For people who own their own homes and have mortgages, you may be wondering how to protect your assets and the future of your family. Putting a mortgaged house in a trust can offer many benefits, but the process can be complicated. In this blog post, we will explore the different types of trusts, the advantages and disadvantages of each, and other important considerations to help you make an informed decision.
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You’re not the only one who worries that their mortgage will get in the way of their estate planning. One of the most common questions we get from homeowners is if they can put their house in a trust while still having a mortgage.
The short answer? Yes, you absolutely can!
But there’s a bit more to it than just signing some papers Let’s break down everything you need to know about putting your mortgaged home into a trust – in plain English, no complicated legal jargon
Quick Answer: Yes, You Can Put Your Mortgaged Home in a Trust
Before diving into the details, let me reassure you: having a mortgage doesn’t prevent you from transferring your home into a trust. The federal Garn-St. Germain Depository Institutions Act of 1982 specifically protects homeowners who want to do this for estate planning purposes.
Why Would You Want to Put Your House in a Trust?
Before we get into the how, let’s talk about the why. There are several compelling reasons to consider putting your house in a trust:
- Avoid probate: Skip the lengthy, public, and sometimes costly court process
- Maintain privacy: Keep your property transfers and estate matters private
- Control your property’s future: Set specific rules about how your home is managed after you’re gone
- Plan for incapacity: Ensure someone can manage your property if you become unable to
- Protect assets: Shield your home from certain creditors (in some types of trusts)
- Simplify management: Make it easier to handle properties, especially if you own homes in multiple states
- Provide for your family: Create clear instructions for who gets to live in or benefit from your home
How to Put a House with a Mortgage in a Trust: 11 Simple Steps
Now, let’s get to the practical part. Here’s how you can transfer your mortgaged home into a trust:
- Choose the right type of trust: Typically, a revocable living trust is most common for this purpose
- Contact your mortgage lender: Let them know your intentions to avoid surprises
- Select a trustee: This can be you, at least initially
- Work with an estate planning attorney: Get help drafting your trust document
- Prepare a new deed: This will transfer ownership from you to the trust
- Sign and notarize the deed: Make it official with proper witnesses
- Record the deed with your county recorder’s office
- Update your homeowner’s insurance: Make sure your policy reflects the new ownership
- Continue making mortgage payments: Your financial obligations don’t change
- Update tax records: Ensure property tax bills go to the right place
- Review and maintain: Periodically review your trust to make sure it still meets your needs
Understanding the Due-on-Sale Clause Exception
This part is a bit complicated, but it’s important to know Most mortgages contain something called a “due-on-sale clause. This means the lender can ask for full payment if you sell the house.
BUT (and this is the important part), federal law creates a specific exception for transfers into living trusts. Under the Garn-St. Germain Act, lenders cannot enforce the due-on-sale clause when you transfer your home to a living trust if:
- You remain a beneficiary of the trust
- Your right to live in the home doesn’t change
This is why it’s usually no problem to put your mortgaged home in a trust!
Types of Trusts for Your Mortgaged Home
Not all trusts are created equal. Here are the main types to consider:
Revocable Living Trust
- Control: You maintain complete control
- Changes: Can be modified or revoked anytime
- Protection: Avoids probate but doesn’t protect against creditors
- Best for: Most homeowners doing basic estate planning
Irrevocable Trust
- Control: You give up control once established
- Changes: Very difficult to modify
- Protection: May offer asset protection and tax benefits
- Best for: Those with substantial estates or specific asset protection needs
Qualified Personal Residence Trust (QPRT)
- Purpose: Specifically designed for homes
- Benefit: Potential estate tax savings
- Living arrangements: You can continue living in the home for a set period
- Best for: Higher-value homes where estate taxes may be a concern
Land Trust
- Privacy: Keeps your name off public records
- Purpose: Primarily for privacy, not estate planning
- Best for: Those seeking privacy in property ownership
Common Questions About Putting a Mortgaged House in Trust
Does My House Have to Be Paid Off to Put It in a Trust?
Nope! We already talked about how you can move a house with a mortgage into a trust. Just make sure to keep making those mortgage payments!.
Who Pays the Mortgage on a House in a Trust?
