Mortgaged property may be transferred into a living trust as a measure to avoid probate, provide greater control over how this asset is distributed to beneficiaries and to provide additional asset protection from creditors. Unlike property which the grantor owns free and clear of encumbrances, mortgaged property requires additional considerations prior to placing it in a trust.
Key Takeaway
Transferring a property with a mortgage into trust can be done, but it is a big decision that requires careful consideration. Make sure you understand all the potential risks, benefits, and legal implications before making any decisions. Additionally, it’s always advisable to speak with an experienced estate planning attorney who can help guide you through the process to help you make the best informed decision.
What is a Trust?
A trust is an estate planning tool that allows you to hold legal title to real property for the benefit of another person or entity. In the case of putting a mortgaged house in trust, it involves transferring the title of your home into someone else's name and then using that person as a trustee to managethe house according to your wishes. This can provide numerous benefits, however, if you're considering placing your mortgage-encumbered home in trust, there are also some risks and important considerations that should be taken into account.
Why Move a Property Into Trust?
There are numerous reasons why you may want to move a property into trust. It can provide protection from creditors, simplify the process of passing your home onto heirs, and avoid probate costs. For instance, placing your home in trust can protect it from being seized by creditors in the event that you default on any other debts you may have incurred. Additionally, transferring ownership of the property into someone else’s name means that you don’t have to worry about going through probate court after your death, simplifying the process of passing on your home to family members or other beneficiaries. Finally, establishing a trust for your mortgaged house can make it easier to refinance or modify the loan without having to go through a lengthy legal process.
Will Doing So Have Tax Consequences?
Although it depends on the state in which you live, generally speaking, transferring ownership of a mortgaged house into trust will not have any tax implications. However, if the property is held by a revocable living trust and the grantor (i.e., the person transferring their property into trust) is also the beneficiary, then they may still be liable to pay property taxes. Additionally, if the property is held by an irrevocable trust and the grantor is not a beneficiary, then the trust itself may be responsible for any applicable property taxes.
It’s important to note that you should always consult with a qualified estate planning attorney before making any decisions about transferring your home into trust. An experienced attorney can help you understand the legal implications of doing so, as well as any applicable tax obligations.
What Are the Steps to Transferring a Property Into Trust?
If you’ve decided that transferring your home into trust is the right decision for you, then here are some of the steps you should take:
Speak to an estate planning attorney and get their advice2. Choose a trustee who is reliable and trustworthy
Draft and sign the trust document
Transfer title of the property into the name of the trustee
Ensure that all legal documents are properly filed
Review your mortgage agreement to make sure that there are no penalties or fees associated with transferring ownership of the property
Once all the necessary documents have been signed and filed, you’re ready to transfer your house into trust!
What Are the Key Considerations When Setting Up a Trust?
If you're considering setting up a trust for your mortgaged home, there are some key considerations that you should keep in mind. First and foremost, you’ll want to ensure that the trustee you choose is reliable and trustworthy since they will be responsible for managing the property according to your wishes. Additionally, it’s important to make sure that all of the necessary paperwork is completed correctly
It’s important to ensure that your chosen trustee is reliable and trustworthy as well as make sure all of the necessary paperwork is completed correctly. Additionally, you may need to negotiate with your lender in order to avoid triggering the “due on sale” clause in your loan.
What is the “Due on Sale” Clause?
Moving a house with a mortgage into a trust may trigger the “due on sale” clause in your loan, which allows lenders to call the entire balance of the loan due if you transfer ownership of the property. However, this doesn’t necessarily mean that you won’t be able to move your home into trust without triggering this clause. In many cases, you can negotiate with your lender to allow the transfer of ownership without having to pay off the loan in its entirety.
What Are My Options If I Can’t Negotiate With My Lender?
If you are unable to negotiate with your lender, there are still other options available. For instance, you may be able to set up a “revocable living trust” for your home, which allows you to retain control of the property while it is in trust. Additionally, you can look into the possibility of refinancing or modifying your loan in order to avoid triggering the “due on sale” clause.
How Do I Refinance My Loan?
To do this, you’ll need to contact your current lender and apply for a new loan with better terms. In some cases, it may also be possible to refinance the loan through another lender. However, keep in mind that refinancing your mortgage-encumbered house may result in additional closing costs and other fees. Additionally, you’ll want to ensure that the new loan will be beneficial for you in the long run before signing any paperwork.
The Bottom Line
Transferring a mortgaged property into a trust can seem like a complex process, but with the right guidance and understanding, it can provide significant benefits. It is a strategic approach to estate planning, offering protection against creditors and simplifying property transfer to heirs. However, it's crucial to properly navigate tax implications, manage potential impacts of the "due on sale" clause, and understand the possible need for loan refinancing. Always consult with a qualified estate planning attorney to ensure the best outcome for your unique situation. The decision to transfer your home into a trust should be made with careful consideration and expert advice.