Transferring Mortgaged Property into a Revocable Living Trust

Mortgaged property may be transferred into a revocable living trust as a measure to avoid probate and provide greater control over how the property is distributed to beneficiaries. Unlike property which the grantor owns free and clear of encumbrances, mortgaged property requires additional considerations prior to placing it in a trust.

The process for funding (i.e., transferring assets into the trust) a mortgaged property to a revocable trust can be confusing, as the process depends on the type of property being transferred. Funding a primary residence can be very different from funding a rental property. One of the reasons for the difference is the Garn–St. Germain Depository Institutions Act of 1982 (the “Act”) and its effect on the “due-on-sale” provision found in most mortgages.

The “due-on-sale” (aka “acceleration clause”) is a provision in a mortgage document that gives the lender the right to demand payment of the remaining balance of the loan when the property is sold. It is a contractual right, not a law. This means that if title to the property is transferred, the lender may (or may not), at its option, decide to “call the loan due.”

However, when the property is transferred into a living trust, homeowners whose mortgage contains a due-on-sale provision receive protection from the Act, which is a federal law that creates several exceptions in which a lender may not enforce the due-on-sale provision. Certain limitations are imposed by the Act on the validity of a due-on-sale provision found in many mortgage contracts; no lender may accelerate in the event of any of the following transfers, regardless of what the particular due-on-sale provision states, whenever the loan is secured by residential real property containing less than five dwelling units:

(1) a junior lien is created on the property.
(2) a purchase-money lien is created for household appliances.
(3) a transfer occurs by devise, descent, or on the death of a joint tenant.
(4) a leasehold is created for a term of three years or less not containing a purchase option.
(5) a transfer to a relative resulting from the death of a borrower.
(6) a transfer where the spouse or children of the borrower become an owner of the property.
(7) a transfer resulting from a decree of dissolution of marriage, a legal separation agreement, or an incidental property settlement agreement by which the spouse of the borrower becomes an owner of the property.
(8) a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property.
(9) any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.

Transfers of Commercial or Investment Property

The ability of a lender to enforce a due-on-sale provision for transfers to a revocable living trust becomes more unclear when the property transferred is not the borrower/beneficiary’s personal residence. California law does not contain the same requirements as the Act – that the borrower must remain the occupant of the property in order to prevent enforcement of the due-on-sale provision. On the other hand, the Act expressly states that it was intended to override state law. In general, when federal and state laws conflict, the federal law controls. Thus, the Act appears to allow for the enforcement of a due-on-sale provision when the borrower/beneficiary does not occupy the property.

In light of this uncertainty and the potentially high stakes involved, if the property transferred to the trust is not occupied by the borrower/beneficiary, the best course seems to be to get the lender’s written permission before transferring the property. A lender typically charges a modest fee for this consideration, but there is no guarantee – especially if the interest rate on the loan is significantly lower than the current market rate. At any rate, while funding your revocable trust with real property is critical to avoiding probate and making the most of a revocable trust, transfers of commercial and non-owner-occupied residential property must be handled with care.

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Protect your future with estate planning

Life insurance can be a valuable tool for protecting your loved ones financially.

The purpose of your life insurance policy will determine which type of policy you choose. Although some people view life insurance as merely a “bet” on when you will die, it has far more important purposes. These include: 

  • Protection: Life insurance can protect your family and other dependents by replacing your salary if you die.
  • Liquidity for Taxes: Life insurance can help make sure that your estate has enough cash to pay estate taxes and other estate expenses.
  • Investment Tool: Life insurance can also be used as an investment tool that allows you to defer payment of the taxes owed on your gains.

Types of Life Insurance:

Life insurance policies fall into two general categories: term life insurance and permanent life insurance (also known as “cash value” life insurance.) Term life insurance is usually used only for a short period of time and consists of insurance on your life for a specified term, usually a period of one to five years. Term insurance is generally considered “pure” insurance because it is not an investment vehicle and only provides protection in the event of death. Permanent or “cash value” life insurance premiums are generally higher than for term insurance. The part of the premium that is not used to cover the cost of insurance is invested by the insurance company; this creates a cash value that the policy holder can borrow against by taking a policy loan.

