Trust vs. Will: How Transferring Property Affects Your Mortgage Options

The majority of property holders make a written, formal plan for what will happen to their property when they die. This virtuous piece of writing is referred to as a will and is one of the most important components of planning for the future. It serves to reduce uncertainty and allow their money to go to their loved ones as they would have wanted.

Property owners have several options in this regard, but living trust and will are the most common ones, and, both, as you would expect, have pros and cons. But they have varying effects on property transfers, especially where there is a mortgage.

Property transfer is a key decision that plays a significant role in mortgage decisions. You ought to understand how a trust differs from a will, as it can help you optimize your financial plan and make informed decisions. Your decisions should be based on your goals.

Discover how each approach affects your mortgage options and find the optimal strategy for your specific situation.

Will vs Trust: An Overview

A will is a document in writing that sets out how your property shall be divided when you pass away. It only comes into operation when the property owner has died and is usually used in simple estates or where there are children who are to be appointed guardians. A will must be probated, which may be something public and a lengthy process.

A trust is a contractual arrangement by which property is placed in the hands of a trustee to hold and disburse according to the instructions of the grantor. It may be operative during the lifetime of the grantor or upon death, providing flexibility and confidentiality. They are normally employed in more complicated estates or to evade probate.

Also Read: Inheriting a Property with a Mortgage: What Are Your Options?

Transferring Property with a Mortgage to a Trust

You are able to transfer a mortgaged property to a trust but with careful consideration of your mortgage’s due-on-sale clause. The clause allows the lender to call for the entire loan to be paid in case the property is sold or transferred.

But under the Garn-St. Germain Depository Institutions Ac of 1982, disposal of a property into a trust where the borrower is to remain a beneficiary doesn’t trigger this section.

Key Considerations for Property Transfer

Due-on-Sale Clause

• Effect: Transfers to trusts usually will not trigger the due-on-sale clause, but review your mortgage contract for compliance.
• Legal Advice: Your case could have special needs. Seek the advice of a legal professional to learn about your case and to make sure that the transfer does not unintentionally activate the clause.

Tax Implications

• Property Taxes: Placing property into a revocable living trust typically won’t affect property taxes. Some states have special titling requirements to maintain exemptions like the homestead exemption.
• Transfer Taxes: Property drafted transfers to a trust must not be subject to transfer taxes.

Probate and Privacy

• Probate Avoidance: Trusts enable assets to transfer to beneficiaries without probate, which is time-consuming and expensive. This is particularly useful for mortgaged homes, as it can ease the transfer of the house for inheritors.
• Privacy: Trusts maintain the division of assets confidential, unlike wills, which are open to the public during probate.

Will vs. Trust: What’s Best for You

• Simplicity and Expense: If you have fairly simple estates and little in assets, a will might suffice. But if you have many assets or want to manage them while you’re still alive, a trust would be preferable.
• Complex Estates: Trusts offer greater control over the distribution of the assets and can protect the assets from creditors, thus being the best for complex or large estates.

Conclusion

In deciding between a mortgage transfer of real estate and a will, trusts are superior to wills in numerous ways, including avoiding probate and maintaining confidentiality. The due-on-sale clause, however, must be approached with caution and local laws adapted to it. Finally, using both a will and a trust can give you complete estate planning, your wishes are upheld, and your heirs have fewer financial and legal problems.