There are many benefits to having a properly drafted estate plan, such as knowing that your family’s finances will not be frozen by the mandatory probate administration process and can make sure that your assets go to the people you want them to go to – instead of getting distributed according to state law for when a person dies without an estate plan. A proper estate plan, also, provides you with the flexibility to provide for your care and financial wellbeing, if you, unexpectedly, are unable to manage your finances (a car accident, for instance). Creating a proper estate plan is much more than simply making a plan for your stuff, once you have passed away.
With the changes to federal tax laws (Hey, stay with me. Don’t doze off so quickly), 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 your stuff during your lifetime and you still get to decide who your money and property goes 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.
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 as proof that that person 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 and most loans used to buy homes contain them.
So, 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, but it doesn’t. A federal regulation, called the Garn-St. Germain Depository Institutions Act, created an exemption to the “due on sale” clause, when homeowners transfer ownership from themselves into their revocable trust.
So, remember and tell other people 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.