When discussing estate planning with California homeowners, a frequently asked question is whether they can transfer their family home or other property into a trust. Many also wonder if this is possible while the property still has a mortgage. Fortunately, it’s perfectly legal and quite common to do so!
In many situations, it is possible to transfer a mortgaged property into a revocable living trust without triggering major financial consequences. However, there are several key points to consider up front: how your mortgage due-on-sale clause works, how a living trust deed is prepared and whether lenders could object.
In some situations, homeowners may explore refinancing either before or after transferring ownership into a trust to help streamline the process.
A living trust allows you to maintain control of your assets during your lifetime. It can also simplify estate administration and help your estate avoid probate after you pass away.
When transferring a home into a trust, you typically sign a new deed that transfers ownership from you as an individual to you as the trustee of your trust. This is usually referred to as a living trust deed or trust transfer deed.
While the mortgage loan remains in your name, the property title is held by the trust.
The biggest concern is the mortgage “due-on-sale” clause found in most loan agreements. This clause allows lenders to demand full repayment if ownership changes.
The good news is that federal law often protects homeowners who transfer property into certain types of trusts. However, it is still important to review your loan terms and consult with professionals to be sure.
Does the bank allow it?
Many homeowners are surprised to learn that the law offers protection when transferring mortgaged property into certain trusts.
The Garn-St Germain Act generally prevents lenders from enforcing a “due-on-sale” clause (calling the loan due) when you transfer your primary residence into a revocable living trust, as long as you remain a beneficiary and continue occupying the property.
Even though legal protection for borrowers does exist, some situations still require caution.
A number of lenders prefer to be notified before a title transfer, while others may require documentation. Obtaining formal approval in writing from a financial institution (lender consent) can help avoid confusion, even when it may not be legally required.
Clear communication with your lender can help prevent administrative issues, especially if your servicer is unfamiliar with trust transfers.
In some cases, homeowners explore refinancing either before or after placing a property into a trust. Refinancing while the property is still in your personal name may simplify loan approval, since some lenders have stricter rules about lending to trusts. After refinancing you can typically transfer the property into your trust using a properly prepared deed.
Common mistakes to avoid
Transferring property into a trust is usually straightforward, but becoming aware of several common mistakes can help you navigate the process without creating unnecessary risk.
One major oversight is failing to complete insurance updates. Homeowners insurance policies often need to reflect the trust as an additional insured or named insured. Without this update, coverage disputes could arise if you file a claim.
Another potential pitfall involves escrow issues. If your lender pays property taxes and insurance through escrow, you must ensure they properly track the ownership change. Otherwise, payment or documentation errors may occur.
In addition, California has had some unique considerations concerning property taxes since the passage of Propositions 13 and 19. Transferring your house to your trust typically does not trigger a tax reassessment. However, transferring the home after your death to a non-spouse such as children or other family members, can be more complicated.
Title errors are another common problem. If the deed is prepared incorrectly, it could invalidate the transfer or create legal complications later. Working with an experienced estate planning professional means you can rest easy knowing that the trust name, trustee designation and legal property description are all accurate.
Finally, don’t wait until problems arise before seeking legal help! Placing your mortgaged home in your living trust is one of the smartest moves you can make. But make note, estate planning and real estate transfers are complex areas of law. If you have questions about the process or need guidance to meet your legacy goals, contact us today to discuss your options and confidently craft a customized plan.