MARCH 7, 2016 VOLUME 23 NUMBER 9
We occasionally get questions from our clients involving ownership of real estate — usually around the creation, funding or administration of a living trust. These questions are particularly common, and since we got them (from different clients) in the last two weeks, it seemed like a good time to review them.
I can’t find my original house deed. What do I need to do?
Nothing. At least in Arizona, there is no need to keep your original deed, once it has been filed with the appropriate County Recorder’s office.
Arizona real estate transactions (like most, but not all, states) rely heavily on title insurers issuing policies covering title to the property. That means that a non-governmental entity — the title insurance company — reviews the records regarding your property and decides whether they will issue an insurance policy. If they will, then that means they have determined that your ownership is clear enough for them to go forward. They will not need to see the original deed (or your mortgage, or anything else) so long as it has been recorded.
Is it OK to simply throw your original deed away? Probably — but of course lawyers hate to encourage people to destroy paper (and especially original documents). We recommend that you keep the original document — the deed from when you bought the property, the refinancing documents when you negotiated that lower loan rate, and the deed we prepared transferring the property to your trust — in the binder with your trust documents. But if you misplace the title documents, don’t worry one bit.
You can always get a new, certified copy of the deed(s) from the Recorder’s office — but we don’t even recommend that you take that step. It’s not that it hurts anything, but the certified copies are expensive and unnecessary.
Having a hard time remembering whether you ever signed a deed transferring the property to your trust? If we prepared your trust, we almost certainly got you to sign a deed at the same time. But it’s pretty easy to check — just look at your annual tax statement (ours arrived this week, so this might be a good time for you to look). Does your property get listed as belonging to you as trustee? If so, that’s a pretty good indication that it was transferred to the trust.
What if your property is not in Arizona? We aren’t sure, as there is some state-to-state variation.
But while it isn’t important to have the original deed in your possession, it is important to make sure that the property is titled properly. If you have created a living trust, you probably want title to the real estate transferred into the trust’s name.
Do I really have to transfer all my property to the living trust?
Yes. For most people, the primary purpose of creating a trust is to avoid the cost and administrative burden of going through a probate proceeding. That only works if property belongs not to you as an individual but to the trust.
It is possible, by the way, to have many kinds of property held in your individual name but with a “pay on death” or beneficiary designation causing it to be retitled to the trust upon your death. Talk with your lawyer about this concept if you are unsure or unclear.
If I transfer my property to my trust, will it affect the mortgage?
The short answer: no. But of course the answer can be much more complicated.
There are at least two things real property owners might worry about when transferring property to a trust: (1) will the mortgage need to be repaid immediately? and (2) if the bank ultimately forecloses on the property, is it easier for the bank to pursue any losses after establishment of a trust?
If you have a mortgage on your home, and you sell it (or even give it away), the bank will probably have the power to insist that its mortgage be paid off immediately. That is sometimes called a “due on sale” provision, and most (but not all) real estate loans include such a clause. But federal law (the Garn-St. Germain Depositary Institutions Act, if you’re looking for the actual law) says a due on sale provision can not be enforced when you transfer your property to a revocable living trust.
The bank’s ability to pursue a judgment for the uncollected value of their loan after sale of your house is a more complicated problem to analyze — and it varies more by state. If, say, you have a mortgage of $200,000 on your home but it is only worth $150,000, you can see that if the bank does foreclose they will not recover the full amount due.
If the bank does sue you for the balance due, they are said to be pursuing a “deficiency judgment.” Can they do that?
Of course, it depends. But in Arizona, at least, they usually can not — provided that the property is a single-family residence or duplex, and the loan was used to purchase the home in the first place. But here’s the most important piece: that answer does not change at all just because the property was transferred into your living trust.
Like any good lawyers, we can make these answers much more complicated. We could point out that in Arizona there are few “mortgages” — real estate secures notes with a “deed of trust” approach rather than a mortgage. We could wax eloquent about “purchase money mortgages”, and the difference between judicial foreclosure, non-judicial foreclosure, short sales and deeds in lieu of foreclosure. But the important message is this: creating a trust, and transferring your property into the trust’s name, will not usually have any effect on your mortgage and will not expose you to a higher likelihood of suffering a deficiency judgment.
As always, we hope this helps you to understand your legal status.