Can you put a house with a mortgage in a trust?

In Florida, you can put a house with a mortgage into a revocable living trust. However, if you do so, you may need to pay documentary stamp taxes based on the amount of the mortgage. You also may need to consider whether your lender will enforce a “due on sale” clause against you.

Why move a property into trust?

The big benefit of moving a house into trust is that trusts can avoid probate. This means that your loved ones will not need to go through the court-supervised probate process to get your house after you pass away. This can save a lot of trouble for those you leave behind.

Putting houses in trust is especially beneficial if you have properties in multiple states. Without some sort of probate-avoidance mechanism in place, your loved ones will have to open up a separate probate in each state. This means paying the probate fees in each state (which comes out of the money you leave behind), dealing with each state’s probate rules, and potentially hiring a separate lawyer in each state (who are also paid for with the money you leave behind). However, if you leave all the properties in a trust, ownership can be transferred without any probates. Simply put, if you have properties in multiple states, a trust can save money and make things significantly easier on your loved ones.

Will moving a house into trust trigger the “due on sale” clause in my mortgage?

Moving your homestead into a revocable living trust will not trigger the due on sale clause. Moving a house other than your homestead into a revocable living trust might trigger the due on sale clause, but probably will not.

A “due on sale” clause is contained in nearly every mortgage contract. This clause states that if you transfer your real estate to a new owner, the lender can make the entire loan due immediately. This is obviously not an outcome most people desire. However, moving a house into trust is transferring the mortgaged real estate to a new owner because the trust becomes the new owner of the property. Thus, many people worry that moving the property into trust will trigger the due on sale clause.

Thankfully, federal law states that a due on sale clause cannot be used when (1) the property is residential, (2) the property contains fewer than five dwelling units (a house is a single dwelling unit), (3) the property is transferred into a properly-drafted revocable living trust, and (4) the transfer does not change who has a right to reside in the dwelling. As long as these requirements are met—which is the case for most residential transfers—the statute forbids the use of the due on sale clause. The federal statute is 12 U.S.C. § 1701j–3(d)(8). However, there is a federal regulation as well, found at 12 CFR § 191.5. This regulation narrows the rule down to your residence. Thus, the statute states that all dwellings are immune to due on sale clauses, but the regulation states that only your personal residence is exempt. This is a clear conflict, and it has not yet been resolved. Theoretically, the statute should overrule the regulation, but we have yet to see this occur. Our only hint as to a resolution is found in an unpublished case, which ruled that the regulation was incorrect to limit the scope of the statute. However, the precedential value of that case is murky, leaving us with little real clarity on the matter.

So, what does that mean for you? Practically, it means that if you are considering transferring your personal residence into a living trust, the due on sale clause certainly cannot be used against you. However, if you are considering a transfer of mortgaged property that is not your residence, then it is not clear whether the due on sale clause will be used against you. More often than not, the due on sale clause will not be called as long as you are paying your mortgage as agreed. Lenders typically do not risk losing a paying customer. But as things stand right now, there is a risk that the lender could try to enforce the clause if you transfer property you are not living in. Thus, the best course of action is to speak with your estate planning attorney before making the transfer into trust.

Will moving a house with a mortgage into trust have tax consequences?

In Florida, moving a house with a mortgage into a revocable living trust could result in documentary stamp taxes being due. The Florida Department of Revenue has previously taken the position taxes are always due if a mortgage is on the property moved into trust. This is because the amount of the tax is based on the amount of the consideration, which includes the amount of your mortgage. Consideration mostly means the amount paid. Thus, if the trust is not paying anything for the house (as is usually the case), then the documentary stamp taxes due would be .7% of the mortgage. However, it is no longer clear if the Department of Revenue consistently takes this position, making the tax burden unclear in some situations.

Thankfully, there is a way around this mess. If you use a lady bird deed to make the transfer into trust, then no documentary stamp taxes are due! This is because the transfer into trust does not take place until the moment of your death, at which point the property automatically moves into trust. Thus, practically the result is the same. But the tax difference could be enormous if you have a mortgage. Thus, it can be helpful to find an attorney familiar with lady bird deeds if you are seeking to transfer a mortgaged property into trust.