Should a House Be in an Irrevocable Trust?

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A home can go into an irrevocable trust. But giving up control over a primary residence is not something most owners want to do. The owner lets go of the “incidents of ownership” and the house goes under a separate tax ID, with taxes filed by a trustee. The owner might continue living in the home, but the house essentially becomes a vessel to hold property for the named beneficiaries.

Any homeowner’s financial circumstances and goals can change, and so can their relationships with potential beneficiaries: family, friends, and charities. This is why an irrevocable trust makes sense only in rare situations.

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Free and Clear: How a Deed of Release Works

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A deed of release serves to lift a restriction or claim, letting the owner buy or hold the property without the burden. This might come into play when:

(1) A deed of trust comes off the title and the homeowner now owns the house free and clear.

(2) Or it could refer to clearing a title of an obsolete restriction.

(3) It could also refer to the deed of release or fiduciary deed in Massachusetts.

In this article, we take a look at all three scenarios, and what homeowners should know about them.

Part One: Releasing a Deed of Trust

In some states it’s common practice to use a deed of trust in place of a mortgage. The deed of trust sets forth the loan’s terms. If the borrower defaults on the loan, the deed of trust enables the trustee to sell the house without having to go through a full-blown judicial foreclosure process.

So, in contrast to a straight mortgage agreement that only involves a lender and a borrower, with the deed of trust, a trustee holds the house title as collateral until the borrower fully prepays the debt, or makes the final loan payoff. After the very last payment, a full deed of release is used to take the lien off the borrower’s home. The lender transfers (grants) the title to the owner (grantee) through a deed of reconveyance, also recorded to enter the home’s chain of title. (If the homeowner is refinancing the home, the first loan is similarly released upon payoff.)

The lender’s attorney has the documents signed, notarized, and recorded, thus removing the deed of trust (lien), in the county where the house is situated. Release and full title, as well as any funds left over in the escrow account, are conveyed to the homeowner, who now owns the home free and clear.

Title Status Checklist  

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For the owner who pays off a straight mortgage, after payoff the lender records a release of the mortgage. After making the last payment, a homeowner should expect the lender to release the mortgage lien and send a copy of the payoff statement to the borrower within about a month. The mortgage servicer can offer a timeline so a borrower will know when to expect important payoff documents, including the final statement, evidencing the full and final payoff. (The mortgage servicer’s contact information is on the monthly statements or the site through which the borrower pays.)

For an owner who signed a deed of trust, the lender records a deed of release.

In either case the borrower should check to see that the lender has filed proof of the final payoff and release in the property’s county. Otherwise, the borrower may need to file it. And once the release is file in the public record, it is a good idea for a borrower to call the title company and other insurers to double-check that the companies show the home’s title cleared of the lien.

The final loan documents are important papers that should be carefully stored with home-related documents, so the homeowner is prepared when the time comes to sell or convey the home to its next owner.

Read more on about the steps to take after your mortgage payoff.

Homeowners can always visit their county recorder of deeds’ offices to obtain copies of filings associated with the property. Additionally, at any stage, a homeowner should be able to look through the county records online for any transactions, claims, and restrictions affecting the property — and the surrounding homes.

Checking the county records is a good habit. It enables the owner to find anything that looks out of place, be sure releases are accounted for, and know that property taxes are up to date, now that the owner is paying them directly instead of through the mortgage escrow account.

Pro tip:  Some people have attempted to get released from paid-off mortgages to clear their titles, but find out the mortgage holders went out of business before recording the release. if your lender shut its doors during the financial crisis, contact the FDIC for support in obtaining a lien release.

Part Two: Release From Restrictive Covenants

If you’ve accepted a deed subject to restrictive covenants, those publicly recorded restrictions prevent you from doing certain things with your property — displaying signs, perhaps, or doing certain types of business, or even painting your door in a certain hue. And unless a real estate covenant has a stated end date, it runs with the land. In other words, it lasts indefinitely, binding every future owner.

Typical examples of restrictive covenants include the Covenants, Conditions and Restrictions (CC&Rs) issued to condo buyers. The usual justification for the restrictions involves preservation of surrounding property values, community aesthetics, or the historic value of the buildings.

Some owners go to court to challenge restrictive covenants that become oppressive, that are routinely violated by many properties without enforcement, or that become otherwise obsolete. Thus, if a subject-to clause is unduly burdensome or if it’s hard to understand or follow, the owner might decide to seek a release of restrictions in the deed.

