Trusts are usually thought of as something that is created while the grantor is living and then enacted once their death. A living trust, however, is slightly different. It is made and goes into effect during the lifetime of the trust maker. It is essentially a private contract between grantor and trustee.
Can a Mortgaged Property be Placed in a Trust?
So how does this come into play with a mortgage? A mortgage that you get on your house while you are living, and continue to pay off? Putting a house which has a mortgage into a trust may not be on the top of your list of things to do. However, you can fund your living trust by transferring ownership of your property into your living trust. In doing this, the rules of your living trust will apply to your real property, even if it has a mortgage on it.
This means that, upon your death, the real property will not pass through probate. Instead, your successor trustee will determine the appropriate distribution of the real property, even if it has a mortgage on it. Certainly, the mortgage will need to be paid off during the trust administration, but at least the cost and burdens of probate will be eliminated.
What if you don’t own your home? Technically, even if your house is mortgaged, it is still owned by you, however, the mortgage is a loan that you pay back until the entirety of the loan is repaid. Many people believe that you can only put property into a trust that is completely paid for, however, this is not accurate. You are able to fund a trust with a mortgaged property, but in some cases, the bank will require prior notice. You should check with your lender. Additionally, in case you wish to refinance your currently mortgaged property, and if your property is already in your trust, your lender may first require that you take the property out of the trust. Once the refinance is complete, you can then fund the property back into the trust. This is accomplished with trust transfer deeds.
With that said, you can transfer property to trust that has an existing mortgage, and it is in fact required to avoid probate, plan for incapacity and effectuate your wishes. Speaking to an estate planning attorney is crucial to understand your situation, as well as the benefits of an estate plan, as it relates to a property that is mortgaged.