The mortgage is paid for by the trust, or more specifically, by the trustee using trust funds. That’s still you in most revocable trusts, so in practice, nothing changes. You’ll keep making payments like you always have.
Can You Refinance a House in a Trust?
Yes, but it might require extra steps. Some lenders may ask you to temporarily remove the house from the trust during refinancing, then transfer it back afterward. Others may be able to work with the trust directly. Either way, it’s doable!
Can I Put My House in a Trust Without a Lawyer?
Technically, yes. There are DIY options and online services available. However, trusts can be complex, and mistakes can have serious consequences. Working with an experienced estate planning attorney is often well worth the investment to ensure everything is done correctly.
Potential Risks and Considerations
While putting your house in a trust offers many benefits, there are some potential pitfalls to watch out for:
- Due-on-sale clause issues: If not handled properly, you could trigger this clause
- Loss of control with irrevocable trusts
- Tax implications: May affect property tax assessments or homestead exemptions in some areas
- Refinancing challenges: As mentioned, some extra steps may be needed
- Trust maintenance costs: Setting up and maintaining a trust isn’t free
- Insurance complications: Policies need to be updated correctly
Cost to Put Your House in a Trust
Let’s talk money. What can you expect to pay? Here’s a rough breakdown:
- Attorney fees: $1,000-$3,000 for trust creation (varies by location and complexity)
- Deed preparation and recording: $100-$250
- Trustee fees: If you hire a professional trustee, expect 0.5%-2% of trust assets annually
- Tax preparation: $200-$1,000 annually if separate trust tax returns are needed
- Ongoing maintenance: Varies, but could be several hundred dollars yearly
Final Thoughts: Is Putting Your Mortgaged Home in a Trust Right for You?
At the end of the day, whether putting your mortgaged home in a trust makes sense depends on your unique circumstances and goals. For many homeowners, the benefits of avoiding probate, maintaining privacy, and controlling your property’s future outweigh the costs and effort involved.
For others, especially those with simpler estates or different priorities, other estate planning tools might make more sense.
We always recommend talking with an experienced estate planning attorney who can provide guidance tailored to your specific situation. They can help you weigh the pros and cons and decide if a trust is the right solution for you and your family.
Remember, good estate planning isn’t just about what happens after you’re gone – it’s about protecting what matters most to you and giving yourself peace of mind today.
Have you put your house in a trust? Are you considering it? What questions do you still have? Let us know in the comments!
Disclaimer: This article provides general information and shouldn’t be considered legal advice. Every situation is unique, so please consult with a qualified attorney before making decisions about your estate planning.
Putting a House With a Mortgage in an Irrevocable Trust
Putting a house with a mortgage in an irrevocable trust is more complex than a revocable trust. In this case, you give the property to the trust and the trustee becomes the legal owner of the property. Because an irrevocable trust is more rigid, you generally cannot change the trust’s terms once you have transferred ownership.
One significant advantage of an irrevocable trust is that it can provide more protection against creditors or lawsuits. Because you have given up control of the property, it is no longer considered part of your estate, which means it is protected from legal claims against you.
Another advantage of an irrevocable trust is that it can help you minimize estate taxes. When you die, the property is not taxed as part of your estate because it is no longer yours.
However, there are potential downsides to putting a house with a mortgage in an irrevocable trust. Because you have given up control of the property, you can no longer change the trust’s terms or sell the property without the trustee’s permission. If you give your property to an irrevocable trust, your mortgage may have a “due on sale” clause that lets the lender demand full payment of the mortgage balance.
Understanding Mortgages and Trusts
When it comes to estate planning, understanding mortgages and trusts is essential. A mortgage is a loan that you take out to purchase a property, and it is secured by the property itself. On the other hand, a trust is a legal arrangement that allows you to transfer ownership of your assets to a trustee, who holds them for the benefit of your beneficiaries. Unlike a mortgage, a trust does not have to be recorded with the County’s Recorder of Deeds.
There are different types of trusts, but the most common ones used in estate planning are revocable and irrevocable trusts. A revocable trust allows you to retain control over your assets, including your property, and change the trust’s terms at any time. An irrevocable trust, on the other hand, is more rigid, and once you transfer ownership of your assets to the trust, you generally cannot change the terms.