In some situations, adjacent homeowners or others who might be able to enforce the deed restrictions assist by supplying signed releases. A release addendum might subsequently be recorded with the deed, under the county’s rules for such documents.

The most effective document is a notarized termination and release of a restrictive covenant. A typical example affirms that the county does not require the covenant, that the homeowner seeks a release, and that the county has agreed to it. The document should also set forth the issues that make the restriction obsolete. Unreasonable, ambiguous, illegal, or unconstitutional deed restrictions are unenforceable.

Part Three: The Massachusetts Release Deed

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If you’re in Massachusetts, you might have heard of the fiduciary deed or release deed. This is the third of three common Massachusetts real estate deeds. The first two, you might have guessed, are the warranty deed and the quitclaim.

The release deed works in the right circumstances to relinquish a possible interest in the property. That’s all. A Massachusetts release deed does not offer any guarantees. It does not even assert that its grantor holds any valid interest in the property. It simply relinquishes the title or whatever claim the grantor releases on the deed. In this way, it can clear up clouds or ambiguities on a title, and the property can be insured.

Whatever Form It Takes…

And whatever its purpose or locations, a deed of release has one goal: to release past obligations. The forms and requirements for deeds of release are state-specific, though, and the procedures to follow can vary widely among counties. For case-specific advice and assistance, consult with a real estate attorney in your state. Best wishes in your journey to free and clear homeownership!

Supporting References

M.G.L.C. 183 § 17.

Consumer Financial Protection Bureau: What’s the Difference Between a Mortgage Lender and a Servicer?

Stewart Title Guaranty Company: Deed of Release Form (MO).

Barry L. Miller, The Closing Agent: Termination of Homeowner’s Covenants and Restrictions.

Ilyce Glink and Samuel J. Tamkin, The Washington Post: The Paperwork You Should Receive When Your Mortgage Has Been Paid in Full (June 25, 2018).

Photo credits: Pasja100 and geralt via Pixabay, and Christian Stahl via Unsplash.

How Does a Limited Warranty Deed Work?

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When you pass along a title with a limited warranty deed, you pass along assurances that the title has not been clouded under your watch.

The limited warranty deed doesn’t offer the full set of title assurances that fortify a general warranty deed. But it carries higher assurances than a quitclaim — which doesn’t declare a property free and clear of liens or other issues. A special warranty deed tells us that the party conveying it has the right to do so, and that any known burdens on the title are obvious on the deed. There is no guarantee against any title defects dating from earlier owners, though.

Limited warranty deeds, also called special warranty deeds, are uncommon in standard home purchase agreements. But they are frequently chosen for transferring title when a general warranty deed is too risky for a seller to offer, or simply inappropriate for the transfer.

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What Does That Mean? A Guide to Real Estate Lingo

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When embarking on a home shopping experience, or simply reading up on deeds, you enter a world of legal jargon and terms of art. We’re on a mission to help our readers become fluent in the language of deeds! In this spirit, we offer a concise guide to the key terminology every loan applicant and homeowner needs to know — categorized for ease of reference into five sections:

  • Mortgage Terminology
  • Deed Talk
  • Speaking of Titles
  • Real Estate Language
  • Death & Taxes

OK, let’s jump in!

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Thinking of Forming an LLC for Real Estate?

A Few Considerations for Property Investors

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A limited liability company, or LLC, is easily formed under state law. Its owners are technically called members, and one person can run an LLC as a sole member. If you plan to purchase investment properties, you might be thinking of an LLC as a shield, protecting your personal assets and income from legal actions.

Liability factors aside, the LLC has several attractive features for investor-owners:

  • Forming an LLC promotes professional best practices, such as keeping business accounts and credit distinct from personal accounts. The owner of an LLC can open a business bank account to pay bills and receive income from and to the LLC.
  • The LLC is generally simpler than other business structures for tax purposes.
  • Most states allow LLCs to convey property to beneficiaries privately, without probate. (In this sense, an LLC and a trust have a similar effect.)
  • An LLC protects owner privacy, by holding a business out in the company’s name.

By the use of a deed transfer, real estate can be purchased by or placed into an LLC.

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Is It Time to Place Your Home in a Living Trust?

With a revocable (living) trust, you can assume the role of trustee, and stay in control of your real estate during your lifetime.

