The answer is yes, you may always place your home, even while there is a mortgage on it, in a revocable living trust.
Remember that a revocable living trust is an estate planning tool. Upon your death, the property you place in the trust continues to be held by the trust, but the trustee can distribute the assets of the trust without going through the probate process.
If your home has a mortgage on it, it can be placed in the trust and your surviving family members do not have to go through the probate process. This is a huge benefit to your surviving family members.
Federal law prevents a mortgage company from denying you the right to use a revocable trust as an estate planning tool.
What if you already have a trust and a mortgaged home is in it. Can a home be re-financed? The short answer is yes, you can refinance your home held by your revocable living trust.
However, the lender might require a few additional steps to complete the refinancing.
Along with the application and financial documents you may have to submit, your lender might want the home transferred out of the trust to the name of the owner(s) as part of the refinance transaction.
This requirement is based on the mistaken belief that the lender cannot foreclose on the real property, if the loan is not repaid, if the trustee(s) of a revocable living trust signed the refinancing paperwork instead of the owner(s). Because most revocable living trusts grant the trustee(s) the power to encumber trust assets, including the home, you may want to point out to the lender that this step is unnecessary, or try to find a lender who is willing to accept the trustee(s) signing the refinancing paperwork.
If this is not possible, an attorney can prepare a deed transferring the home out of the trust for the purpose of refinancing, and transfer the deed back into your trust once the refinancing is complete. The trustee(s) will sign the first deed taking the home out of the trust, and the owner(s) will sign the second deed placing the home back into the revocable living trust.
Alternatively, the lender may require an Attorney’s Opinion letter declaring the trust is an active, valid, legal trust entity under state law.
Under either alternative, it is likely you will need to contact an estate planning attorney to get you through the re-finance process if your house is in your trust.
Tip: If the lender insists on transferring the home out of the revocable living trust, it is extremely important to ensure your home is transferred back into the trust after the refinancing is completed. If you neglect to transfer the home back into the trust, you will lose the benefits of having your home owned by a trust. These benefits include ease of management during life and avoiding probate at the owner(s)’ death.
If your home is not owned by your trust at your death, the home would be transferred back into the trust under the provisions of your pour over will. (A pour over will is a “safety net” that if an asset is left out of the trust, it automatically transfers to the previously established trust upon your death.)
However, the will must still be probated. One of the sole purposes of creating a trust is to avoid the probate process.
Brian T. Treacy is an elder law and estate planning attorney, and owner of Elder Law & Estate Planning Center in Bluffton. hiltonheadelderlaw.com