Ask The Experts: House Can’t Be Separated from Other Assets In Trust

Many homeowners are struggling with upside-down home loans. How to pass those troubled mortgages on to children in a trust can be a challenge.

Here’s some advice on that topic from John B. Kelly, a certified financial planner in Folsom, Calif.

Question: I have two houses with mortgages. I’m upside down on one of them, but continuing to make payments. Can I have two separate revocable trusts, each with one of the homes? The idea is that when I die, my children won’t have to worry about the “upside-down” home draining resources from my modest trust, which would include the other home. A friend told me he had heard of this. Please help; I’m confused.

Answer: I applaud your efforts to navigate for your family during this difficult economic period. Unfortunately, I’m advised by legal counsel that two separate revocable trusts will not help.

While you are alive, your trust is not considered a separate entity from you. Putting the two houses in separate trusts will not keep them from creditors while you are alive. When you die, all of the assets in all of your revocable trusts are available to pay creditors.

Your loan documents probably address this specifically. Your children will have the option to refinance or pay off the mortgages. If your children do not want to keep the house that is upside down, your estate or trust may be able to default on the loan and give the house to the bank without owing anything from your other assets. That’s the case as long as the mortgage is from the original purchase.

If it is from a refinance, the lender could get a deficiency judgment, which would require your children to use your other estate assets to pay off the debt. In that case, your children would not have to pay the mortgage from their own assets. But they may have to sell or refinance the house that has equity in order to pay off the judgment.

The general rule is that assets cannot pass to your beneficiaries at your death until any debts, such as a lien or judgment, are paid off.

Please check with your own attorney who has expertise in real estate and estate matters.

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