There are many benefits to having a properly drafted estate plan. These include knowing your family’s finances will not be frozen by the mandatory probate administration process. You can also make sure that your assets go to the people you want them to go to. If a person dies without an estate plan, their assets will be distributed according to state law. A proper estate plan provides you with the flexibility to provide for your care and financial wellbeing. This can be helpful if you, unexpectedly, are unable to manage your finances (a car accident, for instance). Creating a proper estate plan is more than simply making a plan for your property once you have passed away.
With the changes to federal tax laws, the revocable trust has become an important part of many estate plans. With a properly drafted revocable trust in your estate plan, you still get to use your money and property during your lifetime. Additionally, you still get to decide who those things go to after you die. Most importantly, you get to stay in control of your money and property and you can make changes to the trust during your life. It also greatly reduces the cost and delay of the probate administration process.
“Due On Sale” Clause Exemption
One misunderstanding that keeps people from creating a revocable trust as part of their estate plans, is the belief that property, such as a home, cannot be placed into a revocable trust if there is a mortgage on it. That, simply, is not true. When the previous owner of your home sold it to you, you received a real estate deed. This is proof that the seller no longer owned it. At that time, if the previous owner had not fully paid off the loan used to buy the home, the bank or mortgage company had a legal right to be fully repaid. That right to be repaid when the home is sold is called a “due on sale” clause. Most loans used to buy homes contain them.
You might think that putting your home into your revocable trust, when you still have a mortgage loan, and signing a real estate deed to show that your revocable trust – not you – now owns your home, might trigger a “due on sale” clause in your loan agreement. However, it does not. A federal regulation, called the Garn-St. Germain Depository Institutions Act, created an exemption to the “due on sale” clause. This exemption applies when homeowners transfer ownership from themselves into their revocable trust.
Remember that you can take advantage of the many benefits of having a revocable trust and a complete estate plan even if you have a mortgage on your home. Don’t let this common misunderstanding keep you from creating your estate plan.