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After you pass away, your living trust becomes a substitute for probate. This is especially helpful if your estate would otherwise face multiple probate processes because you have real estate in several locations. It is also a helpful way to pass a home along to children when they become old enough to receive it, as the trust can direct a title change to a child at a specified age.

If you need to modify your estate plan due to children growing up, a marriage or divorce, or other significant changes in the makeup of your household, or because of your age or physical needs, you may. You can take the asset out of the trust, assign a new trustee, change your beneficiaries, or modify other terms of your trust.

For many homeowners, this is the best of both worlds in estate planning. You keep full control during your life, but seamlessly transfer the home on when you pass on, avoiding the time, expense, and stress of probate. Still, there are plenty of things to know before making this decision, as we’ll observe in this article.

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Don’t Be the Intestate Homeowner: Write Your Will

No homeowner should die intestate. In plain English: Every homeowner needs a will.

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By now, everyone knows life is fragile. Nobody has forever and a day to put an estate plan down in writing.

And if you do leave things hanging, and you do pass away without a will, or without some combination of a will and other instruments to convey property, you’ll leave assets to be distributed under the state’s intestacy laws. States try to send everything to your closest relatives, and if you’re single without children, the state will contact siblings and so on, and pass your property to them. That might be OK with you. But if you’re like most homeowners, you’d prefer to decide for yourself.

If you’re a parent, it’ll be hard for your family to agree on what to do without your written guidance. You also need a will to bequeath assets to non-family members or nonprofits. You need a will, too, to explain why you are not giving your home to a close family member if you choose not to. Otherwise, you might be setting up a will contest after you pass.

When a person’s wishes are logically thought out and expressed through a will, though, messy scenarios are far less likely to unfold.

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The Life Estate Deed

Does It Fit Into Your Estate Planning?

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Have you thought about transferring your home into a co-ownership, so the person you’d like to have your home certainly will have it after you pass away? Whether you want to leave your house to an adult child or children, or to another relative or friend, a life estate might be right for you.

It works like this. Owner A., called the life tenant, can live in the house for life. Then, Owner B. gets the “remainder” of the ownership. So, a deed stating the property goes “to Ann Smith for life, then to Ashley Smith as the remainder” vests Ann with a life estate, and Ashley with the remainder. Ann signs the deed, and has it recorded in the county where the house is. Voilà! The home avoids probate, ownership is transferred into both names, yet Ann has a lifelong place to live on her terms.

Without Ann’s express consent, Ashley may not move in during Ann’s lifetime. Ann is free to make upgrades to the home, or even use it for rental income.

But Ann becomes, in effect, the steward of the property for the future benefit of Ashley. Ann must cover all the bills: utilities, insurance, property taxes and repairs. Ann also gets the applicable tax breaks, and the homestead exemption for a primary residence, in states that offer it.

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Airbnb: Why It’s Hot, How It Works

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The enduring appeal of the family-run bed-and-breakfast has met technology. With an app from Airbnb (from “air mattress B&B”), or the somewhat similar VRBO (“vacation rental by owner”), homeowners can make money from their extra rooms or even their entire houses. More than 5 million listings appear today on Airbnb’s website, in more than 100,000 cities all over the world.

Using Airbnb’s online platform, tourists can find and chat with local hosts who offer guests a local’s view of the place they visit. Many listings target no-frills tourists seeking good deals on lodging. Specially vetted Airbnb Plus listings attract customers looking for a more luxurious touch.

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The “House Hacking” Trend: When a House Is a Rental Property Too

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House hacking is the art of making a primary residence out of an investment property, having rental income cover the homeowner’s costs. Millennial Money calls it a way to “use other people’s money (tenant rent) to pay down the mortgage and live for free.”

Of course, this is not a new idea in real estate investing, but millennial buyers may have rebranded it as a solution to a problem afflicting their generation. Younger home shoppers can quickly hit road blocks buying a home. Reasonably priced homes are in low supply and high demand. This imbalance has continually pressed home prices up, making it hard for first-time buyers to enter the market.

Hopeful buyers may read websites that tout house hacking as the best pathway to financial success. The housing market is on a roll; why not tap into the market for income?

Some hold investment properties only as long as they need to. Other home hackers repeatedly buy, building equity as they go and saving rental income for future down payments. As experienced investors can qualify for larger loans, their buying becomes more lucrative over time.

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