Can a Home in a Living Trust Be Refinanced?

Refinancing property in a living trust

On Trust Property In a Time of Low Mortgage Rates

A living trust is a revocable trust. And a revocable trust is a trust you can change — which means you can refinance.

That said, your lender must be on board. Let’s take a brief look at how this plays out.

How the Living Trust Works

Say you want to pass your home along to a specified person after you die. You might choose to place the home into a living trust structure, thus avoiding the gift tax on the deed transfer. If co-owners are on the title, they too may transfer their jointly held property into a living trust, so that the home goes to the beneficiaries of their choosing after the co-owners die. All owners must sign the trust document.

The trust arrangement legally moves the property from the individual owners to a trustee, who now oversees it on behalf of the beneficiary. So, a trustee is assigned to make decisions about the property, and the beneficiary will ultimately receive the trust property. A trustee must act responsibly, in the best interest of the beneficiary. This means making financially sound decisions to maintain the property’s value. It means following the directions in the trust document with care.  

As long as you are named as trustee of your living trust, you may modify your trust. You can sell your trust property to buy a different home, keeping the benefits of the trust structure intact by having the payment made out to the trust, and the new house paid for out of the trust. You can name a new trustee if you wish. You can change the named beneficiaries.

In short, as you’re not giving the home away during your lifetime, you, as the trustee, can continue to make decisions concerning it.

What Happens After Your Lifetime

Family having a picnic in the yard outside their house.

After your life, the property shifts to the trustee you’ve named to take charge next — called the successor trustee. This is the person you entrust with distributing your property to its beneficiaries. If you die with the mortgage still on the house, the successor trustee will need to contact the lender, address the debt, and otherwise administer the trust according to the instructions you placed in the trust documents.

Normally, the debt will need to be refinanced in the beneficiary’s own name at this point. If that is not feasible, the trust will need to sell the house on behalf of the beneficiary.

Note that trusts can be useful to homeowners even before they die. Imagine that one day you are deemed incapable of making sound decisions about your assets. A court-appointed guardian will not have to be pulled in to control your property for you, if your living trust already names a successor trustee who has agreed to take over your decisions for you. That successor trustee will follow your stated wishes, as expressed in your trust document.

Refinancing Property in a Trust While You’re Alive

Can you have a home with mortgage debt, and put it into a living trust? Yes.

An irrevocable trust restricts you from selling or financing the property value while you are alive. But a revocable trust is more flexible. As the trustee, you can refinance the home if the trust document anticipates the need.

With mortgage interest rates currently very low, you might want to look into your refinancing options. Yet the mortgage on a trust property can make things somewhat more complex for a trustee who hopes to refinance a house with a more desirable loan.

What’s the best way to proceed, then? Your state laws or a local attorney will have the best information on whether you can set up the trust, or refinance a home in the trust, on your own. When in doubt, call a professional. Your estate planning lawyer or financial adviser can guide you through any part of the process.

The first step is checking the language of the trust to find words that explicitly empower the trustee to refinance the debt. You’ll need your mortgage specialist and your title insurance company on board, so that the title remains insured. Then you’ll be able to refinance.

Yes, But…

What if the mortgage lender won’t approve the refinancing of a trust property? Consult with a mortgage consultant who has experience with trust properties. This expert can go to the lender on your behalf to obtain a go-ahead for refinancing. Lending to the trust should be acceptable as long as you, as the trustee, have the power to encumber the property under the trust declaration. An estate planning attorney can help you if necessary. Your lender might insist on having an attorney’s written opinion that states that the trust is a valid entity under the law of your state.

But what if your trust does not permit the trustee to encumber the property?

Then you, as trustee, will need to unwind the trust and retitle the home from the trust back into your individual name. Once you do so, you can apply for a new refinancing mortgage on the property.

After You’ve Refinanced

Once you refinance, be sure to transfer your home back into a revocable trust. You’ll use a trust transfer deed to convey the title of your home to [Your name], Trustee of the [Your Name] Living Trust. This is the same action you took when you created the trust in the beginning.

To put the property back into the trust, you’ll need to:

  • Draft the deed, with the exact same legal description that appeared on the prior deed.
  • Sign and date the deed in the presence of, and acknowledged by, a notary.
  • Submit the new deed, together with the applicable fee, to the county recorder of deeds for recording.

At every stage, you as the trustee are responsible for continuing to make the monthly mortgage payments due on your account.

A Few Final Notes

It’s important to choose the best way of passing your property to your beneficiaries through a will, trust, or both in your particular state. Moving property out of a trust can create legal changes you might not expect. An estate planning attorney can alert you if you could be passing property to someone whose access to government benefits may be changed by the transfer, help you understand potential tax impacts, and a number of other issues.

Questions about the deed types to use or procedures to follow? A local real estate attorney or your title company can review your title and advise on proper documentation and procedures. On that note…

This article is offered as general information for readers. Neither this website nor any other can substitute for the case-specific advice of a real estate or estate planning attorney. For questions concerning how changes to your property may impact state or federal taxes, consult your tax expert.

Supporting References

Timios Title and Escrow Services: Refinancing Your Mortgage on a Property Held in a Family Trust.

Audrey Barker for the Blog: Can I Refinance a Property that’s Held in a Living Trust? (Sep. 15, 2020). Is It Time to Place Your Home in a Living Trust? (Jan. 6, 2021).

Photo credits: Josh Willink and Ron Lach, via Pexels.