Estimates from online real estate search firm Zillow indicate that nearly one-third of homeowners own their home free and clear. For the unlucky two-thirds who have either one or multiple mortgages on their home and are considering an estate plan that would include a mortgaged home, questions can arise regarding whether mortgaged property can be transferred into a living trust.
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.
First, the process of transferring mortgaged property to a living trust follows the same process as the transfer of property between individuals. A grantor may place a mortgaged home in a living trust by signing a warranty or quitclaim deed from the current owners to the trust. In this case, the deed would name the living trust as grantee and would be and recorded just like any other property transfer. Despite the relative ease of legally transferring mortgaged property to a living trust, there are important considerations one should consider.
Status of the Mortgage Debt Upon Transfer to the Trust
When mortgaged property is transferred into a living trust, the mortgage holder’s lien will remain on the property unless the trust requires the mortgage to be paid off before distribution to the beneficiary. New Jersey law requires that when property subject to a mortgage passes to a beneficiary through a trust, such property passes to the beneficiary subject to the debt.
Due on Sale Clauses
Another problem that may arise is that some mortgage agreements contain a “due on sale clause” which allows the mortgage holder to demand full payment on the loan upon a transfer of interest. Applications of due on sale clauses arise when an owner sells his or her home, for obvious reasons when the property is transferred to a buyer the lender will demand payment from the seller. However, when the property is transferred into a living trust homeowners whose mortgage contains a due on sale clause receive protection from The Garn St. Germain Act, a federal law which creates several exceptions in which a lender may not enforce the “due on sale” clause. The Garn St. Germain Act Garn exempts homeowners from a due on sale clause when the property is transferred into a living trust in which the borrower is and remains a beneficiary. The Garn St. Germain Act applies to residential one-to-four family homes and does not contain a provision as to whether the property must be owner-occupied.
Homeowners who may want to refinance the loan on the property may encounter some difficulty due to resistance from lenders. However, the law is silent on whether a property placed in a living trust may be refinanced. In cases where a lender agrees to refinance, they may require you to provide a copy of the trust document. Under a worst case scenario, the trustee can transfer the property back to the grantor until the refinance is complete, after which the property could be transferred back into the trust.
Property owners who want to sell mortgaged property placed in a trust will not be prevented from doing so. However, the property owner may be required to transfer the property back to her name, after which the property could be sold.
Transferring mortgaged property to a trust can create difficulties with some title insurance policies. Before transferring property to a trust, an owner can reduce the risk of title insurance related issues by contacting their insurance carrier to notify them of the change. Often the insurance carrier will allow the policy to remain in place. Otherwise, a new policy with the updated information will need to be initiated.
Given the complex laws, which apply to transferring mortgaged property into a trust, it is important to consult a counsel experienced in estate planning to consider the legal and financial implications of this estate planning strategy.
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