The mortgage business is booming in many parts of the country. Historically low interest rates have created an almost frenzied environment with homeowners scrambling to refinance their home loans at these low interest rates. Even a few tenths of a percentage point of interest, over thirty years, can make a massive difference in the amount of interest that is ultimately paid on a loan.
For many, it makes perfect sense to take advantage of these interest rates. Besides the associated transaction fees of refinancing, there is frequently little to no downside to refinancing in times like these. However, one often overlooked consideration is the impact that refinancing your home could have on your estate plan.
When You Own Your Property In Your Name
Whether you own your real estate solely in your name or jointly with a spouse or other family member, refinancing your property has little impact on determining who will receive your interest in the property upon your death.
If your name is the only name on the deed to the property, your Last Will and Testament controls who will receive the property at your death. Of course, if a lender still has a lien against the property to secure the loan, the loan may need to be paid off before transferring the home to the new owner as directed in the will. This is the case if there is a direction to pay off the loan in the Will. Typically, however, the loan is not paid off and the new owner becomes responsible for its payment. Under the federal Garn-St. Germain Act, when a home passes to a relative, the lender cannot force the loan to be paid off or refinanced.
If you do not have a will, your family will likely have to file an intestacy proceeding at the probate court before they can transfer your property to your heirs. “Intestacy” means dying without a will. In that case, state law determines who gets your property. It is usually your spouse or your children. The Garn-St. Germain Act applies to homes passing by intestacy as well.
If you jointly own your property with another person, whether it be a spouse, child, multiple children, or friend, then state law determines how that property will pass at your death. For example, if you own property with a spouse as tenants by the entirety or joint tenants with rights of survivorship, upon your death your spouse would only need to file an affidavit (sworn statement) and perhaps a death certificate with the county recorder where the property is located to take full ownership of the property. However, if a bank has a loan against the property and the Garn-St. Germain exception does not apply, the bank would most likely insist that the loan be paid off first or that the surviving joint owner requalifies for a loan to ensure that the surviving joint owner can continue to make the payments.
Property Owned in a Trust
Many individuals create revocable living trusts to avoid probate and protect loved ones. A revocable living trust is designed to own the accounts and property of the individual (trustmaker), including real estate, so that those accounts and property are deemed to be no longer owned by the trustmaker and subject to probate. While the trustmaker may no longer be the owner of the accounts and property, the trustmaker retains the ability to manage and control the accounts and property as trustee of the trust, and the ability to benefit from those accounts and property as the beneficiary of the trust.
Refinancing Property in a Trust
Problems can arise, however, when people refinance property titled in the name of a trust in low-interest-rate environments like these. Frequently, before a lender allows a trustmaker to borrow against the property in the trust, the lender will require the trustmaker as the trustee to change the ownership of the property from the trust back to the trustmaker. Once the property is in the trustmaker’s name, the lender will make the loan and the trustmaker, as the owner of the property and borrower of the loan, will sign all of the necessary paperwork to secure the loan. After the loan is closed, the attorney or title company assisting with the title work will prepare a deed to transfer the property from the trustmaker back into the trust.
At least, this is how it is supposed to work. Unfortunately, a frequently-skipped step in the refinancing process is the retitling of the property back into the trust. As a result, a trustmaker may pass away thinking that the property is titled in the name of the trust. When the successor trustee prepares to sell the property as the deceased trustmaker’s affairs are wrapped up, the successor trustee discovers that the home is still in the name of the trustmaker rather than in the trust. In such a case, the family will be required to open probate to properly sell or transfer the property.
Suppose the trustmaker had a pour-over will that accompanied the trust. In that case, the pour-over would direct that any accounts and property owned by the trustmaker be titled in the trust’s name. Although this still requires the family to go through the probate process, this also ensures that the property will be distributed according to the trust’s terms. However, this is not an ideal result as it requires the added expense and delay of probate in the state court system.
Titling Problems Between Spouses
Problems can also arise during the refinancing process if a property is owned by only one spouse. For example, assume a couple has been in a second marriage for only a couple of years and brought into the marriage their separate property. One spouse owns a home with lots of sentimental attachment, where the spouse raised children from the spouse’s first marriage, and wants the home to go to those children at death.
Assume further that there is still a mortgage on that house and that the spouse who owns the home wants to refinance the loan. If the title company does not communicate with the lender and the owner and assumes the property should be retitled in the name of both spouses, creating a joint tenancy with rights of survivorship between the spouses, the original owner’s intent for the property would be undone. If such a mistake was made and was to go unnoticed, the property would be owned 100% by the surviving spouse at the original owner’s death, regardless of any estate planning documents (will or trust) stating differently. Instead of just taking advantage of better interest rates, the refinance would disinherit the owner’s children.
This is not what the property owner would have wanted. Without careful supervision of the refinancing process, mistakes like this can be made, creating enormous headaches for families and leading to years of litigation.
Understanding what can go wrong is the first step in making sure that nothing goes wrong. If you are planning to refinance a property, give us a call so that we can make sure that your lender, real estate attorney, title company, and you are on the same page and the property you are refinancing is titled correctly. Mistakes made in the refinancing process are often found too late. Failure to properly coordinate a property refinance with your estate plan will affect you and your loved ones the most.
If you should need assistance in this regard, please reach out to us at firstname.lastname@example.org or call 239-344-1100. Virtual appointments are available.