Benefits And Risks Of Transferring Property Into A Trust
The use of trusts is a vital, important and very useful aspect of estate planning. Generally, trusts can be used to accomplish almost every kind of estate planning goal—they can avoid probate, and give you control over who gets what and when—including outing conditions on the distribution of your wealth and assets.
Real estate can be transferred into trusts, and there are times when this is a useful strategy. But many people see trusts as a “magic bullet,” and unscrupulous companies often promise people they can avoid foreclosure, evade creditors, avoid taxes, and other things, merely by transferring real property into a trust.
But be aware, because it is important to know when it’s a good idea to do this, and what the potential pitfalls may be.
Problems With Mortgages
The first potential problem when transferring property into a trust, is that property with an existing mortgage on it may have a due on sale clause. This makes 100% of the loan balance due immediately—the loan is effectively accelerated, and you have now lost the ability to make regular payments on it, because the mortgage company considers the transfer of the property into the trust, as a change of ownership, or a sale.
There are federal laws that prevent this from happening—but only when the borrower on the mortgage is a beneficiary of the trust. This often is not the case, as people transfer real property into trusts to benefit other people, such as family.
Refinancing can be difficult, as can pulling out equity if you were to need a home equity loan on the property. Some lenders may refuse to lend money at all. Others may want to review your trust document. Either way, you could encounter problems with what would otherwise be an easy process.
Any transfer of real property into a trust, must first be cleared with the title insurance company. The title insurance company may not approve of the transfer (that is, they may refuse to insure the property once it is transferred into the trust). You could lose the vital protections that the title insurance is providing to you.
What are the Benefits?
There are some benefits to transferring real property into a trust.
You may lower the estate taxes that are charged on your estate, through the transfer. Additionally, if something were to happen to you, and you were physically or mentally incompetent to manage the property, there would be no need for a guardian—the trustee is managing the property and would continue to do so.
Property in a trust also avoids probate, allowing whomever inherits to immediately sell, live in, rent, or do what they want with the property (subject to the condition of the trust which you establish).
Questions about real estate in your estate plan? Call the Torrance will and estate attorneys at Samuel Ford Law today.