The insurance industry has developed many types of life insurance. Some of the more common types of life insurance include:

  • Term Life Insurance: Term life insurance is usually used only for a short period of time and consists of pure insurance on your life for a specified term. If you die during the stated term, your beneficiaries collect the face value death benefits.
  • Whole Life Insurance: Whole Life Insurance is a type of permanent life insurance that covers you for as long as you live and continue paying our premiums. Whole life insurance provides pure insurance on your life as well as an investment vehicle to accumulate cash value.
  • Variable Life Insurance: Variable life insurance is permanent life insurance where the amounts of cash value and death benefits are variable and depend on the success of the investments made.
  • Universal Life Insurance: Universal insurance is permanent life insurance that includes both pure insurance and investment components, similar to whole life insurance. However, universal life insurance allows the owner to adjust either the amount of premiums to be paid or the amount of the death benefits to be paid at death.
  • Universal Variable Life Insurance: Universal variable life insurance is permanent life insurance that includes both pure insurance and investment components. It combines features of variable and universal life insurance and allows some flexibility in choosing investments.

In addition to understanding the type of policy, here are some other important questions you should get answered before signing on the dotted line:

  • Do your insurance premiums increase?  Make sure that the language is clear regarding if and when your payments will increase.
  • What happens to your policy if your health declines?
  • What happens if you miss a payment or make a late payment?  Is there a grace period?  The danger is that your policy will lapse and your beneficiaries will be entitled to no money at all.

To get a sense of what a life insurance policy may include, here is a sample life insurance policy. If you have questions about your coverage, or need to get covered, Oakland Prime can offer you a free life insurance review.  Just submit your information at our Life Insurance Center and one of our Advisors will contact you. 

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4 Questions to Ask Your Parents About Retirement and Estate Planning

Sooner or later, it will be time for adult children to have a conversation with their parents about their retirement, will and other financial concerns. If you are at the point where your parents are getting older, it may be time to bring up their finances and how you can be more involved. While talking about money is tough, especially when you must bring it up to your parents and their future, it is important.

Here are some tips on how to get the conversation started and key questions to ask:

Ease into the conversation

Many families hold off on having such a conversation until something happens, such as a parent’s declining health or a death. At that point, it might be too late or the conversation too difficult. By having this conversation early, everyone has a better chance of being on the same page with a clear understanding of the parent’s wishes, which can mitigate stress later on.

Start the conversation by approaching what you want to talk about directly, but with kindness and respect. Let your parents know that you simply want to understand their wishes when it comes to their finances and would like to be more involved if something happens. Do not approach the conversation in a way that may come off condescending or that you know better, as this may cause your parents to be defensive.

Ask about retirement and their financial plan

If your parents have yet to retire, learning more about their retirement goals can help gain insight into their finances and wishes for their future. Asking questions about their plans after retirement, such as if they have a financial plan in place, how they want to spend their retirement or where to live is a great place to start. If they have yet to think about it, mention how speaking to a financial advisor might be helpful.

Learning about your parents’ retirement goals early also may affect your current financial plan for you and your family, especially if your parents might lean on you for financial help in the future.

Inquire whether they have a list of their accounts

If your parents have multiple accounts—like a savings account, IRA, investments, etc.—having information about them all in a safe location can simplify the process if an emergency occurs. With this in mind, it is a good idea to ask your parents if they would be okay with providing you with a list of their financial assets and the beneficiaries attached to the accounts. However, if they don’t want to share this with you now, ask if they could provide you with where they keep this type of information, the contact information of their financial advisor (if they have one) or if they could put their account information in a sealed envelope only to be opened in an emergency as a compromise.

Do they have a will and is it up to date?

Asking your parents about whether they have a will in place and who is the executor is another important piece of information to learn about when speaking to your parents about their finances. Knowing this information can better prepare you and the rest of the family if something happens. Wills also outline specific requests for the executor, such as celebrations or burial preferences, so knowing about these early can help you prepare for the specific requests if need be.

While not everyone has a will, they are a valuable document that will help ease the process once a family member passes. If your parents don’t have one now, ask them if they would be willing to meet with an estate attorney to begin the process.

Start planning early by having the hard conversations

Speaking about finances with anyone, no matter the relationship is difficult. But by starting the conversation early you may avoid confusion and headaches later. Bringing up finances, retirement goals and planning and wills earlier, can help keep you aware of your parents’ situation now and in the future.

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