Taxes, Mortgage, and Title Insurance: Side Effects of a Home Held in Trust

When clients transfer the deed to their home or other real estate into a revocable living trust, or into an irrevocable trust, they often question how it will affect the property’s title insurance, mortgage, and taxes. Because I receive so many questions on this topic, I thought I’d do a post addressing each area.

Title Insurance. If you transfer your home out of your personal name into a trust and your title insurance policy was issued before 2006, it is likely that the transfer voids your title insurance. This is obviously an undesired result, as if there were ever a problem with your title years down the road you wouldn’t be covered. The solution to this problem is to contact your title insurance company before making the transfer to inquire about an endorsement to the policy to cover the trust. Title insurance companies generally issue such endorsements without a problem; usually they only require a copy of the trust, a copy of the deed, and a fee for the endorsement. The fee varies between title insurers. I’ve had some title insurance companies charge as little as $75 and others charge as much as $400 depending on the amount of the policy. Whatever the fee, it is generally small compared to the cost of a new title policy and is worth the investment for piece of mind.

If your title insurance was issued after 2006, the situation is even better as the transfer into trust is likely covered without any endorsement necessary. To find out whether your title insurance covers such a transfer without endorsement, you’ll need to read the policy itself. You’ll need to read the actual policy (sometimes called the “jacket”), not the title work. If a transfer to trust is covered without endorsement, the “Conditions” section of the policy will generally state such in Section 1(d)(i)(D)(4). If you find this confusing, we can review the policy for you to make sure you’re covered.

Mortgage. Your mortgage almost certainly states that if title to your property is transferred out of your name, the entire mortgage balance becomes due and payable immediately. This is called a “Due on Sale” clause. At first blush, this would seem to prevent any transfers into trust unless a home was owned free and clear. In this scenario, however, a federal statute known as the Garn-St Germain Act comes to the rescue. Under the Garn-St Germain Act, a mortgage company is prohibited from enforcing any Due on Sale clause upon a transfer in trust if the borrower is a beneficiary of the trust and is permitted under the trust document to occupy the property. This generally permits transfers into revocable living trusts without any problem. Most irrevocable trusts, on the other hand, may pose a problem unless written approval is first obtained from the mortgage company. Note that Garn-St Germain only applies to residential properties of less than five units.

Taxes. So long as the trust to which your property is transferred is a “grantor trust”, your ability to deduct your property taxes each year on your tax return is unaffected. Likewise, your ability to exclude the gain on sale of your principal residence under IRC 121 is also unaffected. All revocable living trusts are “grantor trusts”, as are many irrevocable trusts.

New Jersey has three major property tax benefits for principal residences: the Homestead Rebate, the Property Tax Reimbursement (“Senior Freeze”), and the Veterans Deduction. All three benefits are ¬†likewise unaffected if the principal residence is held in trust for the person who resides there and is claiming the benefit.

I hope this rundown was beneficial, and if you have any questions, don’t hesitate to contact me.

TAX ADVICE DISCLAIMER: Any tax advice contained in this communication (including attachments) was not intended or written to be used, and it cannot be used, by you for the purpose of (1) avoiding any penalty that may be imposed by the Internal Revenue Service or (2) promoting, marketing, or recommending to another party any transaction or matter addressed herein.
NOT LEGAL ADVICE. Everything posted here is for educational purposes only, and is not to be construed as legal advice. Do not take any action, postpone any action, or decline to take any proposed action based on this information without first engaging the representation of me or another qualified attorney. Nothing posted on Twitter or on any website shall be construed in any way as legal advice.
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