of trust that can be changed, modified or revoked during the lifetime of the trust creator.
Q: What type of trust can make a mortgage or trust loan?
A: A revocable living trust or an irrevocable trust can potentially get a mortgage or trust loan.
Q: What happens to a mortgage when you put your house in a trust?
A: When you transfer the property with a mortgage into a revocable living trust, the mortgage agreement remains intact. The trust becomes the owner of the property, and the mortgage payments continue to be made from the trust’s funds.
Q: Can the trust beneficiary assume the mortgage if the property is transferred into a trust?
A: In some cases, the beneficiary of the trust may be able to assume the mortgage if the terms of the agreement allow it. However, consulting with your mortgage lender to understand the specific requirements is important.
Q: Can I transfer a property to a trust and pay off the mortgage?
A: Yes, it is possible to transfer a property to a trust and pay off the mortgage using the trust’s funds. This can be done if the trust allows for such actions.
Q: What are the benefits of putting your home in a trust with a mortgage?
A: Putting your home in a trust with a mortgage can help avoid probate, streamline the transfer of assets, and provide a clear plan for passing on your property to your chosen beneficiaries.
Summary of Putting a Mortgaged House in Trust
While putting a mortgaged property into a living trust requires careful planning, the benefits often outweigh the extra steps needed:
- It avoids probate, which saves time and legal costs.
- It allows control over inheritance and protects from incapacity.
- With proper documentation, lenders rarely accelerate loans due to the transfer.
- Refinancing is possible by temporarily transferring back out of the trust.
- Consult with an attorney and lender to ensure a smooth transfer process.
With some professional preparation and advice, most homeowners can successfully transfer a mortgaged property into a living trust as part of their estate plan.
