Revocable and Irrevocable Trusts in Plain English
Understanding a reverse mortgage is as easy as falling off a log. Understanding trusts is not nearly so simple.
Talk With Your Attorney (TWYA).
What is a Trust?
A Trust is a form of ownership of an asset. Since there is a whole canon of law on this topic which we are not qualified to weigh in on, this page is limited strictly to reverse mortgage issues on Revocable and Irrevocable Trusts.
Why would I want ot put my house in a Revocable Trust?
TWYA. We have to dodge this question in the same way as the the last one. However, We're not out on a limb in saying that a Revocable Trust can be useful in simplifying the transfer of assets to the next generation.
Can I still get a reverse mortgage if my house is in a Revocable Trust?
Yes. It presents no difficulty, as long as you qualify to begin with.
Why would I choose an Irrevocable Trust instead?
Again, this is the domain of the legal profession, but a common reason is to avoid probate of your estate.
What is a Medicaid Trust?
It is an Irrevocable Trust used to help you qualify for Medicaid by exempting your assets from consideration. TWYA.
So what's the big problem with Irrevocable Trusts?
The crux of it is that you no longer own the property you put in trust. Not "nod, nod...wink, wink," we mean you really don't own it. Hence the word "Irrevocable."
So how can I mortgage a property I don't own?
You can't, for the most part. Almost all ordinary mortgage lenders no longer do properties held by an Irrevocable Trust, unless the Trust can prove a constant stream of income adequate to repay the loan. Or more simply, if a trust is swimming in money, a bank might give it a loan. But these are rarely mortgage customers.
So my situation is hopeless?
Not yet. The FHA reverse mortgage allows some properties held in Irrevocable Trusts to be mortgaged. Generally, the borrower has to be allowed to collect income from the trust, and must also have life estate rights.
Life Estate means...what?
Having the right of Life Estate means the borrower can stay in the house for as long as he lives, even though he may not own it.
Are there restrictions?
Often, yes. The lender may limit the borrower to certain types of reverse mortgage, like fixed-rate only.
Are there other restrictions?
They may also require the proceeds to be put in the name of the trust, not the borrower. They may also require corrections to your deed, among other items.
Any more restrictions?
Yes. The consent of the trustees is required, as well as the final beneficiaries.
Can I spend the money then?
The result of a reverse mortgage on an Irrevocable Trust property is that it takes an illiquid asset (real estate) and converts part of it to a liquid one (cash in an account). It is exactly like if someone sold AT&T stock in an IRA and bought IBM. The money is still in trust, and can be used in the manner provided by the trust document. TWYA (times two).
What is a common reason Irrevocable Trusts get turned down?
The most common reason is a trust does not give the borrower the right to live in the property. Failing that, all the beneficiaries have to qualify for a Reverse. Even then, lenders are skittish about Trust properties, so approval is subject to underwriting whim.
Any additional fees?
If you Talk With Your Attorney (TWYA) as often as we have mentioned, you might incur costs. Also the same with deed/title issues. But Jacob Dean Mortgage does not charge an additional fee that is specific to Irrevocable Trusts.
But I was told by a reverse mortgage consultant that I had to dissolve the Trust. Why did he say that?
Because he's a moron who doesn't know what he's doing. Dissolving a trust is rarely a good idea. Pulling the house out of a trust and then back in will reset the clock of any clawback provisions you were trying to avoid.
Why doesn't everyone do this?
It often involves three sets of attorneys, trustees, borrowers, and remaindermen, even before going to underwriting. It's complicated and must be completed in a set time frame. Like they say on TV, "Don't try this at home" or use an advisor without plenty of experience. Jacob Dean hsa done more Irrevocable Trust reverses than probably anyone else. We have a process and are familiar with the pitfalls.
Wait, I have more questions!
Don't we all. For a review of your situation, we are available by phone (Martin Dekom at 516 850-2717) or email (martin.dekom@gmail.com). Alternately, complete the "Contact Us" form and we'll get back to you. And Talk With Your Attorney (TWYA).