Today, lenders are seeing more and more HECM borrowers with property held in a revocable or irrevocable living trust. Trusts are created for a number of reasons, but the most notable benefit is that they give borrowers the ability to avoid probate and give a faster distribution of assets to their heirs. However, for borrowers applying for a HECM loan on a property held in a living trust, there are additional considerations to be aware of and requirements that must be met.
Basic Considerations FHA will insure HECM loans on property held in the name of a living trust as long as some key guidelines are met.
Trust agreement: The trust must be valid and enforceable, and the lender must receive a complete copy of the agreement with all amendments. The trust may be revocable or irrevocable; however, irrevocable trusts come with additional considerations that must be reviewed, such as ensuring the borrower has unrestrained access to HECM proceeds, the proceeds are distributed in accordance with trust requirements, and the trust allows for the borrower’s debts to be repaid. Due to the many different types of trusts and individual state requirements, many lenders require a trust attorney to do a full review of the trust to ensure all FHA requirements are met before closing the loan.
Beneficiaries: The primary beneficiary receives the benefit of the trust assets during his or her lifetime. All primary beneficiaries of the trust must be eligible HECM borrowers at the time the loan is originated and until the loan is satisfied, meaning they must occupy the property as their primary residence, and no beneficiaries may be added or removed from the trust. The beneficiary must sign all loan documents.
Contingent beneficiaries who receive benefits of the trust only after the primary beneficiary is deceased do not have to be HECM borrowers.
Trustees: The trustee has a fiduciary duty to manage the trust assets for the beneficiary in accordance with the terms of the trust. The trustee must sign certain loan documents, including the mortgage, and may be required to sign other loan documents, such as the note. If the trust names multiple trustees, all trustees must sign, unless the trust specifically allows each trustee to act individually on behalf of the trust. The trustee may be the borrower, or it may be another person elected by the borrower in the trust agreement.
Non-Borrowing Spouses We are often asked if non-borrowing spouses can be beneficiaries of a trust agreement. Since the non-borrowing spouse is not an eligible HECM borrower, they may not be a primary beneficiary of a trust, if the property will be held in trust. The spouse may be a contingent beneficiary receiving benefits of the trust upon the borrower’s death. The borrower must consult with their attorney to decide if they want to revise their trust to include the spouse as a contingent beneficiary, remove their property from the trust and close outside of the trust, or cease proceeding with the HECM loan.
Use of a Trust and Power of Attorney Often, a borrower with his or her property held in trust will also utilize a Power of Attorney (POA) due to mental or physical incapacity. In this case, there are additional considerations. Both the trust and the POA may have requirements on how to determine if the borrower is mentally or physically incapable of signing. For example, for mentally incompetent borrowers, letters from two physicians indicating mental incompetency may be required. These documents should be carefully reviewed to ensure all requirements are met.
Since the trust holds legal title and the beneficiary holds equitable title, two signatures are required on some documents. A POA cannot sign on behalf of a trustee, but may sign on behalf of the borrower as beneficiary of the trust. Therefore, where the borrower is the beneficiary and trustee of the trust, the POA will sign on behalf of the borrower as beneficiary; however, a successor trustee appointed in the trust document will sign as successor trustee.
Other Considerations Closing in the Name of Two Trusts: In some instances, a property may be vested in two trusts (one for each borrower). For example, a husband and wife may each have their own trust document. This is acceptable if each borrower is the sole contingent beneficiary of the other borrower’s trust and the house is vested into both trusts. This ensures that upon the death of one spouse, the other receives full rights to the property while they are still living and occupying the property.
Transfer in to or out of Trust After Closing: Borrowers may need to deed in to or out of trust after loan closing. FHA does allow a borrower to transfer the property into a trust after closing if the lender ensures that the trust meets all requirements that would have applied when the loan was closed. The property may be transferred out of the trust or the trust terminated during the life of the loan, as long as one or more of the HECM borrowers continues to occupy the property as a primary residence and retain title in fee simple or leasehold interest.
In summary, trusts can be an important estate planning tool for borrowers. However, if you are not familiar with the different nuances and requirements, it may be difficult to navigate a loan closing in a trust. Learning these nuances will lead to a smoother loan closing for all parties involved.
