When it comes to estate planning, irrevocable trusts can play a vital role in preserving assets for your loved ones. However, questions often arise regarding the flexibility of these trusts, particularly when it comes to securing a mortgage.
At Casey Lundregan Burns, P.C., we have extensive experience helping clients with trust and estate matters in Massachusetts. New clients often come to us asking if an irrevocable trust can obtain a mortgage.
Let’s explore the key factors surrounding this critical issue and clarify how an irrevocable trust can affect the ability to secure a mortgage on trust-owned property.
What is an Irrevocable Trust?
Before diving into mortgages, it is essential to understand what an irrevocable trust is. Unlike a revocable trust, which can be altered or canceled during the grantor’s lifetime, an irrevocable trust is locked in once it is established.
Essentially, the assets you place into an irrevocable trust are no longer yours—they now belong to the trust, which a trustee manages. This change offers certain benefits, such as asset protection from creditors and tax advantages, but it also limits flexibility.
Once assets are in the trust, the trustee is responsible for managing them according to the trust’s instructions. This can make things like obtaining a mortgage more challenging.
Can an Irrevocable Trust Get a Mortgage?
The answer is yes—an irrevocable trust can technically secure a mortgage—but it is far more complicated than a traditional mortgage for individuals. Lenders are often reluctant to offer mortgages to irrevocable trusts, and this is primarily due to a few reasons:
- No Personal Liability: One significant hurdle is the absence of personal liability. The trustee cannot be personally held accountable for the loan, which makes lenders uneasy about recouping their funds in the event of default.
- Foreclosure Concerns: If the trust defaults on the loan, the foreclosure process can become more complicated due to the legal status of the trust. Lenders may hesitate, fearing drawn-out proceedings.
- Assessing Creditworthiness: Since the trust is technically the borrower, the trustee must prove that the trust has sufficient assets and equity to secure the loan. Unlike an individual borrower, credit scores and personal income are not considered.
Trust Provisions That Impact Mortgages
A critical factor in determining whether a mortgage can be obtained is the wording of the trust itself. Not all irrevocable trusts are created equal, and some may have restrictions that prevent borrowing against trust assets.
The trust document must include a provision that explicitly allows the trustee to secure loans or mortgages on behalf of the trust. Without this, securing a mortgage becomes virtually impossible.
If you are considering placing property into an irrevocable trust and might want to borrow against it later, working with an experienced attorney to ensure your trust documents are properly drafted is essential.
Types of Financing Available
If the trust documents allow borrowing, what type of mortgage can you get? The options are more limited than traditional mortgages, but there are a few possibilities:
Short-term Mortgages
Some lenders specialize in offering short-term financing to trusts. These loans typically have higher interest rates and shorter terms than conventional mortgages.
Home Equity Loans or Lines of Credit
If the trust property has sufficient equity, lenders might consider offering a home equity loan or line of credit. This option could be more favorable for short-term financial needs rather than long-term borrowing.
Reverse Mortgages
In certain cases, a reverse mortgage may be available for trust-owned properties, particularly if the grantor is still living in the home and meets other eligibility requirements.
It is important to note that traditional 30-year mortgages are less common for irrevocable trusts, and finding a lender willing to work with you may require some research.
Potential Challenges and Considerations
Beyond the limitations of available financing options, there are other factors to consider:
Sufficient Equity
Lenders will be more willing to offer a loan if the property has substantial equity. If the trust owes significant debt on the property or its value has diminished, securing a mortgage becomes even more difficult.
Purpose of the Loan
enders may look more favorably on loans intended for specific short-term needs, such as trust distributions to beneficiaries, rather than long-term financial obligations.
Finding the Right Lender
Not all banks and financial institutions are equipped to handle loans for irrevocable trusts. It is crucial to conduct thorough research to find a lender experienced in dealing with trusts
For example, Quontic Bank is known to work with irrevocable trusts, but policies can change, and other lenders may offer better options depending on the trust’s circumstances.
Process of Securing a Mortgage
If you determine that obtaining a mortgage is necessary and possible for your irrevocable trust, there are a few steps you will need to take:
Trust as the Borrower
Remember that the trust, not the trustee or any individual, will be the borrower. The trustee must act in the best interest of the trust and its beneficiaries when making decisions about the loan.
Conduct Due Diligence
As mentioned earlier, finding the right lender can be challenging. It is important to shop around and ensure the lender you choose understands the nuances of trust financing.
Legal Guidance
Given the complexities involved, working with an attorney experienced in trusts and estate law is essential. They can help ensure the trust documents are in order, review loan terms, and guide you through the entire process.
Alternative Options
In some cases, securing a mortgage for an irrevocable trust may not be feasible. If that happens, there are alternatives to consider:
- Temporary Removal of Property from the Trust: While this option is available, it can have serious implications, particularly regarding Medicaid eligibility. Removing property from the trust to obtain a mortgage may trigger the Medicaid look-back period and result in penalties.
- Specialized Lenders: If traditional lenders are unwilling to work with your trust, consider reaching out to firms that specialize in trust financing, such as HCS Equity. However, suitability will depend on your specific circumstances.
Need Guidance with Trusts and Real Estate in Massachusetts?
At Casey Lundregan Burns, P.C., we understand the intricacies of managing trust and estate matters, including how irrevocable trusts interact with real estate.
If you are considering securing a mortgage for your irrevocable trust or have questions about trust administration, our firm is here to help. Contact us today for a consultation, and let us guide you through the process to protect your interests.
Disclaimer: The information in this post is not intended as legal advice or as a substitute for the particularized advice of counsel. For more information, please consult an attorney.