Can a Trust Buy a House with a Mortgage? Using Your Trust Fund to Purchase a Home
Borrowing from a trust can be an alternative to taking a jumbo mortgage, defined as above $417,000 in most markets and $625,500 in some high-price areas such as New York and San Francisco. In some cases, a trust can buy the home outright.
A mortgage tends to be a necessary evil to purchase a home. For most, it’s just part of the home buying process. But what about for those who have trust funds available to help?
Under the right circumstances, trusts may be tapped to assist you and your loved ones, even when it comes to bypassing the bankers and buying a home. This is more and more useful as interest rates rise.
Whether you are the beneficiary of a trust or just out to settle one, you will want to read a recent article in The Wall Street Journal titled “Tapping the Trusty Trust Fund to Buy a House.”
Essentially, a trust can operate in much the same manner as a bank, but without much of the onerous rates, rules, liens and stress. As a trust beneficiary, you can approach the trust for a “mortgage” in the form of a loan from the trust and the trustee can even grant the loan at little or no interest. Sometimes, you can even ask for a full distribution from the trust to finance the whole transaction.
In any event, your access to the trust funds is up to the trustee as guided by the rules of the trust itself. You see, some trusts are not designed to permit this for a variety of reasons, some known only to the person who established the trust. In addition, the trustee may have the interests of other trust beneficiaries to consider. Nevertheless, if there are no such limitations, then having access to trust funds can be a great blessing.
Depending on the language of the trust and your unique circumstance, the trust itself may be engineered specifically to own the house. Properly structured, ownership by the trust can provide important asset protection from potential divorces, lawsuits and bankruptcies. Alternatively, Qualified Personal Residence Trusts (QPRTs) and Intentionally Defective Grantor Trusts (IDGTs) can be extremely valuable in this regard, even though normally we talk about them in the context of transferring the family home.
If you are ready to create a trust for your beneficiaries, or perhaps are looking for creative ways to help your loved ones buy their first home, these are some options to explore.
Reference: The Wall Street Journal (September 19, 2013) “Tapping the Trusty Trust Fund to Buy a House”
Understanding Trusts and Mortgages
What is a Trust?
A trust is a legal arrangement where one party, known as the trustee, manages assets on behalf of another party, called the beneficiary. The person who creates the trust is known as the settlor, and they set the rules for how and when the assets are distributed. Trusts come in two main types: revocable and irrevocable.
Revocable trusts, also known as living trusts, offer flexibility as they can be altered or terminated by the settlor during their lifetime. On the other hand, irrevocable trusts are more rigid and cannot be easily changed once established. Despite their restrictive nature, irrevocable trusts provide significant tax benefits and asset protection, making them a valuable tool in estate planning. They help in minimizing estate taxes, protecting assets from creditors, and avoiding the lengthy probate process.
Can a Trust Get a Mortgage or Loan?
Yes, a trust can indeed obtain a mortgage or loan, but the process is not without its complexities. The type of trust and the specific requirements of the lender play crucial roles in this scenario. Revocable trusts, or living trusts, generally have an easier time securing a mortgage or loan from traditional lenders. This is because the settlor retains control over the trust’s assets and can make changes as needed.
Irrevocable trusts, however, face more stringent restrictions. Since the assets in an irrevocable trust are no longer under the settlor’s control, lenders may be hesitant to approve a mortgage or loan. It’s essential to thoroughly understand the terms of the trust and the lender’s requirements before proceeding with an application. Consulting with financial institutions and trust loan lenders can provide clarity and help navigate the complexities involved.
Pros of Using a Trust Fund to Buy a Home
Using a trust fund to purchase a home can offer several significant advantages:
- Tax Benefits: Trusts can help minimize estate taxes and avoid the probate process, providing substantial financial savings.
- Asset Protection: Trusts safeguard assets from creditors and lawsuits, ensuring the beneficiary’s inheritance remains secure.
- Flexibility: Revocable trusts can be modified or terminated during the settlor’s lifetime, allowing for adjustments based on changing circumstances.
- Control: Trusts allow the settlor to dictate how and when assets are distributed, ensuring the beneficiary receives the intended inheritance.
- Avoidance of Probate: Trusts bypass the often lengthy and costly probate process, facilitating a smoother transfer of assets to beneficiaries.
