You have your new trust, or maybe you have had it for years. You were told that your trust avoids probate, but only if you fund your trust. But what is funding?
Funding is the titling of your assets consistent with the instructions you have left in your trust. Funding includes the proper naming of your trust or individuals as owner or beneficiary of your assets and as additional insureds on your liability insurance policies.
The funding of your trusts is critical in making your trust work and having the results that you anticipate. Failure to properly fund your trusts will cause unintended consequences, which could include probate, distributions not in accordance with your instructions and other than you planned, additional taxes and additional administrative and legal expenses.
Your home is one of your most valuable, if not the most valuable, of your assets. Since it is real estate, it is also one of the most complicated types of assets to fund into your trust. This is especially true if you have a mortgage. Your real estate with a mortgage requires at least four steps or “funding transactions” to be properly placed or funded into your trust.
The first step is to request a waiver of the due-on-transfer clause in your mortgage from your mortgage lender. Most all mortgages nowadays have a provision that states if you sell or transfer your real estate, the entire balance of your loan can be called due. Although, there is some legal authority that says a lender cannot call a loan if the transfer is made to a revocable trust of the borrower, I would rather not risk it and request the waiver. If some electronic real estate recording monitoring service detects the transfer and notifies your mortgage lender, it could trigger the acceleration of the whole loan due immediately.
When you have a home equity loan, there is also a mortgage to secure payment of the home equity line. Because of this, you also have to request the waiver of the due-on-transfer clause from your home equity loan lender. Some lenders may require you to pay a fee to obtain the waiver.
Once you have obtained the waiver of the due-on-transfer clause from your lender, you then can transfer your property to your trust, usually by a deed. You may have been told by a financial advisor, banker, insurance agent, realtor, register of deeds or friend that all you need to do to put your home in your trust is to do a quit claim deed using the legal description on the county web site.
DO NOT follow this advice. I regularly fix funding errors resulting from trustmakers following this free estate planning advice from people who are not estate planning professionals.
DO NOT use a quit claim deed. It can void your title insurance. Use a warranty deed instead.
DO NOT use the legal description from the county web site. It is only a tax description and not necessarily a full legal description, resulting in only part of your property going in your trust.
DO NOT draft your deed yourself. A deed may look simple because it is only one page. But if you do not understand real estate law, you can mess it up real bad, real easily. Then you have to pay your attorney to fix it.
DO NOT hold your deed unrecorded. Your unrecorded, undelivered deed is void upon your death and is legally ineffective to transfer title of your real estate. You should record your deed immediately at the register of deeds office of the county in which your property is located.
After your deed is recorded, you have to file a property transfer affidavit with the municipal assessing unit responsible for your property. I recommend that a copy of the recorded deed accompany the affidavit. There are two main reasons you file the affidavit.
The first reason to file the affidavit is because it is required by law to be filed whenever there has been a sale or transfer of the property. The second reason is to prevent the “uncapping” of the taxable value of your property to the current state equalized value (“SEV”). This isn’t a big deal if your taxable value is close to your SEV. However, if there is a big difference between the values because you may have owned the property since the mid-nineties when the law changed, failure to file the affidavit can result in substantial tax increases.
The last step in funding real estate into your trust is adding your trust (and your spouse’s trust) as additional insureds on your homeowners insurance policy. When you put your home into your trust and you then have a catastrophic loss such as a fire, if you haven’t named the trust(s) as additional insured, your homeowners insurance may not cover you.
This is because your home and contents are now owned by your trust, but only you may be individually named as insured on your homeowners policy. If your trust is not a specifically named insured, because your trust is the owner of your home, your home may not be insured. This could be an easy way for an insurance company to try to get out of paying a claim.
If you have a trust, make sure that ALL of your assets are properly funded into your trust. If properly funded, your trust based estate plan will keep you in control while you are alive and well, provide for you and your loved ones during your mental disability and after you are gone, give what you have to whom you want when you want the way you want.
The wisest choice is to just bite the bullet and pay to have the funding of your trust done right the first time. If done once correctly the first time and your trust is properly maintained, your wishes will be followed at a lower overall cost to you and your loved ones.
By Matthew M. Wallace, CPA, JD
Published edited June 17, 2012 in The Times Herald newspaper, Port Huron, Michigan as: Funding real estate into a trust not as simple as a quitclaim deed