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Transferring a Property With a Mortgage Into a Trust

Nathan R. Olansen

Most of the population who own homes are not yet “free and clear.” If you own one or multiple homes, when doing your estate planning, you might be wondering if it is a good idea or even whether you are able to put your real estate properties into a trust. Creating trusts can become complex and, if not structured correctly, can lead to estate tax complications, ownership confusion, distribution complexities, or other problems.

The experienced estate planning attorneys at Midgett Preti Olansen are ready to help you understand those decisions, along with the advantages and drawbacks of placing a home and other mortgaged real estate into a trust. To learn more about how we can help, contact our law firm today at 757-687-8888.

Can Property With a Mortgage Be Placed Into a Trust?

Elderly couple looking at a house

Yes, in most cases, a property owner who still carries a mortgage on a home is permitted under Virginia law to place the house into a revocable or irrevocable trust. However, it is important to know what your contractual due-on-sale clause states and understand how this might affect your ability to put the property into a trust.

Due-on-Sale Clause

Under the rules associated with a Due-on-Sale Clause, lenders are permitted to demand full repayment of a mortgage if the borrower sells the home or collateral used to secure the original loan. In other words, if you sell your home or assets, the bank can invoke this clause and legally enforce immediate repayment. Structured correctly, if you create a trust and place your primary home into it for you and/or your spouse, you can usually avoid triggering this clause, especially if:

  • The property is residential and not commercially rented.
  • The property contains fewer than five dwelling units.
  • The property is placed into a revocable living trust.
  • The transfer into the trust does not change who has the right to reside in the home.

Generally, residential homes that are primary residences are able to avoid triggering the due-on-sale clause. However, other homes are far less likely to be immune. Either way, your best bet is to speak to a knowledgeable Virginia trust attorney for legal advice.

Garn-St. Germain Act

In October 1982, President Ronald Reagan signed into federal law the Garn-St. Germain Depository Institutions Act, which was designed to ease pressures on financial institutions caused by the high inflation of the 1970s. However, this law also made several significant changes that affected borrowers, lenders, and property owners who carry mortgages.

As a part of the act, specific exemptions were created which declared that lenders are not permitted to enforce the due-on-sale clause in certain situations, even under circumstances where ownership of the property mortgaged has been transferred through a trust. On the other hand, in certain situations, the Garn-St. Germain Act may prohibit the owners from transferring a mortgaged property without penalty. This is an excellent example of a situation in which you would want to seek professional assistance and obtain guidance on which exemptions from enforcing the due-on-sale clause of your loan might apply.

If you have a mortgage on your home but want to establish asset protection and create a trust to avoid the probate process for your loved ones, speak with a lawyer who is well-versed in federal laws, state laws, and Virginia estate planning and trust laws. Doing so can make the difference between making a smart financial decision and a costly one. Before creating a trust that includes your home when you’re still carrying a mortgage, seek professional legal guidance.

Will Moving a House With a Mortgage Into Trust Have Tax Consequences?

No, moving a mortgaged property into a trust should not trigger any transfer tax if drafted correctly. Due to specific state laws, before you transfer the title of the home to a new owner, weigh the matter carefully because you do not want it to backfire and create a dicey tax situation.

That said, it is a good idea for homeowners to speak with an experienced and knowledgeable Virginia estate attorney. Since each state might have different laws, you want to ensure your trust aligns with the rules set forth by the Commonwealth.

Can You Put Your House in a Trust if You Have a Reverse Mortgage?

Did you know that even if you have a reverse mortgage on your home, you can still place your property in a trust? To do this, you would have to obtain the lender’s approval. The benefit is you would receive the financial advantages of the property being in a living trust even with the Home Equity Conversion Mortgage (HECM). Even if you already have your home in a trust, you can also apply to receive a HECM if you meet other criteria.

What Are the Advantages of Putting Your House in a Trust?

Many homeowners find several advantages in putting their house into trust, even if they currently have a mortgage on the property. There are two scenarios where it makes things easier for your loved ones.

First, a trust allows your loved ones to inherit the home without an arduous and expensive probate process. A trust empowers the successor trustee and beneficiaries to simply take ownership of the home after your passing with simplicity and ease. Second, if you were to become incapacitated and be unable to make your own financial decisions or unable to express your wishes, a living trust would designate someone (a trustee) who can step in to manage your assets during your incapacity and distribute your assets upon your death. Additional advantages, aside from avoiding a costly probate situation, include:

  • Selecting the heirs you want to inherit and not letting a court decide in the event your will is contested
  • Maintaining greater control over how assets, including a home, are distributed to beneficiaries
  • You can personally designate your successor trustee to manage your living trust.
  • If you do not already have a transfer on death deed associated with your home, placing it into a trust will allow you to skip probate.
  • Your business, personal, and financial matters are kept private since trusts are not public, unlike probate.
  • You can designate a power of attorney to protect your family from undergoing a conservatorship legal process in a Virginia court.
  • May be able to save money on estate taxes

Like anything else, there are disadvantages to a living trust. The upside is most, if not all, of these drawbacks can be mitigated. Speaking with a skilled estate attorney who knows how to correctly draft a trust on a mortgaged property with the advantages in mind can mitigate many downside risks and eliminate complexities.

Should You Seek Legal Guidance When Placing a Property into a Trust?

Elderly couple signing paperwork with a lawyer

Due to the tedious process of placing a piece of property with a mortgage into a trust, it is wise to seek legal counsel in order for the process to be smooth and legal. As the grantor, your lawyer can advise you about signing a warranty or quitclaim deed prior to placing your mortgaged home into a trust.

You also might want to consider different options when choosing the type of trust you want to create. For instance, a revocable trust may be your best option to safely transfer the deed to your home to a beneficiary without a requirement first to pay off the mortgage. Your attorney will also discuss other circumstances that may affect your trust, including refinancing, names placed on the trust, or other important factors relating to establishing your trust.

Every situation is different, and your estate planning attorney will help you select the best options for your financial and personal circumstances. Once you make your decisions, your estate planning attorney will help you draft your trust documents, giving you peace of mind that you have created an estate plan you approve of while you are still alive and of sound mind. Having everything in place beforehand helps ensure your loved ones are not left dealing with the expense and stress of settling your financial affairs.

Own Multiple Homes and Want to Place Them Into a Trust?

It is never easy to think about death and make plans for this eventuality. Estate planning, while difficult to talk about, can help you decide how you want to distribute your bank accounts, property, insurance policies, and other valuable assets.

Property owners who have more than one home will want to seek competent legal advice to help determine the best course of action when it comes to establishing a last will and testament, power of attorney, revocable trusts, and irrevocable trusts. The thoughtful and diligent attorneys at the Midgett Preti Olansen law firm take pride in providing our clients with complete, competent, and accurate service.

When you work with our Virginia Beach law firm, you can rest assured that our attorneys are on your side and working hard to help you protect you and your heirs. Our law firm proudly serves northeast North Carolina and the entire Hampton Roads area, including Virginia Beach, Norfolk, Chesapeake, Suffolk, Hampton, Newport News, and the Eastern Shore.

To learn more about how Midgett Preti Olansen can assist you in your estate planning or to obtain general information, contact us to set up an appointment at 757-687-8888 or fill out our contact form, and a member of our legal team will get right back to you.

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Written By Nathan R. Olansen


Nathan R. Olansen is a Shareholder in the law firm of Midgett Preti Olansen. His practice is focused on estate planning, probate and trust administration, IRS and state and local tax audit and tax collection cases, as well as individual and entity tax planning, asset protection and a variety of related transactional matters.

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