How To Put House In Trust With Mortgage

How to Put a House in Trust with a Mortgage

Imagine you’ve just bought your dream home. You’re busy settling in, painting walls, and planning backyard barbecues. But then the thought strikes you: what happens to this beautiful place if something unexpected happens to you? That’s where putting your house in a trust comes into play. It’s a smart move not just for protecting your asset but also for ensuring your loved ones are taken care of. In this post, we’ll break down how to put a house in trust when there’s still a mortgage on it. You’ll learn the ins and outs of trust types, the legal steps involved, how it impacts your mortgage, and some real-world scenarios to help you visualize the process.

What is a Trust?

A trust is a legal arrangement where one party, the trustee, holds property for the benefit of another, the beneficiary. It’s a way to manage and protect your assets, ensuring they go to the right people when you pass away or if you become incapacitated. Trusts can also help avoid probate, which can be time-consuming and expensive.

Types of Trusts

Revocable Trust: You can change or dissolve it as long as you’re alive. It’s flexible but doesn’t offer asset protection.
Irrevocable Trust: Once established, you can’t change it without the beneficiaries’ consent. It provides better protection against creditors and can help with estate taxes.
Living Trust: This is created during your lifetime and allows for asset management while you’re alive and after your death.
Testamentary Trust: This is established through your will and takes effect after your death.

When it comes to putting a house in trust, most people opt for a revocable living trust because it offers flexibility and ease of management.

Why Put a House in Trust?

You might wonder why you’d want to put your house in a trust, especially with a mortgage. Here are some reasons:

Avoiding Probate: A house in trust can pass directly to your heirs without going through probate, which can take months or even years.
Asset Protection: If you face legal issues or creditors, a trust can help shield your home from being seized.
Control Over Distribution: You can specify how and when your heirs receive the property, which can be especially useful if you have young children.
Tax Benefits: In some cases, placing your home in a trust can provide tax advantages, particularly for estate taxes.

Steps to Put Your House in Trust

Putting your house in trust involves some legal steps, but it’s manageable. Here’s how to do it:

Consult an Attorney

First, speak with an attorney who specializes in estate planning. They can help you choose the right type of trust for your situation and guide you through the paperwork.

Create the Trust Document

Your attorney will draft a trust document outlining the terms of the trust, including who the trustee and beneficiaries are. This document will specify how your assets, including your house, will be managed.

Transfer the Title

Next, you’ll need to transfer the title of your home into the trust. This involves filling out a new deed, which must be recorded at your local county office.

Notify Your Mortgage Lender

If you have a mortgage, notify your lender about the trust. Some loans have “due on sale” clauses, which means the lender could require you to pay off the mortgage if you transfer the property. However, many lenders allow transfers to revocable living trusts.

How a Mortgage Affects a Trust

When you put a house in trust that has a mortgage, it’s essential to understand how it impacts your mortgage obligations.

Due-on-Sale Clauses

As mentioned, some mortgages have a due-on-sale clause. This means that when you transfer your property, the lender can demand full repayment. Always check your mortgage agreement.

Keeping Payments Current

Even though the house is in a trust, you’re still responsible for making mortgage payments. If you fail to do so, the lender can initiate foreclosure.

Refinancing the Mortgage

If you’re thinking about refinancing while your home is in a trust, you may need to remove the property from the trust temporarily. Lenders usually want to see the original title before approving a refinance.

Real-World Scenarios

Scenario 1: The Smith Family

Meet the Smith family. They bought a home worth $300,000 with a $250,000 mortgage. They set up a revocable living trust to ensure their kids inherit the house without going through probate. A year after the trust was established, Mrs. Smith passed away unexpectedly. Because the house was in the trust, Mr. Smith retained ownership without any legal hassles, and the kids would receive the property when they turned 21.

Scenario 2: John’s Unexpected Turn

John, a 45-year-old single father, bought a house for $350,000 with a $280,000 mortgage. He decided to put the house in a trust for his two young children. He consulted his lender and learned that the mortgage had a due-on-sale clause. After discussing options with his attorney, he set up a revocable trust but paid off a portion of the mortgage to keep the lender happy. This way, he could secure his children’s future while managing mortgage payments.

Common Misconceptions About Trusts

Trusts are Only for the Rich

Many believe that only wealthy individuals need trusts, but that’s not true. Trusts can benefit anyone with assets they want to protect or manage.

Trusts Eliminate Taxes

While trusts can help with tax efficiency, they don’t eliminate taxes altogether. It’s crucial to consult with a tax professional to understand any potential tax implications.

Trusts are Complicated

Setting up a trust isn’t as complicated as it seems. With the help of a qualified attorney, the process can be straightforward and manageable.

Frequently Asked Questions

Can I put my house in a trust without a mortgage?

Yes, you can place any property in a trust, even if there’s no mortgage. It’s a common practice for estate planning.

How does putting my house in a trust affect my property taxes?

Generally, transferring your home into a trust won’t affect your property taxes. However, it’s wise to check with your local tax authority for any specific regulations.

What if I want to sell my house after putting it in a trust?

You can sell a house in a trust. The trustee can handle the sale, and the proceeds will remain in the trust.

Can I change my trust after I’ve created it?

If you set up a revocable trust, you can amend it or dissolve it whenever you wish. Irrevocable trusts, however, are much harder to change.

Is it expensive to set up a trust?

The cost of setting up a trust varies based on the complexity and the attorney’s fees. Typically, it can range from $1,000 to $3,000, depending on your location and needs.

Next Steps

Now that you know how to put your house in trust with a mortgage, the next step is to consult an estate planning attorney. They can guide you through the process, help you choose the right type of trust, and ensure everything is done legally. Don’t wait until it’s too late. Protect your home and your loved ones today, and rest easy knowing you’ve made a smart decision for your family’s future. If you’re looking for more information on mortgages, check out our guides on abbreviations for mortgages or whether there are 50-year mortgages.