Transferring a House with a Mortgage into a Trust: Legal Considerations and Methods

Transferring a house with an existing mortgage to a trust is a common topic in estate planning. This article discusses the legal and financial considerations and provides methods on how to do so effectively.

Can You Transfer the House into a Trust?

It is possible to include a house with an existing mortgage in a trust, but it comes with certain legal and financial implications. Here's a detailed look at the process and the considerations involved.

Understanding Legal Restrictions

The primary restriction when transferring a house with a mortgage is the presence of a due on sale clause in the mortgage agreement. This clause stipulates that the mortgage must be paid off if the property is sold. However, there are ways around this in certain circumstances.

Legal Implications and Solutions

Due on Sale Clause: This clause prevents the transfer of property covered by a mortgage without first paying off the debt. However, if you remain the mortgagor and the beneficiary of the trust, the mortgage still applies, as the mortgagor is the original owner under the doctrine of substance over form.

Fraudulent Transfer: Transferring a house to a trust while still owing the mortgage could be considered a fraudulent transfer by creditors. This could lead to legal complications and potential penalties.

Steps to Transfer the House:

Here is a step-by-step guide to transferring a house with a mortgage into a trust:

Create a Trust: Establish a trust with a named Trustor, Trustee, and Beneficiary. A living trust is a common choice. Open Escrow: Open an escrow with a title company to record the house onto the title as part of the trust. Residence and Beneficiary: Ensure the residence is the primary residence and that the beneficiary remains the same as the original owner, which helps avoid triggering the due on sale clause. Mortgage Company Permission: Involve the mortgage company and ensure their permission for the transfer. They may need to be informed and give consent. Re-appraisal and Re-assessment: Expect the house to be re-appraised and re-assessed for property tax purposes.

Conclusion

The process of transferring a house with a mortgage into a trust is complex and should be carefully considered. Consulting with a trust attorney can provide guidance and ensure compliance with legal requirements.

Final Thoughts

Remember, while it is possible to transfer a house with a mortgage into a trust, it is crucial to be aware of the potential legal and financial implications. Seeking professional advice is highly recommended to navigate this process successfully.