You have your trust. You felt pretty good having it done. But then you were told that your trust will not work the way you want it and avoid probate unless you fund it. But what is this funding and why is it important?
Your trust is a vehicle, a financial vehicle. It’s like that new car sitting in your driveway. It sure looks great, but it isn’t going anywhere unless you put fuel in it. The fuel for your trust is your assets. To properly fuel your trust, it must be funded. Trust funding is completely and correctly designating your trust and individuals as owners, beneficiaries and insured parties of your assets. Basically, it’s putting your stuff in your trust.
The proper funding of your trust is critical in making your estate plan work and having the results you plan. Failure to properly fund your trusts may cause unintended results. These may include probate during your lifetime or after death; distributions not in accordance with your goals and objectives; additional taxes; and additional administrative, legal and other 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 notify your mortgage lender of the transfer to your trust. 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. However, pursuant to state and federal statutes, the lender cannot enforce that provision if the transfer is of the borrower’s primary residence to the borrower’s revocable trust. By notifying the lender of the transfer, you can prevent the inadvertent acceleration of the whole loan due immediately
If the real estate is not your primary residence, you should request a waiver of the due-on-transfer clause in your mortgage from your mortgage lender. Do not transfer the real estate to your revocable trust until you receive the waiver from your mortgage lender. Some lenders may require you to pay a fee to obtain the waiver.
When you have a home equity loan, there is also a mortgage to secure payment of the home equity line of credit. Because of this, you also have to notify your home equity loan lender of the transfer to your trust if it is your primary residence or request the waiver of the due-on-transfer clause from your home equity loan lender for other real estate.
For the second step, once you have notified your lender of the transfer or 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 prepare a quit claim deed using the legal description on the county web site. You may have even been given a form to fill out.
- 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. In most instances, it costs more to fix a bad deed than it would have been to do it right in the first place.
- 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, and could result 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 really bad, really 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.
For the third step of funding your real estate into your trust, 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 taxable value and the SEV 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 fourth and final 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. After you put your home into your trust and if you then have a catastrophic loss such as a fire, if you haven’t named the trust(s) as additional insured on your homeowners insurance, it may not cover you.
This is because your home and contents are now owned by your trust. You may be the only named insured on your homeowners policy without having your trust as a specifically named insured. Because your trust is now the owner of your home, your home may not be insured. This could be an easy way for an insurance company to deny a loss 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 July 19, 2015 in The Times Herald newspaper, Port Huron, Michigan as: Funding real estate into your trust not as simple as a quit claim deed