Can I Refinance a Property that’s Held in a Living Trust?

Many people from real estate investors to individual owners choose to hold their property title in a trust rather than their personal name. There are significant advantages to this from privacy to lowering tax liabilities. But, there could be some pushback if you try to refinance the property in the future. We break it down below. 

What is a Trust?

A trust is a legal agreement that transfers the control of assets from an individual to a third party or trustee on behalf of the trust’s beneficiaries. It is a common mechanism for estate planning and generally comes in two forms: revocable and irrevocable.

Revocable Vs. Irrevocable Trust

A revocable or living trust is the most common form of trust due to its flexibility. A revocable trust can be changed at any time, such as adding or removing beneficiaries. Often the individuals who set up their living trust also act as the trustee, therefore maintaining maximum control of the assets, while taking advantage of the benefits afforded by the new legal structure. 

In contrast, irrevocable trusts are set in stone the minute they are signed. The main advantage of irrevocable trusts is avoiding estate taxes, but in order to do this the grantor must effectively give up control of the assets to the new trustee. Unlike a living trust, the grantor and trustee are almost never the same person in an irrevocable trust, so you give up control to a true “third party.”

What are the Advantages of Holding Title in a Revocable Trust?

Avoiding Probate

One of the most important advantages of holding title in a trust is the avoidance of probate court, which specializes in splitting up assets and paying off creditors after a person’s death. Instead of getting tied up in court, a trust allows you to easily hand off assets to your successor trustee, who will then divide assets up to you beneficiaries.

Avoiding Conservatorship

If you are ever in an accident or fall ill, you could be deemed unfit to make decisions regarding your property. In the absence of a trust, your property could end up in conservatorship, in which a judge appoints a guardian to take control of your financial assets. 

Instead of leaving this huge decision up to a judge, with a living trust, you can appoint a successor trustee who would be in charge of your assets in the event that you’re unable. 

Privacy

With many revocable trusts, your personal name is still listed on the deed in the county public records. For example, a common way for an owner to be listed is "Susan Smith, Trustee of the Susan Smith Living Trust, dated May 25, 2015." 

In an effort to maintain more anonymity, some property owners choose to set up land trusts. Land trusts are only available for real property, are a form of revocable trust, and allow you to hold property anonymously. Unlike family trusts, the trustee is usually a third party rather than the owner of the property. But, the trustee, often a bank, is largely bound to do what the actual owner of the land (the beneficiary), tells it to do.   

Can I Refinance a Property Held in a Living or Revocable Trust?

Similar to trying to refinance as an LLC, you could get some pushback from your lender when you try to refinance your property held in a trust. A residential lender might even ask you to transfer the title of your property out of the trust and back into your personal name before they’ll refinance. 

The primary reason for this is that lenders are afraid that in the event that you’re unable to pay back the loan, they won’t be able to foreclose on the property with it titled in a trust. But, as long as you “the trustee” are granted the power to encumber the property (take out a mortgage) within the trust, the lender would be in their full right to foreclose.

So, the answer on whether you can or can’t refinance a property held in a trust is ultimately up to the lender. But, armed with this information, you can have a better chance of negotiating refinance terms. Here at Spruce, we work on refinance transactions almost daily in which trusts are listed as the owner, so it’s definitely a common practice. 

If your lender refuses to refinance unless you deed the property into your personal name, it’s a good idea to enlist an attorney and/or your preferred title company for advice. Because, transferring title can have unintended consequences, such as incurring costly transfer taxes or even invalidating your current mortgage or owner’s title insurance policy. 

Key Takeaways on Trusts

  • Grantor: person who sets up the trust. Other terms include: settlor, trustor, donor.
  • Trustee: the person in charge of managing the trust’s assets
  • Beneficiary: the person who will receive the assets held in the trust
  • Revocable trusts can be changed at any time and the main benefits are avoiding probate and conservatorship. 
  • Irrevocable trusts are set in stone the minute you sign them and the owner is not the trustee, meaning you give up control to a true third party. The biggest advantage is avoiding estate taxes. 
  • Land trusts are a form of revocable trust only used for real property and the main benefit is privacy. 
  • You might get pushback from a lender when you try to refinance a property held by a trust. But, if you (the trustee) are granted the power to encumber the property (take out a mortgage) within the trust, you should be able to negotiate the refinance.

For more title industry insights, continue exploring the Spruce Blog or check out our FAQs.

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