Homeowner considers pocket deed to add home to trust

I have been working on putting my townhome in my revocable trust but have had major pushback from two financial institutions, back when I first purchased the home in 2016 and then again when I refinanced last spring. Both institutions said that I needed to wait until I closed the mortgage, but then pushed back after the closing.

Finally, after many inquiries, the lender sent me a letter stating how the trust needed to be worded to allow the home to be added to the trust. I consulted with my trust attorney and the solution that he suggested is a “pocket” deed.

He created a new deed with the home in the trust. I am going to sign it and have it notarized, then place it in my safe deposit box with the original deed. In the event of my death, my executor will pay off all my bills including the mortgage and then take the “pocket deed” and have it filed, thus putting the property in my trust. By then, the bank/mortgage company will be out of the picture, as the home will be paid off.

What do you think about this solution?

A: We know some lenders have no problems giving residential loans to borrowers who own their homes in a living trust. We’re not sure why others are averse to furnishing loans to these types of borrowers, when so many financial advisors and attorneys recommend them.

Sam has had quite a number of clients that closed on their residential purchases and refinancings without any issues where the homes were owned in a trust. He also has seen lenders tell their borrowers to deed out the property from the trust — meaning that the borrower deeds the property from the living trust back to the trust owner. Later, after the closing, the borrower conveys the property back into the trust.

However, it can be expensive to do that. Moreover, it seems unnecessary and even wasteful to take the property out of the trust and then pay to put it back in.

For those readers who aren’t familiar with living trusts, let’s start with a short explanation. A living trust is a document that holds real estate and other assets for a beneficiary in trust. When a property owner puts their home into the trust, that person is the trustor and they designate who the trustee and beneficiary are for the trust. Usually the trustor, the trustee and the beneficiary are the same person. (There are many different types of trusts but we are only discussing the basic living trust that many people use to own their homes.)

The trustee controls the trust and the beneficiary is the owner of the trust. The purpose of this type of a living trust is to control who gets the home when the owner of the trust dies or who can dispose of the home if the trustee becomes incapacitated. That’s why we recently wrote that you might want to make changes to your living trust as your life changes.

Generally, when a homeowner dies, that home would pass to the owner’s heirs as designated by his will or as designated under the laws of the state in which the property is located. (If the home is jointly held, then it would pass automatically if held with rights of survivorship.) However, that also means having to hire an attorney and going to probate court. Both the hiring of an attorney and the probate court cost money and take time.

However, you can pay a small fee to an attorney to set up the living trust and then transfer title to your home into that trust. When the trust owner dies, the successor trustee can transfer ownership of the home as designated under the trust or, if the intent is to continue to have the trust own the home, the successor trustee and beneficiary wouldn’t need to do anything as the home would stay in the trust.

Once you put the home into a trust, you wouldn’t want to spend the money to take it out and put it back into the trust. Sometimes it can cost several hundred dollars to take an asset out of the trust and put it back in.

Let’s go back to the lenders. Some lenders may not allow the use of living trusts if local law has any specific requirements that would prevent the lender from foreclosing on the loan or properly securing the loan. If that’s the case where you live, we’d understand why lenders wouldn’t want to allow a borrower to close in the name of the trust.

In markets where some lenders will give borrowers a loan when the property is in a living trust, you might want to work with a mortgage broker. Mortgage brokers can shop the loan around and should know which lenders are open to working with living trusts and which are not. Now, if the lender that allows it is a bit more expensive than others, you’ll have to balance the costs before deciding which way to go.

Finally, we have to say that we don’t like your idea of setting aside a signed document for future recording. For one, your kids may not have access to your safe deposit unless they share it with you. If you don’t share access, they may need a court order (through probate, if you’re dead) allowing them access to the safe deposit box. Memories get forgetful through the decades and your kids might not remember about the safe deposit box. When the time comes, they might wind up in probate to sell the home, not realizing you had laid the groundwork for another option.

Also, if during your life, you become incapacitated, your kids may not benefit from the trust terms that would allow them to handle the financial affairs if the property is in your name and not in the name of your trust.

One last item: Your lender may be overly cautious about how you title your property after you finance or refinance your home, but you should be entitled to put your home into your living trust without your lender making it a problem. Again, we’re talking about a living trust and not some of the other estate planning trusts that take the home out of the control of the owner in order to adjust the value of an estate. The Garn-St. Germain Depository Institutions Act of 1982 allows homeowners to transfer ownership of their homes to their living trusts or to spouses without a lender impediment.

Having said that, if you find a lender and it won’t allow you to take out the loan while your home is in the trust, you can deed it out of the trust, refinance the mortgage, then put the property back into the trust after the closing. Remember, when you insure your property, you need to let the insurance company know that the home is owned by the trust so that the insurance names you and the trust on the policy.

(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through their website, bestmoneymoves.com.)