Navigating Real Estate Transfers to Trusts: What You Need to Know

Creating a revocable living trust is a valuable tool for protecting and distributing your assets. It allows your assets to pass to your beneficiaries without going through probate, simplifying the process for them. After establishing a revocable trust, it’s crucial to fund it by transferring assets from your individual ownership to the trust. This involves changing the titles of your assets from your name to the name of the trust. Real estate is often one of the largest assets, and funding it into your trust requires preparing the appropriate legal documents and filing them with the county where the property is located.

When funding real estate into a revocable trust, three common questions often arise:

1.  What if I have a mortgage on the property?

If you have a mortgage on the property you are transferring into your revocable trust, you may need to obtain approval from your lender prior to the transfer. Mortgage documents often contain a due-on-sale or due-on-transfer clause, also known as an acceleration clause. Federal and state laws generally prohibit lenders from calling a loan due in some, but not all, cases. It’s good practice to obtain the lender’s consent before the transfer. Since transferring real estate into a trust is common, many standard lending documents will explain what is required.

Traditionally, 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 the 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.

However, the Garn-St. Germain Depository Institutions Act of 1982 prohibits lenders from exercising their due-on-sale clauses in several situations[1]. The statutory exceptions generally apply to due-on-sale clauses in mortgages on primary residences with less than five units. Under the Act, transferring a home into a revocable living trust typically does not trigger acceleration, provided the borrower remains the beneficiary and continues to reside in the home.

Thus, while the due-on-sale clause is not usually triggered, it’s advisable to notify your lender of the transfer. Although the Act prohibits the bank from accelerating the mortgage, the language in your mortgage typically outlines your obligations when you transfer an interest in the property. Some lenders may have specific requirements or procedures for such transfers.

2.  Will my homeowner’s insurance be affected?

When you transfer real property into a revocable trust, the trust becomes the legal owner of the property, even if you maintain control as the trustee. However, placing your property in a trust may create a disconnect for insurance coverage if you do not take the necessary precautions.

Insurance companies may try to deny claims if there’s a mismatch between the property’s legal owner and the named insured on the policy. For example, if you transfer your home into your revocable trust but don’t update your homeowner’s insurance policy, the insurance company might deny your claim due to the ownership mismatch.

There isn’t a universal approach to listing a trust on a homeowner’s policy, as treatment and coverage extensions vary by carrier. Therefore, it’s important to contact your insurance company to inform them of the transfer.

Often, the insurance company will list the trust as an “additional insured,” typically without changing the premium. When a trust is listed as a named insured along with the occupants, everyone is covered for liability and personal property, while the trusts insurable interests are also protected. Sometimes, this change is made through a separate endorsement adding the trust as an additional insured, with coverage limited to its interest in the property and premises liability.

Adding your trust as an additional insured ensures continuous insurance coverage without gaps, protecting both you and the trust’s interests.

3.  What about title insurance?

Title insurance protects you from financial loss if there is a defect in the title to your property. A title defect can be any issue that raises a question about who truly owns the property, ranging from simple typographical errors in public records to more complex issues like liens or claims against the property. Many title insurance policies extend coverage to transfers into a revocable trust.

However, if your title insurance does not extend to a revocable trust, you should contact the title insurance company to discuss your options. These options may include purchasing a new policy or adding an endorsement to the original policy to include an “additional insured.”

Depending on the policy form issued at the time of purchase, if the named insured on the policy is no longer the owner of the real estate, coverage may have terminated because the property is no longer owned by the named insured. In that case, the current owner no longer benefits from the title insurance policy. Therefore, it is important to review the terms and conditions of the policy and remedy any defects.

¹ https://www.law.cornell.edu/uscode/text/12/1701j-3

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