How a Revocable Living Trust Can Protect a Property with a Reverse Mortgage
Reverse mortgages have implemented additional safeguards over the last five years for senior citizens and people over the age of 55 years of age, making the loan a safer and viable option.
But one lingering fear among reverse mortgage applicants is that the lender forecloses on their property upon the death of the last borrower and takes whatever equity remaining, leaving heirs with nothing.
Having the home inside of a revocable living trust can prevent this particular situation from happening.
I recently had a conversation with Mary Ankerbrand, an estate planning attorney located in Thousand Oaks, CA, on how a revocable living trust creates a layer of protection for beneficiaries on a property their parent(s) own(s), which has a reverse mortgage, when the last living parent passes away.
But first I asked Ms. Ankerbrand to describe what a revocable living trust is. “A revocable living trust is a thing, an entity. Conceptually, I like to tell people to think of a trust like a box. To the system, you are either alive or you’re deceased, and your assets are either inside or outside of the box. If your assets are outside of the box, then they are in your own name, as an individual (or individuals). If your assets are inside of the box, then they are in the name of the box. The trust document itself describes the box. It names the person/people creating the box. It describes the powers that the managers have over the contents of the box. It outlines how, when and to whom the contents of the box will be distributed. It also names successor managers of the box. The revocable part just means that as long as you are alive and competent to change your mind, you can do so. You can amend the terms and powers of the box or even destroy the box altogether, in which case the assets will be returned back to you as an individual or individuals.”
I then asked Ankerbrand what happens when someone passes away and doesn’t have their home in a revocable trust. She states, “If you own a house that is titled in your own name, as an individual, and you pass away, you will no longer be here to sign the transfer deed that transfers your house to someone else, including your kids. Escrow is not going to take someone’s word for it that they are entitled to the house because escrow won’t want to assume liability for transferring the house to the wrong party. Instead, escrow will require the court to tell/order them who to transfer the house to, which absolves them of liability, and that’s what drives people into the probate courts. Rarely, will people go into the probate courts willingly. They go in because they have to. They can’t get an asset transferred/distributed without a court order, which is what the probate process produces.
Probate can also be very expensive and time consuming. Ankerbrand says to send a $500,000 home through a simple probate where everybody gets along, may take up to a year to conclude and costs $13,000 in ordinary statutory attorneys’ fees, $13,000 additional in ordinary statutory Executor fees, plus court costs. If there are other assets to probate, costs go up.
Generally the cost to create an estate plan, which includes a will, a trust and other documents is several thousand dollars. It covers your estate whether you are alive or not and whether your assets are inside or outside the trust/box. It does depend on your circumstances but when comparing this cost to probate fees, you can see why it is necessary and makes sense. It can also quiet the family bickering since there are distribution instructions in the trust.
Another key takeaway here is a property that has a reverse mortgage balance that goes through probate is in jeopardy. Here’s why. After the last living parent passes away, a reverse mortgage lender will give heirs/beneficiaries three 90-day periods to pay off the loan, either by selling the property or by refinancing the loan.
It is possible beneficiaries could lose their parent’s home to lender foreclosure during the probate period. To prevent a property foreclosure during probate, someone needs to be appointed by the court to serve as the deceased person’s legal representative. If the beneficiaries/heirs are squabbling and legally maneuvering over who that person should be, delays happen which in some cases could take years. Lenders will not wait past their foreclosure deadline for a probate to settle. Having a revocable living trust properly funded with your assets and instructions generally avoids this lender issue and protects the kids’ inheritance.
Ms. Ankerbrand goes on to say, “If you think about it, if you own a house that you transferred to your revocable living trust, then legally, the trust/box owns the house. You may be the manager of the trust/box, which still gives you power and control over the assets inside of the box, including the house, but when you pass away, your successor manager can simply file paperwork to remove your name as manager of the box and replace it with their own name. Once that happens, the new manager of the trust/box can distribute the house in compliance with the probate code and pursuant to the terms of the trust you created.”
It’s usually a fairly swift process, avoids probate, and enables the beneficiaries to move forward and sell the home or refinance an existing loan on the property without much delay.
Again it’s worth mentioning that a reverse mortgage lender has more time-sensitive deadlines and restrictive rules that other mortgage loans don’t have when it comes to how a property is handled after the death of the last living borrower.
In summary, it is essential that anyone owning a home can benefit from having a revocable living trust, and it’s especially vital to have when there is a reverse mortgage loan on the property.
Mary Ankerbrand obtained her law degree from Pepperdine University and has been practicing since 2006. Her address is 325 Rolling Oaks Dr., Suite 201, Thousand Oaks, CA 91361, phone number 805-557-0123, her website is www.ineedatrust.com, and she is available to do Zoom meetings as well.
Regards,
Kevin Walton Certified Reverse Mortgage Loan Officer C2 Reverse NMLS 245923
www.californiareversemortgage.biz
805-276-1942