Estate Planning 101

You can put a house with a mortgage into a trust — here’s how it works

You can put a house with a mortgage into a trust. But, depending on the type of trust you're using, it can be complex. Here's what you need to know.
April 10, 2024

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To put a house with a mortgage into a trust, you need to:

  • create a trust document
  • check it’s okay with your mortgage lender
  • change the property deed to the trust's name
  • update your insurance

You can put a house with a mortgage into a trust — but it can be a little complex

When you move a house with a mortgage into a trust, you need your mortgage lender to agree to it. 

Banks will usually let you move your house into a revocable trust (one you can change) without asking you to pay back the full loan, thanks to the Garn-St. Germain Act. If you use an irrevocable trust (which can’t be changed), it can be more complicated.

These two types of trust — revocable and irrevocable — work quite differently when it comes to property transfers.

The rules around putting mortgaged houses in trusts vary between states

Different states have their own rules about putting a house with a mortgage into a trust.

In most states, the process is pretty much the same, and transferring the house is straightforward.

But, each state can be unique.

In California, you can use a revocable living trust to transfer a house with a mortgage into a trust easily.

In Texas, things might be a bit different. There might be extra steps or paperwork. But you can still put your house into a trust.

Florida has special rules about home protection and taxes. These can affect how a house in a trust is treated.

New York is like California: transferring a mortgaged house into a trust is straightforward. Still, take local tax rules into account.

Knowing your state's laws is important. The details can change how you transfer the house and affect taxes and the protections you get.

If you use a revocable trust, you’ll (usually) still make the mortgage payments, not the trust

When you put your house into a revocable trust, the trust owns the house. But you usually still pay the mortgage.

How it works

You create a trust and move your house into it. The trust is now the owner on paper.

Despite this, you keep paying the mortgage, not the trust.

Tax benefits

Because you pay the mortgage, you can still deduct the interest on your taxes. The trust doesn't change this.

Trust and control

With a revocable trust, you can change or end it. You still have control of the assets.

This is why you continue to handle the mortgage payments.

The trustee’s role

The trustee manages the trust. Often, this is you.

The trustee uses the trust's rules to take care of the house, but you pay the mortgage.

If the trust is irrevocable, you don’t (usually) make the mortgage payments — the trust does

When a house goes into an irrevocable trust, the trust takes over. You give up control and ownership.

As part of this, the trust usually takes on mortgage payments.

Tax considerations 

When your house is an irrevocable trust, the trust may get to deduct mortgage interest, not you.

Set in stone

Irrevocable means no changes. Once the house is in, you can't take it back or decide on payments.

Trustee’s duties

A chosen trustee manages everything. They make sure the trust pays the mortgage, following the trust's fixed rules.

Key points

  • With an irrevocable trust, the trust often takes on mortgage payments
  • Tax deductions for mortgage interest shift from you to the trust
  • The trustee follows strict rules to manage the property and its expenses

There are several steps to putting a mortgaged house in a trust

  1. Choose the type of trust

There are two main types: revocable and irrevocable. A revocable trust lets you make changes. An irrevocable trust does not.

  1. Talk to your mortgage lender

Some mortgages have a clause that says the bank can ask for full payment if you transfer the house. Most times, banks allow the transfer if it's to a revocable trust.

Speak to your mortgage lender to understand their rules.

  1. Find a lawyer

Strictly speaking, you don’t need a lawyer. But it can be very helpful. They’ll guide you through setting up the trust correctly.

  1. Write the trust document

Your lawyer will write a trust document. This paper says how the trust works, who is in charge, and what happens to the property.

  1. Change the house’s deed

To move the house into the trust, you must change the house's deed. The new deed shows the trust as the owner. Your lawyer can help with this: it involves signing a new deed and sometimes paying a small fee.

  1. Tell your insurance company

Tell your home insurance company about the change. The trust now owns the house, so the insurance might need updating.

  1. File the deed

After signing the new deed, it needs to be official. This means filing it with the local government office that handles property records. Your lawyer usually takes care of this.

  1. Update the trust when you need to

Over time, your situation might change. You can update the trust if it's revocable. If it's irrevocable, changes are hard to make.

  1. Keep good records

Keep all documents related to the trust and the house safe. This includes the trust document, the new deed, and any records of conversations with the bank or insurance company.

You need a number of documents to make the transfer

Putting your house into a trust means you need some important papers. Here's what you'll need.

Trust document: this is the main document: it creates the trust. It says who is in charge and what happens to the property.

House deed: when a house goes into a trust, you need a new deed. This moves the house from your name to the trust's name.

Mortgage information: have your mortgage details ready. This includes your loan number and the lender's name.

Proof of title: this shows you own the house. It's often a previous deed or a title insurance policy.

Property tax information: know your property tax details. This includes your tax ID number and recent tax statements.

Insurance information: your house needs insurance. The trust must be added to your insurance as the owner.

Letter to mortgage lender: you might need to tell your lender about the trust. A letter can explain the change.

Letter to the insurance company: like with the lender, tell your insurance company about the trust. If you don’t, your insurance might not be valid.

Some states might ask for extra documents. Check your local rules to make sure you have everything.

Tax deductions on mortgage interest can vary depending on the type of trust

Irrevocable trusts

When a property in an irrevocable trust has a mortgage, the trust itself may be able to reduce its taxes by the amount of interest it pays. This only applies if the property is making money for the trust. 

If you get money from the trust, you might have to pay taxes on it, depending on how the trust is set up.

Revocable trusts

If you've put your property into a revocable trust, you might still be able to deduct the mortgage interest on your own taxes. This is because the IRS often treats you as the owner for tax purposes. The same goes for deducting property taxes.

How deductions work

To deduct mortgage interest, the mortgage must be for buying, building, or improving the house. You also have to choose to list your deductions on your tax return to claim it. 

Not everyone benefits from this, so it's a decision you should think about.

Reporting to the IRS

Trusts report their income and deductions on a Form 1041

If you're getting money from the trust, you might get a K-1 form. This form tells you what part of the trust's income and deductions are yours to report on your taxes.