Due to the expense and complexity of probate and the uncertainty surrounding death taxes, many senior citizens are creating revocable trusts to avoid these estate-planning concerns. It is quite common during the origination process to meet a client whose home is titled in their trust. Many senior citizens create their living trusts through estate planning services, or “trust kits,” without the full benefit of advice and instruction from an attorney and accountant. Often, the senior creator of the trust forgets that the trust has been created, misplaces the trust agreement, or is reluctant to provide a full copy of their trust document. When these types of issues arise, a reverse professional can help guide their clients to possible solutions by having a basic understanding of trusts.
Trusts are estate-planning tools that manage property during one’s life and can also replace or supplement the need for a last will and testament. An extremely common reason for establishing a trust is to transfer assets outside of a formal probate process after death. Probate is the legal process that takes place after someone dies that includes distributing the deceased person’s property according to their last will and testament or applicable state law. Probate can be costly, time consuming and may require attorneys. However, if a home is titled in a trust, the home will not be included in the formal probate process and title to the home will pass outside of probate pursuant to the trust’s directions.
Unlike a corporation, a trust is not a legal entity and has no independent existence. However, a trust, if properly created, can hold title to real property with the same rights of possession and alienation as an individual. A trust is simply a relationship of “trust” between certain individuals. These individuals include the trust creator (the individual who creates the trust), the trustee (the individual who manages the trust) and the beneficiary (the individual who receives the trust’s benefits.) The trust serves as the governing basis for their legal relationship with one another.
To create a trust, the creator (also known as the “trustor,” “grantor,” or “settlor”) transfers legal ownership of the property to a person or institution (the “trustee”) to manage the trust property for the benefit of another person (the “beneficiary”). The trustee is the person who acts on behalf of the creator and beneficiaries pursuant to the express authority and directions contained in the trust. Many clients will choose to serve as their own trustee and continue to manage their affairs for as long as they are able. Married couples 8 often serve as co-trustees. When one spouse dies or becomes incapacitated, the surviving spouse can continue to manage their finances as the sole trustee. All trustees owe a fiduciary duty to the beneficiaries of the trust. As a fiduciary, the trustee is under a duty to act in the best interests of the beneficiaries when dealing with trust property and assets.
While there are various types of trusts, the most common and basic type of trust that one will encounter during a HECM origination is an inter vivos revocable trust,which an individual creates during their lifetime. Inter vivos is a Latin legal term that means “between the living,” and refers to a transfer or gift made during one’s lifetime, as opposed to a testamentary transfer, which is a gift that takes effect on death. Therefore, an inter vivos revocable trust is a trust that: an individual creates during their lifetime; becomes effective during its creator’s lifetime; and can be changed or canceled (revoked) by its creator at any time, for any reason, during the creator’s lifetime. The most important aspect of this type of trust is that it is revocable, meaning the creator of the trust reserves the power to change all terms of the trust at any time without needing anyone’s consent or permission. Property, including the client’s home, can be delivered to or removed from this type of trust at any time by the trust creator.
Less common are irrevocable trusts. An irrevocable trust is a type of trust that cannot be easily changed, amended or canceled once it is set up without the consent of the beneficiary. When a senior client creates an irrevocable trust, they permanently give up ownership and control of the trust property. If a client’s home is titled in an irrevocable trust, they may still be able to change the terms of the irrevocable trust and remove their home from their trust by obtaining permission from the trust beneficiaries, a court or both. In order to do so, one must identify all interested parties to the trust and obtain their written consent to the transaction.
Fannie Mae’s Selling Guide B2-2-05 provides that a revocable trust must be established by one or more natural persons, solely or jointly. The primary beneficiary of the trust must be the individual(s) who established the trust. Contingent or future beneficiaries, who receive no benefit from the trust nor have any control over trust assets until the beneficiary dies, do not have to be eligible borrowers. If the trust is established jointly, there may be more than one primary beneficiary as long as the income or assets of at least one of the individuals establishing the trust is used to qualify for the mortgage. Most importantly, the trustee must have the authority to borrow money and mortgage and encumber the real estate for the purpose of properly securing the property.
All current beneficiaries of the trust must receive HECM counseling by a HUD-approved housing counseling agency. Contingent or future beneficiaries do not have to receive counseling, although FHA strongly encourages and recommends counseling for all parties. Likewise, trustees do not have to receive counseling but reverse professionals should be aware that often the trustee may also be the current beneficiary as well as creator of the trust and must be counseled. Reverse professionals can consult HUD Mortgagee Letter 2006-25 for additional information on HECM counseling for those borrowers whose property is titled in a trust.
