When you create your revocable living trust as part of your estate plan, the trust is only worth the assets actually contained within it. For most individual estate planners, their primary concern is whether the real estate is properly funded into the trust. This means that, typically, all property, wherever located, must be titled in your name as trustee of your trust in order to effectively avoid probate.
If your property is not properly titled, then it is still possible to administer the trust effectively after your death, but it must be done in conjunction with a probate proceeding. If the real estate is described with sufficient particularity in the trust or in an attached schedule listing trust property, or equivalent document, an abbreviated procedure may be used. The petition, called a Heggstad petition, essentially requests the court to recognize that the real estate was intended to be transferred into trust, and although the transfer was not recorded, the Settlor gave and the Trustee accepted the transfer. If such a petition is not feasible for one reason or another, than a formal probate proceeding of the “pourover will” typically must be completed , which makes the trust the beneficiary of estate property.
Although these “work arounds” exist for administering your trust, ideally you will “fund” your real estate into the trust immediately upon creating the trust. At this point, there is an open question about whether doing so reflects a change in ownership transfer for particular purposes. In the case of mortgages, most mortgages contain a “due on sale” clause, which allows the lender (bank) to demand full payment on the mortgage when property is transferred. As a practical matter, the bank does not typically attempt to call a loan against an individual transferring their home into a revocable living trust. Many practitioners take the position that most residential property, including rentals, would not be subject to the “due on sale” clause due to federal law. However, for large residential property and commercial property, it is probably better to be cautious; it may be worth getting approval for these parcels from your mortgage holder when transferring real estate.
Similarly, title insurance is often personal to the owner of the property; a subsequent transfer of the property could invalidate the title insurance. The issue with title insurance is more problematic; courts have upheld a title insurance company’s refusal to honor the insurance policy under certain circumstances. However, most title insurance policies offer a simple endorsement of the owners as trustees when the insurance company is properly notified and in newer policies is often standard. If you question whether your title insurance policy will continue in effect once you have transferred your property into trust, it is worthwhile to address your concerns with your estate planning attorney when creating or reviewing your estate plan. Maintaining a clear real estate title will enhance your trustee’s ability to administer your trust and, if necessary, transfer your real estate in the future!
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