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 in trust with a mortgage may not be on the top of your list. However, you can fund your living trust by transferring ownership of your property to your living trust. In doing this, you become the Grantor of the living trust and are able to reap the benefits.

What does this mean? Upon your death, the property continues to be held by the trust, but the trustee can distribute the assets of the trust without going through the probate process. Your mortgage is in trust, and not having to go through probate is a huge benefit with proper estate planning.

What if you don’t own your home? Mortgages are essentially loans that you pay back until the entirety of your house is purchased. many people think of putting property in a trust that is completely paid for. That, however, is not necessarily true. Is there a way to benefit from a living trust and your mortgage being paired?

Yes. Bringing these two together, putting a mortgage in trust, can be beneficial and strategic estate planning. You can transfer property to trust with mortgage into a revocable living trust. There are pros and cons to this strategy move, and it is important to note both. Speaking to an estate panning attorney is crucial to figuring out whether this is the right move for you. They can assess your situation and determine what is the right fit for your property moving forward.

Important Fine Print

So, you have decided you may want to transfer your mortgage into your living trust for estate planning purposes. There are a few things to make sure to keep in mind:

  1. You still have to pay your mortgage. Transferring this into a living trust does not negate that obligation. Your house is still subject to foreclosure if payments are not made. You are also unable to avoid any other debt on the house by putting it into the trust. All financial obligations are still valid and intact.
  2. You cannot automatically take out a new loan or refinance the loan on a property that is in the trust. This is important in an age where interest rates can change, and property owners may want to refinance to secure a better rate. The housing market continues to ebb and flow, and as a property owner, you want to take advantage of the best interest rates possible. Many banks will not refinance your home if it is in a living trust. You may have to transfer the property out of the trust and back to the grantor before you can refinance. The good news is, once the refinancing is over, ownership can easily be transferred back into the trust. While the multiple transfers, cost, and time may add up, it is important to know that it is possible.
  3. But it is still possible. The Federal National Mortgage Association has recently made changes in their guidelines. As a result, there are occasions in which the title transferring does not have to occur in order to refinance. For this to occur, there is criteria that must be met:
    • You must create the trust during your lifetime.
    • The trust you create must be revocable.
    • You must remain a primary beneficiary of your revocable living trust throughout the entirety of your lifetime.
    • You must hold the position of trustee in your revocable living trust (though you may also name additional trustees).
    • The property in question, or at least a portion of the property in question, must constitute your primary residence or a second home.
    • The trust documents must provide the trustees with the authority to take out a mortgage on the property in the trust.
    • You must sign the promissory note for the mortgage or refinancing and must also sign the deed of trust and any riders of the promissory note or deed of trust which must indicate that the trust is liable for the debt and that the promissory note and deed of trust are given by the trust to secure the mortgage or refinancing in question.
  1. Transferring your property to a revocable living trust is not the same as selling or gifting the property or selling it to another individual. There is a “Due on Sale” clause that is in every mortgage agreement. This clause is not enacted with the transfer of a mortgage into a revocable living trust. As a result, your mortgage will not be due in full immediately upon transfer to the trust. If you were selling or gifting your property, it would be, making the two actions different in that way.

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.

Summary

A mortgage in trust may be something that you have never prior considered, but could be a good move. Anyone who owns property can but their mortgage in a revocable living trust so as to not deal with the probate process after death and utilize other estate planning benefits. You should discuss your situation with an estate planning attorney, who can determine if a revocable living trust and placing your mortgaged property within it is the ideal fit. White you may have to refinance your property later on down the line, you can still put your mortgage in trust in spite of that.

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"You will not be disappointed" John M.R. - Harrison, NY
"You will not be disappointed"
John M.R. - Harrison, NY