What if My House Is Not Paid for: Can I Put It in My Living Trust?

by Vanessa Padgalskas

A living trust is an estate planning tool that acts as a holding area for property. A grantor -- the legal term for a person who creates a trust -- can add many types of assets to a trust, including a house with a mortgage, bank accounts and personal property. Property is placed in the trust for the benefit of the trust's beneficiaries, to whom the trust assets are distributed according to the terms of the trust. A trustee, who can also be the grantor, manages the trust and its property.

Benefits of Transferring a House to Trust

The primary benefit of transferring property to a trust is avoiding probate. All property owned by a trust avoids the probate process, unlike property given away through a will. This can save the trust's beneficiaries time, money and hassle upon the grantor's death. All property placed in the trust stays in the trust when the grantor dies and is not subject to probate. Although the grantor must name himself as primary beneficiary and trustee of the trust, the grantor must also name at least one other beneficiary and a successor trustee. When the grantor dies, the successor trustee has the role of distributing the trust assets to the remaining beneficiary according to the terms of the trust. Another benefit of avoiding probate is asset privacy. If assets go through probate, they are publicly listed in court records that anyone can view. In addition, transferring mortgaged property to a trust is a way to transfer property without having to pay off the mortgage.

Revocable Trust

A house with a mortgage can be transferred to a revocable trust. A revocable trust is one type of living trust that is created during the grantor's lifetime. The grantor, who can name himself as trustee, can modify a revocable trust at any time. The grantor retains control over the property put into a revocable trust. A grantor can choose to transfer the property out of the trust if needed or sell the property. A revocable trust gives the grantor flexibility with his property.

Irrevocable Trust

Unlike a revocable trust, a grantor relinquishes control over property that she transfers to an irrevocable trust, and the grantor cannot be the trustee of her own irrevocable trust. An irrevocable trust cannot be changed or modified without approval from all beneficiaries. A mortgaged house can be transferred into an irrevocable trust, but the grantor loses control over the house, which may cause long-term difficulties. For example, refinancing a home in an irrevocable trust is more difficult, and a grantor cannot choose to sell a home in an irrevocable trust or transfer it out of the trust. However, an irrevocable trust has some tax advantages. Because the grantor loses control of property transferred to an irrevocable trust, the value of the property will not be included in his taxable estate upon death.

Transfer Process

Before transferring a mortgaged property into a revocable living trust, you should notify the bank that issued the mortgage to eliminate confusion about the transfer. However, the bank cannot object to the transfer because you are merely transferring the house to yourself as trustee of the revocable trust. You are responsible for the mortgage as trustee. Transferring a house into a trust requires the property owner to fill out a deed in trust and grantor-grantee statement. Check with your municipality to see if you required to get a transfer stamp before registering the new deed. You may be required to pay a small fee for the transfer stamp. Send or personally deliver the completed deed to the local deed recorder. When you receive the new deed, call your mortgage company and homeowner's insurance company to notify them that your trust is the new owner.