Introduction

If you created a living trust, but assets like your house are still titled in your personal name, your trust may not control that property when your family needs it most.

In this article, we’ll discuss the seven mistakes people make when transferring property into a trust, including problems involving the deed, the mortgage, insurance, and assets that should not be transferred at all.

Transferring Property into a Trust

So, what does it actually mean to transfer property to (or fund) a trust? Contrary to popular belief, it is much different than simply creating the trust.

Transferring property to the trust involves changing ownership or beneficiary designations so that the trust can operate as intended. This is especially important, because if assets are neither held in the trust nor titled in the trust name, they do not avoid probate. For real estate, this usually means executing and recording a deed from the current owner into the name of the trust.

At the end of the day, a trust that does not own or control the intended assets will not provide the estate planning benefits they were created to provide. We’ll now discuss the seven mistakes that people make when transferring assets into a trust.

Mistake #1: Assuming the Trust Document Automatically Owns the House

The first mistake people make is assuming that the trust document automatically owns the house.

The county recorder’s office normally controls who holds title to the real property. When there’s a change in ownership (like transferring the property from your individual name into the name of the trust) you need to record a deed with the county recorder’s office to show the ownership change and put it on record.

Now, while your estate planning documents are important, you will still need to deed your property from your individual name into the name of the trust. The deed will likely need to identify the trustee, the trust name, and the trust date where it’s required.

For example, if your name is John Smith and you set up the Smith Family Trust, you’ll need to deed your property from your individual name (John Smith) into the name of the trust (which would be John Smith, trustee of the Smith Family Trust).

The exact wording and recording requirements vary by state and county. We strongly recommend having this deed reviewed by a local attorney before you go into the county recorder’s office and record it.

Mistake #2: Using the Wrong Deed or Failing to Record it

Second on this list is using the wrong deed or failing to record it.

After forming a trust, you must use a new deed to transfer any real estate you own. This will require you to show that title to the property was transferred from your individual name into the name of your new trust.

It’s worth noting that the property transfer is not complete simply because the deed is sitting in a drawer. You must not only sign the deed, but also properly record the deed with the county recorder’s office to show the rest of the world that the trust owns your property.

There are a few deed options that you have here. They can include a quit claim deed, a warranty deed, a grant deed, or another state specific deed form.

Before you prepare your deed, there are several things you will need to consider. The first is title insurance. When you use a quitclaim deed, the title insurance is severed (which is why we never recommend using quitclaim deeds to begin with).

Instead, we recommend using either a grant deed or a warranty deed. When you use this type of deed, you’ll also need to be aware of other items, including existing liens, transfer tax rules, homestead exemptions, county recording requirements, and whether there are multiple property owners.

Mistake #3: Ignoring the Mortgage & Due-on-Sale Clause

Mistake number three is ignoring the mortgage and due-on-sale clause.

There are many homeowners out there who worry that transferring property into a trust will cause the mortgage to become immediately due. However, lenders have become more comfortable with this practice over the years. There are also federal laws (like the Garn St. Germaine Depository Institutions Act) which make it easier for people to transfer residential property from their individual names into their new trust.

Now, at the end of the day, this change in ownership is simply a transfer, and not a sale. And after you make the transfer, you still own the property.

However, if you are concerned about the due-on-sale requirements, you can review the loan documents, confirm the structure with an attorney, and notify the lender if it’s appropriate.

Mistake #4: Forgetting Insurance Records

Number four is forgetting insurance records. This is important, because changing title will require an update with your homeowner’s insurance carrier.

Here, you must confirm that the trust is properly listed as an insured or an additional insured party. You must also confirm that the individual occupants remain properly covered and that the policy still reflects the actual ownership and use of the property. If not, the insurance company could deny coverage for future claims if they aren’t aware that the property was transferred from your individual name into the name of a trust.

All of these rules are state specific, and you’ll need to reach out to your insurance provider ahead of time before making the transfer.

Mistake #5: Thinking That Revocable Trusts Provide Asset Protection

Mistake number five is thinking that a revocable trust provides automatic asset protection.

This is where many people get confused, because a revocable trust is generally designed for estate administration, incapacity planning, and probate avoidance. And the act of transferring a home into a revocable trust does not automatically make it lawsuit proof.

Revocable trusts are great for estate planning and probate avoidance. However, they’re bad for privacy, creditor protection, and asset protection. If you want to take advantage of these benefits, you’re much better off using an LLC.

Contrary to what promoters tell you on the internet, never assume that one trust can solve every estate planning and asset protection issue.

Entity selection and trust design are both important. They provide different benefits when used correctly. But when used incorrectly, they can get you into serious legal trouble.

Mistake #6: Transferring Every Asset into the Trust

The sixth mistake is transferring every asset into the trust.

Not every asset should be retitled in the same way. This is because there are different assets that often require different treatment. Retirement accounts like IRA, 401ks, and other qualified retirement accounts generally use beneficiary designations rather than directly retitling them into the trust.

Life insurance is similar, as it may also be controlled through beneficiary designations or a separate irrevocable life insurance trust (ILIT), depending on the situation.

Vehicles usually stay out of the trust as well because there are issues with transferring title of the vehicle from an individual into the name of a trust.

Now, these assets may be connected to a trust depending upon the specific situation. However, the correct treatment depends on the account policy and the estate plan.

Mistake #7: Never Checking if the Transfers Worked

The last mistake is never checking whether the transfers actually worked. It’s always important to double check and see if your assets (like your home) have been properly transferred into the trust.

To ensure that they are transferred, here’s a quick checklist that you can use.

Confirm that the deed was accepted and recorded

Obtain a recorded copy of your deed

Check the county’s online property records to show that the trust is listed as the owner of your home.

Notify the insurance company of the transfer

Review beneficiary designations.

And lastly, you’ll want to include a pour over will in your estate plan. This will ensure that the additional assets are transferred into your trust if they weren’t originally listed in the trust document.

Now, a trust is only as complete as the assets and instructions that support it. And if you have these instructions on hand, your trust will likely work as intended.

Conclusion

In conclusion, transferring property into a trust is not simply a matter of signing a trust document. You have to make sure that everything in your estate plan works together, including the deed, title, mortgage, insurance, and everything else.

At Sutton Law Center, we specialize in creating and funding revocable living trusts for Nevada residents. For more information on our services, call (775) 824-0300