When considering a reverse mortgage, one of the initial steps is disclosing to the lender whether or not the ownership of the property is in a trust. A trust is a legal document often used in estate planning. Prior to proceeding, it is important to understand the vocabulary of a trust.
The grantor is the owner of the property and the assets.
The trustee is a third party who manages the trust
The beneficiary is the person who receives benefits (financial or otherwise) from the trust
Within the document are specified provisions defining how and when assets will be transferred from grantor to beneficiary.
A Trust and a Will; Difference?
A trust differs from a will in that a will does not go into effect until after the grantor passes; meanwhile, trusts become active as soon as they are created. While a trust is typically more costly than a will, they are often preferred because they offer more control over assets and avoid probate. The probate process consists of a court proceeding during which assets are distributed to the predetermined beneficiaries. Avoiding this process allows for much faster distributions of assets and avoids proceeds for probate court from being taken from the assets/estate. And one of the ways to avoid the probate process is via a beneficiary deed of trust.
Does a reverse mortgage go through probate?
In the event that there’s a probate on a home with a reverse mortgage, the mortgage still serves as an encumbrance. And encumbrances typically remain with the property even after ownership has changed until it is satisfied. When the last borrower passes away, the reverse mortgage must be paid off and then the equity left belongs to the beneficiaries or heirs going by the terms in the will or trust.
What is a Beneficiary Deed of Trust?
A beneficiary deed otherwise known as a TOD deed (Transfer on Death Deed) refers to a specific type of deed that would allow for the transfer of ownership outside of private and comes in handy in cases relating to a reverse mortgage.
This deed is simply an interest conveyor in the actual property that is revocable, and it comes into effect once the grantor dies or in the case of multiple grantors, the death of the last surviving grantor.
It is mainly used to avoid probate but may also be effective for excluding a particular property from a private estate. When used in conjunction with a reverse mortgage, in addition to allowing you to remove a property from probate, it also grants the beneficiary instant access to the property. This way, they would be able to move on with the process of either sales or transfer of ownership with the lender or servicer.
Revocable and Irrevocable Trusts
While there is a wide variety of trust options to choose from, most homes are protected by either revocable or irrevocable trusts.
In a revocable trust, the grantor will remain the beneficiary and maintain full control over the assets covered by the trust until said grantor passes. Revocable trusts are flexible in that they allow the grantor to alter or cancel any provisions throughout the life of the trust. Upon the death of the grantor, provisions may no longer be made and ownership of the assets are transferred to the predetermined beneficiaries.
With an irrevocable trust, the grantor’s ownership of their assets are transferred to the trust. As a result, the grantor does not have the ability to alter or cancel the provisions of the trust without approval from the beneficiary. However, they still retain the right to reside in the home as their primary residence. This kind of trust is beneficial for the grantor as they are no longer responsible for ownership obligations, such as estate taxes. Further, irrevocable trusts are managed by independent third party trustees, providing the grantors a sense of security.
Clarifying Irrevocable Trusts and Life Estates
Irrevocable trusts are not to be confused with life estates, which involve no third party trustee. This may cause issues down the road if the beneficiaries experience financial difficulties during the lifetime of the grantor.
Borrowers with homes secured by revocable trusts are typically approved for reverse mortgages. These borrowers should be prepared to provide a complete copy of the trust for review and incur slightly higher closing costs to cover this review fee. In the review, a third party will look to ensure that the borrower is the sole beneficiary (currently) and that the trustee has the ability to encumber the property. In some states, an attorney opinion letter will be issued stating whether or not the borrower under the revocable trust satisfies the proper requirements.
Similarly, borrowers with homes secured by irrevocable trusts must also provide complete trust documents for review. However, these kinds of trusts are typically less likely to receive approval. This is because the borrower is no longer the legal owner of the property. As a result, all beneficiaries must meet the HECM guidelines in order to qualify for a reverse mortgage. Such that they are at least 62 years old and they reside in the home as their primary residence. Additionally, when the home is no longer their primary residence, these beneficiaries are responsible for funding the reverse mortgage.
To avoid these complications, borrowers may be able to turn an irrevocable trust into a revocable trust; however, this can be a difficult process. Potential borrowers can also take an alternate route and deed their home out of the trust, take out a reverse mortgage, and then put their home back in the irrevocable trust.
When it comes to borrowers who have a life estate, they are even less likely to receive approval for a reverse mortgage, due to the fact that all beneficiaries must take part in the entire reverse process.