Posts Tagged ‘real estate’

Your Trust and Ownership of Real Property

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.

Creating Your Trust: Dealing With Specific Assets

DECEMBER 28, 2015 VOLUME 22 NUMBER 48

When our clients establish revocable living trusts, we help them transfer assets to the trust’s name. That’s not unique — most law firms help clients through the process. This is often referred to as “funding” the trust, and it can be more complicated than it seems like it might be.

Some asset transfers are relatively straightforward. A deed can transfer your home and any other Arizona real estate into the trust. A trip to the bank and another to your stockbroker can complete those transfers (we can’t make those changes directly from our office, but can give you help and directions). There are a number of assets, though, that will often require some special considerations. Depending on your circumstances, those might include:

IRAs and other retirement accounts. These are often the most challenging. Depending on your family situation and the terms of your trust, it might be important to name the trust as a beneficiary (or maybe an alternate beneficiary) on your retirement accounts. For the next person in similar circumstances, it might be a mistake to name the trust as beneficiary. There are specific rules that have to be addressed, and this one requires some individualized attention.

Out of state real estate. This is often the most important item to transfer into the trust’s name and, unfortunately, we usually can’t help you with that transfer. We aren’t familiar with deed practices in other states, and aren’t qualified to practice law in those states, either. Unfortunately, your (or we) will need to make arrangements with a law firm in the other state to complete the transfer. We’ll take care of the details, but it will add another cost to the establishment of the trust.

Your home. Normally we want your home transferred into the trust’s name, but not in every circumstance. For people with special property tax breaks, for instance, it might be important to keep the home in the owner’s individual name. We might be talking about creating a “beneficiary deed,” an option Arizona permits for transfer of real estate to another person — or to a trust — automatically on your death.

Life insurance. Often we counsel that you should name the trust as beneficiary on your life insurance policies, but not in every instance. One difference: if the life insurance goes straight to beneficiaries, it clearly is not liable to claims made against your estate or trust. If you name your trust, or your estate, as beneficiary, you could be subjecting the life insurance to those claims. This is normally not a big issue, but we do need to think about it for a few moments before naming beneficiaries.

Vehicles. We usually do not push clients to transfer their cars into the trust, partly because the difficulty and cost are greater for this transfer than for many others. Besides, under Arizona law we can collect up to $75,000 of your assets even if they are outside the trust at your death, and few clients have vehicles worth that much. We do suggest that you think about the trust next time you buy a car, and ask about titling it to the trust. Make sure your insurance agent knows about the title to the car, and that your insurance is not affected (it shouldn’t be, but double check). Arizona permits a “transfer on death” designation for car titles, and sometimes we like to employ that approach to ensuring that the vehicle transfer is not a problem when you die.

Some vehicles are more valuable, or more problematic for other reasons. We have transferred airplanes, recreational vehicles and commercial trucks to trusts; the importance of accomplishing the transfer is clearer when the value of the vehicle is larger.

Let us also mention another problem that comes up frequently with vehicles. Suppose you intend to leave your house and all its contents to one beneficiary. Is the car parked in the garage included? You get to decide, but simply saying “house and its contents” might leave a significant asset unresolved.

Annuities. The choice of owner and beneficiary for annuities will vary depending on income tax issues, purpose of the annuity and its change in value over time. As with retirement accounts, it can be hard to generalize about annuities. We’ll need to discuss this asset class.

Operating bank account. What about the bank account you use for direct deposit of your Social Security and retirement payments? Should it be titled to the trust, or kept in your individual name? We generally prefer that you transfer even that account to the trust’s name, but that will usually mean a new account, new checks (they can still carry your individual name) and new debit cards. Another option: keep one small operating account outside the trust, but name the trust as “payable on death” beneficiary.

Clients frequently establish a living trust, transfer all of their assets to the trust, then worry about making sure there’s money available for emergencies “in case something happens” (by that they usually mean “when I die,” but that’s hard to say). There’s no need for an emergency account — the trust authority automatically transfers to your successor trustee on death, and the delay in getting access to the accounts will normally be very short.

Are you worried about having money immediately available? You might think about naming the daughter who will be your successor trustee as co-trustee instead. Give her immediate authority to manage trust assets, and she won’t have to prove your death in order to take over responsibility that she already has. Besides, creating even a small account with her as a joint owner invites family disputes about whether that account was supposed to be inside the trust or separate.

Our takeaway: “funding” your trust is more complicated than it looks like it might be. Talk to us about the best way to handle your various asset types. We can help figure this out.

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