In our last post, we looked at some of the rules surrounding real estate that should be taken into consideration in determining whether to fund real property into a revocable living trust. We’ll now look at how we move title of real property into trust.
Funding a trust with real property is as simple as executing a deed. Generally speaking, a General Warranty Deed should be executed to affect the transfer. A General Warranty Deed contains promises from the grantor the person transferring the property) that the title to the land is good and that the grantor will defend any claims against the title. This is important as we’ll see shortly.
Another way to transfer the real estate is via a Quitclaim Deed. This also transfers the real estate, but it does so without any warranty that the title is good and defensible. This is not a preferable method of transferring title, as it may leave the property exposed to claims against title which may otherwise be covered by title insurance.[As noted above, when executing a general warranty deed, the grantor warrants that title is good. If subsequent to moving the property into trust a claim against the title arose, the Trustee could look to the Grantor to defend the title. The Grantor could in turn look to her title insurance company. If the property were quitclaimed, the Trustee couldn’t look to the Grantor, because the Grantor made no warranties that the title was good.]
A common question that arises in funding real estate is what happens to my mortgage? Mortgages typically contain a due on sales clause, which allows the bank to call the loan when the property is transferred. Fortunately, a federal law known as the Garn-St Germain Depository Institutions Act of 1982 protects homeowners from banks exercising their due on sales clause under certain conditions, one of those being a transfer to a revocable living trust. You can read about the law here: https://www.fdic.gov/regulations/laws/rules/8000-8300.html.
How, when and in what manner to incorporate real estate into an estate plan requires an analysis of many variables. Once a decision is made to move real property into a living trust, the mechanics are straight forward and are independent of whether to there is a mortgage in place.