Missing Trust Document: Occasionally, one may encounter a home titled in a trust but the senior client does not have a copy of their trust document. These types of files may be problematic because there is no written evidence of the trustee’s authority to convey, sell or mortgage the home. If the senior has misplaced their trust instrument, it may be possible to obtain a copy by directly contacting the attorney or estate planning service that created the trust. Additionally, state law should be researched as it may confer to a person identified as a trustee certain powers as enumerated by applicable state law.
Reverse professionals should also determine if the state has a statute that authorizes the borrower to provide a trust certification, certificate or memorandum of trust that replaces the need to produce the entire trust document. Most states have statutes stating that if a certification of trust includes certain required information, institutions must accept the certification in lieu of the entire trust document. For instance, California law provides that someone who refuses to accept a valid certification of trust and demands the entire instrument may be liable for monetary damages suffered by the trust creator.
Moreover, and just as important, a valid trust certification given to a third party protects that party from their dealings with the trustee, even if a full copy of the trust is not provided. The trust certification, therefore, provides assurances to the settlement agent that the trustee has the power to execute deeds and mortgages conveying and encumbering the home. Under applicable state law, third parties can rely on this document to ensure the trustee’s authority to manage the property.
If the trust instrument cannot be located, one may also be able to look to the vesting deed that conveyed the property to the trust to establish the authority of the trustee to act. For instance, in Florida, if the vesting deed contains language that confers on the trustee the power and authority either to protect, conserve and sell, or to lease, encumber, or otherwise manage and dispose of the real property described in the deed, the trustee has full rights of ownership over the real property. A recorded deed that contains trustee powers means that the trustee would have full power and authority to manage the real estate including the power to execute deeds and mortgages.
Private Trust Information: A trust is an estate-planning tool and may contain certain private information that a client may wish to keep private during the origination process. A primary reason trusts are selected by clients is for the privacy they provide. For instance, a client’s trust could contain provisions establishing transfers and distributions for certain beneficiaries that the client wants to keep confidential. If the entire trust document is turned over, those provisions are no longer private.
In these types of situations, a trust certificate may be used to avoid providing the private information. Properly executed trust certificates do not disclose the identity of the beneficiaries of the trust. A valid trust certificate would, among other things, identify: the powers of the trustee; whether the trust is revocable or irrevocable; and who and how many trustees are required to sign on behalf of the trust. It would contain a statement that the trust has not been revoked, modified or amended in any manner that would cause the representations contained in the certificate to be incorrect. The certificate is signed by the trustee in the presence of a notary public under penalty of perjury. Most states have enacted laws that set forth the requirements for a valid certification of trust. If the certificate meets the state’s requirements, institutions must accept the certificate or face potential liability.
Multiple or Incapacitated Trustees: In some instances, there may be more than one named trustee, or the named trustee may be incapacitated, have resigned or is otherwise no longer serving. If more than one trustee has been named, the conveyance language in the vesting deed and the trust should be examined to determine if the trustees are identified jointly or severally. For instance, many senior married couples will name themselves as co-trustees of their living trust and expressly provide that either spouse may act independently of each other as trustee. Alternatively, the trust language may have been drafted in such a manner as to require both trustees to act jointly in order to act on behalf of the trust.
If a trustee has resigned or has become incapacitated, then one should examine the trust to determine if a successor trustee has been properly identified. The trust may contain instructions for determining the original trustee’s incapacity. For instance, the trust may require one or more medical doctors to certify in writing that the trustee is not physically or mentally able to handle his or her financial affairs before the successor trustee can act.
When the original trustee no longer serves as trustee, the trust documents generally will identify an individual or institution to act as the successor trustee. Typically, several successor trustees are named in succession in case one or more cannot act. Sometimes two or more adult children are named to act together. Sometimes an institutional trustee (bank or trust company) is named.
In today’s world of crowded and expensive probate courts and a desire for privacy, trusts have become a popular manner of holding title to real property. Reverse professionals will often encounter clients whose home is titled in their living trust. Those professionals who understand trusts, and the reasons their senior client placed their home in a trust, are better equipped to offer solutions that meet their client’s needs.
