Understanding revocable and irrevocable trust real estate
Living trusts have become a common tool for managing financial assets due to estate planning and tax benefits that they may bring. While establishing a trust, you must decide whether it should be a revocable or irrevocable. This decision determines how much control you may have over the property that you place within the trust while you are alive, and how convenient it will be to get a secured loan or to refinance a property.
A trustee’s power to mortgage a property
According to the law, a trust is just similar to an individual business entity once the transactions are allowed under the trust’s agreement passed by the grantor. So it is easily possible for the trustee, in this case, to mortgage a property. The trust’s grantor, however, does not have the power (right) to mortgage the real estate because the person does not own the property anymore.
The difficulties to get a mortgage
However, just because a trustee may be authorized to offer a mortgage does not mean that a lender will always give a loan for a mortgaged parcel of land bound by an irrevocable trust. An irrevocable trust usually provides the best protection against any creditor claims – this protection, in turn, will make it difficult for a lender to get a loan on real estate having a lien and will find it even more difficult to foreclose upon default. If, however, the real estate is a vacant land that is unimproved, then the problem is compounded, making the loan approval process tedious.
In such cases, a borrower will need to notify lenders before on the real estate’s status and provide them the land’s trust copy. And even if a borrower will not notify them, they will discover by carrying out a search on the real estate. Further, a lender always studies the trust papers properly to determine if the trustee has the power to take a mortgage on the said property. The papers may even be checked to determine if the property (trust) can be used as security or collateral for the loan.
Picking the right trustee
An irrevocable trust’s grantor can technically become the trustee too, but this is often discouraged. With an irrevocable trust, a grantor can easily avoid some tax advantages; for ensuring these advantages, the grantor can give up the real estate’s ownership. Further, a trustee should always serve beneficiaries’ interest along with the interests of a grantor. If a grantor is serving a trustee, the irrevocable trust will be disregarded by the law and will lose all its advantages. Now, take out time for a pop quiz.
The pop quiz
Q: What do you mean by an irrevocable living trust?
A: Do you know the answer? No? Here is the low-down: An irrevocable living trust is established during a grantor’s lifetime and is set in stone. This trust is established for reducing or eliminating taxes or protecting the creditors’ assets.reverse mortgage